Regulatory environment and corporate governance Flashcards
What is GAAP and what does it include?
Generally accepted accounting rules
- Company Law
- Accounting Standards
- Stock exchange requirements
Underlying assumption in preparing financial statements
Going concern
6 CGMA Fundamental Principles
- Professional competence and due care
- Integrity
- Professional Behaviour
- Integrity
- Confidentiality
- Objectivity
5 Threats
- Self interest
- Self review
- Advocacy
- Familiarity
- Intimidation
UK Corporate Governance Code 2018
the UK Corporate Governance Code gives guidance to companies as to how they should be directed and controlled
Corporate governance
The internal systems or means by which companies are directed and controlled.
Safeguards to fundamental principles
- Corporate governance requirements
- Educational, training and experience requirements for the profession
- Effective complaint systems which enable the professional accountant and the general public to draw attention to unethical behaviour
- An explicitly stated duty to report breaches of ethics requirements
- Professional or regulatory monitoring and disciplinary procedures
The standard setting process
Step 1 - An ‘Issues Paper’ is prepared by IASB
Step 2 - Discussion Papers published for public comment (usually 120 days).
Step 3 - Comments are received/reviewed and an Exposure Draft is developed and published for public comment
Step 4 - IFRS issued a final
International Financial Reporting Standard
The OECD Principles of Corporate governance
Principles based approach
- Broad principles
- Comply or explain
- Greater flexibility
- Investors cannot be confident of the consistency of approach
- Incorrectly viewed as voluntary
- E.g. UK Corporate Governance Code 2018
Rules based approach
- Detailed and rigid approach
- Non-compliance cannot be justified
- Third parties penalise companies (SEC)
- Easier compliance
- Provides minimum standard of governance
- Allows no leeway or deviation
- Sarbanes-Oxley Act (2002)
SOx - Sarbanes-Oxley Act (2002)
- The establishment of the Public Company Accounting Oversight Board (PCAOB)
- Auditors should review internal control systems.
- rotation of lead or reviewing audit partners every five years.
- Auditors are expressly prohibited from carrying out most non-audit services
- Audit committees should be responsible for the appointment, compensation and oversight of auditors.
- All members of audit committees should be independent, and at least one member should be a financial expert.
- CEO & CFO should certify that they have reviewed the financial statements and that they are accurate and truthful
- That financial information includes disclosures relating to any off-balance sheet liabilities
- at annual reports should contain internal control reports where management should state whether or not the company’s internal control procedures are adequate and effective
- That management should update the public of any significant financial matters when they happen rather than wait until the quarterly or annual report
- Imposes penalties for any breaches of the SOx rules which include fines or a prison term
UK Corporate Governance Code 2018 guidance
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
Responsibilities of the chair - UK Corporate Governance Code 2018
Division of Responsibilities
- The chair leads the board
- responsible of overall effectiveness in directing the company
- chair facilitates constructive board relations
- the chair also facilitates the effective contribution of all non-executive directors,
- ensures that directors receive accurate, timely and clear information.
Auditor independence - SOx (2002)
Auditors cannot do the following:
- Bookkeeping or other services related to the accounting records or financial statements of the audit client
- Financial information systems design and implementation
- Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
- Actuarial services
- Internal audit outsourcing services
- Management functions or human resources
- Broker or dealer, investment adviser, or investment banking services
- Legal services
- Expert services unrelated to the audit
The International Organisation of Securities Commissions (IOSCO)
- International body that brings together the world’s securities regulators
- Is recognised as the global standard setter for the securities sector
Threats to the fundamental principles
Self-interest
where the professional accountant’s personal financial or other interest may inappropriately influence their judgement or behaviour.
Threats to the fundamental principles
Self-review
Where a professional accountant evaluates previous judgements made by themselves (or another individual within the firm).
Here there is a risk that they may not perform an appropriate evaluation
Threats to the fundamental principles
Advocacy
a professional accountant promotes a client’s or employer’s position to the point that their objectivity is compromised.
Threats to the fundamental principles
Familiarity
a professional accountant promotes a client’s or employer’s position to the point that their objectivity is compromised.
Fundamental principles
Professional competence and due care
Being knowledgeable enough to ensure the client or employer receives competent services.
Not doing things you are not trained to do.
Fundamental principles
Integrity
should be straightforward and honest in all professional and business relationships.
Fundamental principles
Professional behaviour
Should comply with relevant laws and regulations and avoid any action that discredits the profession.
Fundamental principles
Confidentiality
Should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose
