Corporate Governance Flashcards
What is Corporate Governance?
The system that companies are directed and controlled.
The purpose of corporate governance is to give effective, entrepreneurial and prudent management that can deliver long term success to a company.
It considers the responsibilities of directors, how the board of directors should be run and structured, the need for good internal controls and the relationship with external auditors.
Responsibilities of Audit Committee?
To monitor financial statements.
To implement policy on supply of non-audit services by external auditor.
To review and monitor independence and objectivity of external auditor.
To approve remuneration and engagement terms of external auditor.
To recommend appointment, reappointment and removal of external auditor.
To monitor and review effectiveness of internal audit department.
If there is no internal audit function, the committee is required to consider annually whether there is a need for one.
To monitor arrangements safeguarding the privacy of whistle blowers.
Advantages of Audit Committee
Increased confidence in the credibility and objectivity of financial reports
Save more time on management and spend more time focusing on business practices.
Provide access for auditor to report issues to audit committee.
As an impartial body for auditors to consult.
As an independent point of reference.
Disadvantages of Audit Committee
Increasing Costs.
Difficult to select sufficient non-executive directors with the necessary competence.
The establishment of such a formalized reporting procedure may dissuade the auditors from raising matters of judgement and limit them to reporting only on matters of fact.
What is Internal Control?
Internal controls function to minimize risks and protect assets, ensure accuracy of records, promote operational efficiency, and encourage commitment to policies, rules, regulations, and laws.
Internal Controls are essential in management as they contribute to:
Safeguarding the company’s assets.
Helping prevent and detect fraud.
Safeguarding the shareholders’ investment.
Key to Effective Governance
An effective, independent board
- Chairman not the CEO
- Majority NED on board
- Board members have the time and experience to be able to serve correctly on the board.
A proactive audit committee.
A compensation committee aligning executive compensation to shareholder value.
A nominating committee ensuring effective governance of the board.
Key to Effective Governance
A sound internal control framework.
A relevant code of ethical behavior.
Clear, enforced policies and procedures.
Effective management of risk.
An objective, well-resourced internal audit function.
Independent, effective external audit.
Transparent disclosure, effective communication, and systems that ensure effective communication and accountability.
