Week 5 Flashcards
What is the underpinning theory of Cooperate Governance?
Agency Theory -> Assumes that the the itnerests of principles (shareholders) and agents (board of directors) arent alway aligned, leading to ‘principal agent problem’
Cooporate governance aims to reduce this problem
Define cooporate governance
A system of rules, practises and processes that are put in place to manage and control a company
How must UK companies implement cooperate governance?
Listed companies must comply with the UK cooporate governance code, or explain in why not in their cooporate governance report
Who are the main players in corporate governance and what are their role?
Shareholders = Owners, have voting rights
Board of Directors = Run the company, accountable to shareholders
Management and staff = accountable to board
Audit comittee = Promotes reliability of financial reporting systems
Renumeration comittee = Establishes salary of company executives
Nomination Committee = Responsible for selecting candidates for each seat on board
What is the difference between the Chair and the CEO?
Chair: Head of board, elected by shareholders, meant to protect shareholders interests -> strategic objectives, not day-to-day
CEO = Top decision maker, day-to-day decisions, all senior management report to them
What is the difference between executive and non-executive directors?
Non-execs are independent, not involved in day-to-day operations of the business, tend to be on the board of a variaty of businesses.
Executives are directly involved in day-to-day operations of the business
What are external auditors?
They write to shareholders expressing whther or not they think that the financial statements are true or fair
What are some examples of poor cooporate governance?
-Combined role of CEO and Chair
-Excessive pay and bonuses despite poor performance
-Audit independence/quality is questionable
How is a bad debt expense recorded?
Dr ‘Bad debt expense’ on PnL as operating expense
Cr ‘Trade receivables’ on SFP
How is an allowance for receivables recorded?
Dr ‘Allowance for receivables’ as an operating expense on PnL
Cr ‘Allowance for receivables’ on current assets as a NEGATIVE
