Beruflich Dokumente
Kultur Dokumente
Week 6
4-1
Define Corporate Governance
4-2
Accountability/Responsibility
Shareholders
Responsibility
Accountability
Elect
Board of Directors
Empower
Management
Engage
Operating management
4-3
Primary parties involved in
corporate governance
Shareholders
Boards of Directors
Audit Committees of the Board
Management
Self-Regulatory Accounting Organizations (e.g.
MIA, MASB)
Other Self-Regulatory Organizations (e.g.
KLSE/BM, MESDAQ)
Regulatory Agencies (e.g. Securities Commission)
External Auditors
Internal Auditors
4-4
Shareholders – Failure in CG
Responsibility:
Effective oversight through election of
BOD, approve major decisions, buy/sell
shares
Failures:
Focused on ST prices
Failed to perform LT growth analysis
Surrendered responsibilities to
management as long as share price
increased
4-5
Board of Directors – Failure in CG
Responsibility:
Directly accountable to shareholders
Failures:
Inadequate oversight of management
Approval of mgt’s compensation plans, esp
those which include share options
Election of directors which are not
independent
Insufficient time in performing duties
Continually repriced share options when
market price declined
4-6
Management – Failure in CG
Responsibility:
Operations & accountability - formulating
strategy & risk, implementing internal controls,
financial & other reports to stakeholders
Failures:
Earnings management to meet analysts’
expectations
Fraudulent financial reporting
Pushing accounting concepts to achieve
reporting objective
Viewed accounting as a tool, not a framework,
for accurate reporting
4-7
Audit Committee – Failure in CG
Responsibility:
Oversight of internal & external audit
function & the preparing of annual FS &
public reports on internal control.
Failures:
No expertise or time to provide effective
oversight
Were not viewed by the auditor as the “audit
client”. The power to hire/fire often rested
with the management.
4-8
Self-regulatory accounting
organisations – Failure in CG
Responsibility:
Setting accounting/auditing standards that
determine underlying financial reporting/
auditing concepts, set expectations of audit &
accounting quality
Failures:
Too rule-oriented in response to complex
economic transactions
4-9
Other self-regulatory organisations
(KLSE/BM, MESDAQ)
- Failure in CG
Responsibility:
Ensuring efficiency of the financial markets,
including oversight of trading & companies
that are allowed to trade on the exchange
Failures:
Pushed for improvements for better CG by
its members, but failed to implement those
same procedures for its governing board &
management
4 - 10
Regulatory agencies – Failure in CG
Responsibility:
Ensuring accuracy, timeliness & fairness of
public reporting of financial & other info for
plcs
Failures:
Identified problems but not provided with
sufficient resources by Govt to deal with the
issues
4 - 11
External auditors – Failure in CG
Responsibility:
Performing audits of FS to ensure that they are
free of material misstatements, including those that
may be due to fraud
Failures:
Pushed accounting concepts to help orgns boost
earnings
Promoted personnel based on ability to “cross-sell”
Failed to uncover basic frauds, e.g. Worldcom &
HealthSouth because fundamental audit
procedures were not performed
4 - 12
Internal auditors – Failure in CG
Responsibility:
Performing audits of companies for compliance
with company policies & laws, efficiency audits,
audits to determine accuracy of financial
reporting process
Failures:
Focused efforts on operational audits & left
financial reporting to external auditors
Reported results to management with little
effective reporting to audit committee
In some instances (Worldcom, HealthSouth),
did not have access to the corporate FS
4 - 13
What are SEC concerns regarding
the auditing profession? (US)
Auditors were no longer willing to
confront clients over questionable
accounting practices
Consulting fees were impairing auditor
independence
Accountants were using technical
interpretations of GAAP to push the
limits of accounting
4 - 14
What are the Public Oversight Board
(POB) concerns? (US)
Analytical procedures used inappropriately to
replace direct tests of account balances
Audit firms not thoroughly evaluating internal
control and applying substantive procedures to
address weaknesses in control
Audit documentation, especially related to audit
planning, did not meet professional standards
Auditors ignored warning signs of fraud and other
problems
Auditors were not providing sufficient warning
about companies that might not continue as 'going
concerns'
4 - 15
Sarbanes-Oxley Act 2002 –
PCAOB’s authority & powers (US)
Establishes the Public Companies Accounting Oversight Board
(PCAOB) with broad authority, including the power to set
auditing standards for audits of plcs
Authority & powers:
Set auditing standards - the PCAOB has chosen to set auditing
standards
Set financial accounting standards - the PCAOB has chosen to
let the FASB continue to set accounting standards
Set standards for the reports on internal control and risk
management
Perform quality reviews of public accounting firms and
recommend penalties if the firms fail to perform
Establish quality control standards for the audits of public
companies
Require all public accounting firms that audit plcs to register
with the PCAOB and become licensed to perform such audits
4 - 16
SOX - auditor independence provisions?
