Week 3 - Auditing And The Corporate Governance Flashcards
Corporate governance
Making sure the companh is run properly in the interest of shareholders& other stakeholders
- NOT managing managers properly = management
Unitary board
A board of directors that make strategic decisions of a company - making decisions about long-term strategic direction if the business
Like US AND UK
NEDS and executive are members
NEDs
Non-executive directors
Not employees of company
Roles = independent oversight and serving on audit committees
Insider systems
Insiders are seniour managers who also sit on their firms board
Outsider systems
Have no connection with the company eg shareholder
Why are guidelines needed - to monitor
Directors are maximising shareholder returns
Business is at a reasonable level
One/more directors are not dominating the company
Auditors are independent of management
The cadury report - main recommendations
There be a clear division of repsonsibilities at the top e.g. chairman, CEO
The majority of the board be comprised of outsider directors
Audit committee must have 3 NEDs = the majority
Further UK initiatives - the greenbury report
1995
Directors remuneration - changed to salaries for directors
Further UK initiatives - hampel report
1998
Reviewed, combined and clarifies cadbury and greenbury report recommendations
Further UK initiatives - the turnbull report
1999
On directors obligation esp. reinternal control, audits and the quality of financial reporting
Further UK initiatives - myners report
2001
On institutial investors
Further UK initiatives - higgs report
2003
On role and effectiveness of NEDs
Further UK initiatives - the smith report
2003
On the independence of auditors
ENRON
Fraudulent accounting Aggressive creative accounting Audit firm not independence Unethical/agressive business culture Chair & CEO found guilty of fraud & conspiracy
Carillion
Carillion explioted its supply chain finance scheme in which it used nearly £500 million. Used aggressive accounting strategies efficiently to window dressing financail statements fo flatter the cash-flow conversion ratio, heighten net cash, decrease debt, increase cash generated from operations
Carillion failures
The board failed go manage risk
Questionable accounting assumptions
NEDs appear not to have provided effective observation
Auditor KPMG independence and competition in the audit market
The internal audit was ineffective
Directors failed go act to prevent failure
Corporate governance in the UK
Is a traditionally owned by external shareholders, but controlled by managers which gives rise fo info asymmetry and agency problems
5 sections present principles
Board leadership and company purpose Division of respsonbsilities Composition, succession and evaluation Audit, risk, internal control Remuneration
NEDs
The audit committee should - FRC guidance
Review: external audit planning audit findings management representation letters and judge if accurate audit process st end of cycle
Corporate governance
The system by which companies are directed and controlled
Executive remuneration
Pay packages specifically designed for business leaders/ senior management
The annual report
Financial statements - audited Remuneration report - partly Financial highlights - NOT Audit committee,enviro, social ans governance reports - NOT Chairmans report,strategice report - NOT
What is internal audit
To provide independent assurance thst an organisationa risk management, governance and internal control processes are operating effectively
Countries with large and developed capital markets traditionally have
Shareholder oriented governance systems
How many independent NEDs should a listed company have?
At least half of thr board - excl the chair
With regard to the provisions of the current corporate governance code, the london stock exchbage requires listed companies to
Comply or explain
“Tone at the top” refers too
The need for ethicsl leadership
Whistleblowing and the protection of whistleblowers
