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ASIA PACIFIC COLLEGE OF ADVANCED STUDIES

COLLEGE DEPARTMENT

CHAPTER 2

CORPORATE GOVERNANCE RESPONSIBILITIES


AND ACCOUNTABILITIES

INTRODUCTION

Many of the characteristics of good governance described in Chapter 1 are


relevant to both SME's and large listed public companies. As an organization
grows in size and influence, these issues become increasingly important.

However, it is also important to recognize that good corporate governance is


based on principles underpinned by consensus and continually developing
notions of good practice. There are no absolute rules-which -must be adopted
by all organizations. "There is no simple Universal formula for good
governance". Instead emphasis is many localities, has been to encourage
organizations to give appropriate attention to the principles and adopt
approaches which are tailored to the specific needs of an organization at a
given point in time.

When corporate governance is discussed, it is often spoken of in terms of a


company's corporate governance framework. The key elements within an
effective governance framework, and the issues relating to each element, are
set out on the following pages and are relevant to organizations large and
small, in both the private and the public sectors. The table provides a useful
structure for any company to consider its' own approach to corporate
governance and the matters which may assist it to achieve its strategic
objectives.

Many of the matters listed may not be directly relevant in all situations and
some may not, in particular circumstances, be within the board's control, but it
provides a useful context in which any organization can consider its
governance needs so that they might be most appropriately addressed.
ASIA PACIFIC COLLEGE OF ADVANCED STUDIES
COLLEGE DEPARTMENT

The essence of any system of good corporate governance is to allow the board
and management the freedom to drive their organization forward and to
exercise that freedom within a framework of effective accountability.

RELATIONSHIP BETWEEN SHAREHOLDERS / OWNER(S) AND OTHER


STAKEHOLDERS

The relationship between the shareholders / owners, management and other


stakeholders in a corporation is shown below.

Board of Shareholders
Directors / Owners

Board of External
Directors Auditors
Shareholders
/Owners
Regulators
Operational
Management

Internal Society of
Auditors Others

Governance starts with the shareholders/owners delegating responsibilities


through an elected board of directors to management and, in turn to operating
units with oversight and assistance from internal auditors. The board of
directors and its audit committee oversee management and, in that role, are
expected to protect the shareholders' rights. However, it is important to
recognize that management is part of the governance framework;
management can influence who sits on the board and the audit committee as
well as other governance controls that might be put into place.
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COLLEGE DEPARTMENT

In return for the responsibilities (and power) given to management and the board,
governance demands accountability back through the system to the
shareholders. However, the accountabilities do not extend only to the
shareholders. Companies also have responsibilities to other stakeholders.
Stakeholders can be anyone who is influenced, whether directly or indirectly,
by the actions of a company. Management and the board have responsibilities
to act within the laws of society and to meet various requirements of
creditors, employees and the stakeholders.

A broad group of stakeholders has an interest in the quality of corporate


governance because it has a relationship to economic performance and the
quality of financial reporting. For example, it is likely that many employees have
significant funds invested in pension plans. Those pension plans are designed
to protect the financial interests of those employees in their retirement. We use
the word society in the diagram to indicate those broad interests. In a similar
fashion, employees and creditors have a vested interest in the organization and
how it is governed. Regulators are a response to society's wishes to ensure
that organizations, in their pursuit of returns for their owners, act responsibly
and operate in compliance with relevant laws.

While shareholders / owners delegate_ responsibilities to various patties within the


corporation, they also require accountability as to how well the resources1hat
have been entrusted to management and the board have been used. For
example, the owners want accountability on such things as:

Financial performance

Financial transparency — financial statements that are clear with full


disclosure and that reflect the underlying economics of the company.

Stewardship, including how well the company protects and manages the
resources entrusted to it.

Quality of internal control


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COLLEGE DEPARTMENT

Composition of the, board of directors and the nature of its activities,


including information on how well management incentive systems are
aligned with the shareholders' best interests.

The owners want disclosures from management that are accurate and objectively
verifiable. For instance, management has a responsibility to provide financial
reports, and in some cases, reports on internal control effectiveness. Management
has always had the primary responsibility for the accuracy and completeness of an
organization's financial statements. From a financial reporting perspective, it is
management's responsibility to:

Choose which accounting principles best portray the economic substance of


company transactions.

Implement a system of internal control that assures completeness and


accuracy in financial reporting.

Ensure that the financial statement contain accurate and complete disclosure.

PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE


BROAD ROLE AND SPECIFIC RESPONSIBILITIES

Corporate governance and financial reporting reliability are receiving


considerable attention from a number of parties including regulators,
standard setting bodies, the accounting profession, lawmakers and financial
statement users.

Party Overview of Responsibilities


Broad Role:
1. Shareholders

Provide effective oversight through election of board


members, approval of major initiatives such as
buying or selling stock, annual reports on
management compensation, from the board.
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Broad Role:
2. Board of Directors
The major representative of stockholders to ensure
that the organization is run according to the
organization's charter and that there is proper
accountability.

