Corporate Governance And Auditor Regulation Flashcards
Why is corporate governance needed
Corporate governance is the system by which companies are directed and controlled. Auditing financial statements as to their credibility and this enables shareholders to better understand how the directors and company have performed
Who developed the principles of corporate governance
The organisation of economic cooperation and development (OECD)
What are the six principles of corporate governance framework
According to OECD
It should promote transparent of firm markets and the efficient allocation of resources and support effective supervision and enforcement
Super text shareholders rights ensuring fair treatments of all shareholders including minor shareholders. E.g. all shareholders have the same information
It should provide for stock markets to function in a way that contributes to good corporate governance e.g. insider trading is prohibited
It should recognise the rights of all stakeholders and not just shareholders. To encourage active cooperation between the entities and stakeholders in creating jobs wealth and sustainability of financially sound entities
It should ensure timely and accurate disclosure of all material matters including financial position performance ownership and governance
It should ensure the strategic guidance of the entity effective monitoring of management by the board and the board accountability of the entity. In particular the board to set us own objectives monitors own performance and have its own performance assessed
What governance code to use in the UK
The OECD principles Are put into effect in a variety of ways in different countries. The UK corporate governance code published by the financial reporting council can be referred as best practice
Does the UK corporate governance code have legal force
No the code has no legal force and is in force on listed companies to the stock exchange via comply or explain
How is corporate governance difference in Europe than in the US
UK app stopped a principles based approach where is US adopt a rules based approach
What are the main principles of the UK corporate governance code
Board leadership and company purpose
Division of responsibilities
Composition succession and evaluation
Audit, risk and internal controls
Remuneration
Evaluate further on “board leadership and company purpose” regarding UK corporate governance code
Every company should be headed by an affective board
All directors must act with integrity
The board should:
Establish the companies purpose values and strategies
Ensure the company has a necessary resources to meet its objectives
Establish effective controls to assess risk and manage them
Ensure effective engagement with stakeholders
Ensure that workforce policies and practices are consistent with the companies values
Evaluate further on “division of responsibility” regarding UK corporate governance code
There should be clear division between running of the board and running of the companies business (CEO and chair should not be performed by one person)
Chair is responsible for leadership of the board and should be independent (not an employee within the last five years)
At least half the board should be non-executive directors who are considered independent
Non-executive directors should provide constructive challenge and strategic guidance and hold management to account
Evaluate further on “composition succession and evaluation” in regards to UK corporate governance code
Appointments to the board should be subject to formal rigourous and transparent procedures led by a nomination committee (majority of committee should be independent non-executive directors)
The board and his committees should have a combination of skills experience and knowledge. Regular membership to the board should be refreshed and the chair man should not be held beyond nine years
All directors should be submitted for re-election annually
Evaluate further on “audits, risk and internal controls” regarding the UK corporate governance code
The board should establish formal and transparent policies to ensure independence and effectiveness of internal and external audits
Financial statements should state whether the board consider the appropriateness of going concern and identify any material uncertainties for at least 12 months from date of approval of financial statements
The board should establish procedures to manage risk
The board should establish an audit committee of at least three independent non-executive directors with at least one committee member having relevant financial experience
Elaborate further on “remuneration” regarding the UK corporate governance code
Remuneration should be sufficient to attract retain and motivate directors
Remuneration policies are designed to support long-term sustainable success which includes a significant proportion structured to bonuses for the board
No director should be involved in deciding his or her own remuneration. This means that a remuneration committee of non-executive directors should be formed to fix directors pay
What are the main roles and responsibilities of audit committee
Monitoring and reviewing the effectiveness of internal controls
Companies still have to have internal audit departments but the need for one must be reviewed annually
Making recommendations to the board about the appointments and re-appointments or removal of external auditors
Review the controls and risk management systems
Annually assessing the independence and objectivity of external auditors
Acting as a forum to link directors and auditors
What are the regulations of auditors
Auditors are regulated by:
Professional bodies - ACCA
National bodies - the financial reporting council
International bodies - international federation of accountants
What are the boards and committees under the International Federation of accountants (IFAC)
IAASB (International auditing and assurance standards board) who set international standards on auditing (ISA) and other insurance standards
IESBA (International ethics standards board for accountants) issues the international code of ethics for professional accountants
TAC (transnational auditors committee) responsible for implementing and advancing the promotion of high quality standards financial reporting and auditing practices worldwide
PIOB (The public interest oversight board) oversees the public interest activities of the standard setters.
Note that the IAASB’s ISAs are adopted by FRC in the UK which has local regulatory power and the IESBA’s code has been adopted by ACCA in its code of ethics and conduct