Specific activities include among others:

1. Overall Operations
 Establishing the organization's vision,
mission, values and ethical standards.
 Delegating an appropriate level of authority to
management.
 Demonstrating leadership.
 Assuming responsibility for the business
relationship with CEO including his or her
appointment, succession, performance
remuneration and dismissal.
 Overseeing aspects of the employment of the
management team including management
remuneration, performance and succession
planning.
 Recommending auditors and new directors to
shareholders.
 Ensuring effective communication with
shareholders other stakeholders.
 Crisis management.
 Appointment of the CFO and corporate
secretary.
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2.Performance
 Ensuring the organization's long term
viability and enhancing the financial
position.
 Formulating and overseeing implementation
of corporate strategy.
 Approving the plan, budget and corporate
policies.
 Agreeing key performance indicators
(KPIs)
 Monitoring / assessing assessment,
performance of the organization, the
board itself, management and major
projects.
 Overseeing the risk management framework
and monitoring business risks.
 Monitoring developments in the industry
and the operating environment.
 Oversight of the organization, including its
control and accountability systems.
 Approving and monitoring the progress
of major capital expenditure, capital
management and acquisitions and
divestitures.

3. Compliance / Legal Conformance


 Understanding and protecting the
organization's financial position.
 Requiring and monitoring legal and
regulatory compliance including compliance
ASIA PACIFIC COLLEGE OF ADVANCED STUDIES
COLLEGE DEPARTMENT

with accounting standards, unfair trading


legislations, occupational health and safety
and environmental standards.
 Approving annual financial reports, annual
reports and other public documents /
sensitive reports. Ensuring an effective
system of internal controls exists and is
operating as expected
3. Non-executive or Broad role:
Independent Director
The same as the broad role of the entire
board of directors

Specific activities include among others:

 to understand the organization, its


business, its operating environment
and its financial position,
 to apply expertise and skills in the
organization's best interests,
 to assist management to keep
performance objectives at the top of
its agenda,
 to understand that his/her role is
not to act as auditor, nor to act as a
member of the management team,
 to respect the collective, cabinet
nature of the board's decisions,
 to prepare for and attend board
meetings,
 to seek information on a timely basis
to ensure that he/she is in a position
ASIA PACIFIC COLLEGE OF ADVANCED STUDIES
COLLEGE DEPARTMENT

to contribute to the
 discussion when a matter comes
before the board, or alert the
chairman in advance to the need for
further information in relation to a
particular matter, and
 to ask appropriate questions relative
to operations.
4. Management Broad Role:

Operations and accountability. Manage the


organization effectively; provide accurate
and timely reports to shareholders and
other stakeholders.

Specific activities include among others :

 recommend the strategic direction


and translate the strategic plan into
the operations of the business
 manage the company's human,
physical and financial resources to
achieve the organization's objectives
- run the business
 assume day to day responsibility for
the organization's conformance with
relevant laws and regulations and its
compliance framework
 develop, implement and manage the
organization's risk management and
internal control frameworks
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 develop, implement and update


policies and procedures
 be alert to relevant trends in the
industry and the organization's
operating environment
 provide information to the board
 act as conduit between the board and
the organization
 Developing financial and other
reports that meet public, stakeholder
and regulatory requirements.
5. Audit Committees of Broad Role:
the Board of Directors
Provide oversight of the internal and
external audit function and the process of
preparing the annual financial statements
as well as public reports on internal
control.

Specific activities include among others:

 Selecting the external audit firm


 Approving any non-audit work
performed by the audit firm
 Selecting and / or approving the
appointment of the Chief Audit
Executive (Internal Auditor)
 Reviewing and approving the scope
and budget of the internal audit
function
 Discussing audit findings with
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internal auditor and external auditor


and advising the board (and
management on specific actions that
should be taken
6. Regulators Broad Role:
a. Board of
Set accounting and auditing standards
Accountancy
dictating underlying financial reporting
and auditing concept; set the expectations
of audit quality and accounting quality.

Specific activities include among others:

 Conducting CPA Licensure Board


Examinations
 Approving accounting principles
 Approving auditing standards,
 Interpreting previously issued
standards implementing quality
control processes to ensure audit
quality
 Educating members on audit and
accounting requirements

b. Securities and
Exchange Broad Role:

Commission Ensure the accuracy timeliness and


fairness of public reporting of financial
and other information for public
ASIA PACIFIC COLLEGE OF ADVANCED STUDIES
COLLEGE DEPARTMENT

companies.

Specific activities include among others:

 Reviewing filings with the SEC


 Interacting with the Financial
Reporting Standards Council in
setting accounting standards
 Specifying independence standards
required of auditors that report on
public financial statements
 Identify corporate frauds, investigate
causes, and suggest remedial actions
7. External Auditors Broad Role:

Perform audits of company financial


statements to ensure that the statements
are free of material misstatements
including misstatements that may be due
to fraud.

Specific activities include among others:

 Audit of public company financial


statements
 Audits of nonpublic company
financial statements
 Other services such as tax or
consulting
8. Internal Auditors Broad Role:

Perform audits of companies for


compliance with company policies and
ASIA PACIFIC COLLEGE OF ADVANCED STUDIES
COLLEGE DEPARTMENT

laws, audits to evaluate the efficiency of


operations, and periodic evaluation and
tests of controls.

Specific activities include among others:

 Reporting results and analyses to


management (including operational
management) and audit committees
 Evaluating internal controls