4 - 17
SOX - Management
4 - 18
SOX – Audit Committees
All PLCs must have a fully independent Audit Committee
Is designated as the audit client
Has oversight responsibilities over the internal audit and
financial reporting processes
Must be comprised of "outside" directors, i.e. not members of
management or have other relationships with the organization
Must have at least 1 person who is a financial expert. Other
members must be knowledgeable in financial accounting and
control
Must report on its activities to public, including the results of
significant discussions with the external auditor
4 - 19
SOX - Audit committee responsibilities
Be appraised of all significant accounting decisions
made by management
Be appraised of all significant changes in accounting
systems and system controls
Have authority to hire and fire the external auditor
Review the audit plan and discuss audit results with
the auditor
Have authority to hire and fire the head of the
internal audit function and set the budget for the
internal audit function
Review the audit plan and discuss all significant
results
Receive all regulatory audit reports and meet with
regulatory auditors to discuss findings
4 - 20
SOX - Required communications to the
audit committee (US)
Auditing standards (SAS 61) require specific
communications between the audit committee and
the external auditor:
Auditor's responsibility under Generally Accepted
Auditing Standards
Significant Accounting Policies
Management Judgments and Accounting
Estimates
Significant Audit Adjustments
Other Information in Annual Reports
Disagreements with Management
4 - 21
Protections for Corporate Whistleblowers
under Sarbanes- Oxley
Civil liability whistleblower protection
Creates civil liability for companies that retaliate against
whistleblowers
Protects only employees of publicly traded companies
The employee must report the suspected misconduct to a
4 - 22
Protections for Corporate Whistleblowers
under Sarbanes- Oxley
Criminal liability whistleblower protection
Makes it a crime to knowingly, with the intent to
they work
4 - 23
Corporate governance in Malaysia
Establishment of Securities Commission in 1993 to
regulate the market, CG
Financial Reporting Act, 1997 --> introduces
accountability & transparency in the regulatory
environment
Finance Committee on Corporate Governance
established, issued The Finance Committee Report
on CG (1999), sets out…
The Malaysian Code on Corporate Governance
principles & best practices for good governance by
plcs
4 - 24
The Finance Committee Report on
Corporate Governance
Strengthening laws over shareholder rights,
director duties, duties of other corporate
participants (with emphasis on RPT’s)
Enhancing disclosure & transparency
Promoting effective enforcement
Development of a Malaysian Code of Best
Practices in CG restructure BOD
composition, more effective
Identification of training & education needs of
directors, other key corporate participants &
investors
4 - 25
Malaysian Code of Best Practices in CG
Set by the Malaysian Institute of Corporate
Governance (MICG)
MICG comprised of:
(a) The Federation of Public Listed Companies
(b) MIA
(c) MAICSA
(d) MICPA
(e) The Malaysian Institute of Directors
Improvement of BOD composition – independent
directors, independence of working
Increase in efficiency & accountability of BOD’s –
independent & seen to be independent
4 - 26
Malaysian Code of Best Practices in CG
Enforcement by Bursa Malaysia in Revamp
Listing Requirements 2001.
Requirements for companies to disclose in
reports/accounts:
(a) How have companies applied the principles set
out in the Code?
(b) To what extent have they complied with best
practices in the Code (with justification for
non-compliance)?
(c) To set out dates when the Code would be
complied with
4 - 27
Recommendations of Finance
Committee Report
Every plc should be headed by an effective BOD
which should lead & control the company
BOD should have a balance of executive & non-exec
directors (including independent non-execs) such that
no individual or small group can dominate decision-
making
Timely & high quality information should be
supplied to the BOD to enable decision making
Formal & transparent procedures:
For appointment of new directors
All directors to submit themselves for re-election at
regular intervals, & at least every 3 years
Annual Report should contain details of directors’
remuneration
4 - 28
Recommendations of Finance
Committee Report (Contd.)
Companies should use the AGM to
communicate with shareholders & encourage
their participation
Audit Committees:
Each plc to establish an AC of at least 3 non-
exec directors (majority of them independent),
with written terms of reference which deal
clearly with its authority & duties
Chairman should be an independent non-
executive director
4 - 29
Recommendations of Finance
Committee Report (Contd.)
Audit Committees – duties (Contd.):
Consider the appointment of external auditor, audit fee,
questions of resignation/dismissal
Discuss with external auditor before audit commences,
the nature & scope of audit. Ensure co-ordination where
more than 1 audit firm is involved.
Review half-year & annual FS, focusing on changes in
accounting policies/practices, significant adjustments
arising from audit, going concern assumption,
compliance with standards & other legal requirements
Discuss problems & reservations arising from interim &
final audits, and any other matter the auditor wants to
discuss (in absence of mgt where necessary)
Review external auditor’s management letter & mgt’s
response
4 - 30
Recommendations of Finance
Committee Report (Contd.)
Audit Committees – duties (Contd.):
Where an internal audit function exists, to
ensure that it is adequately resourced & has
appropriate standing in the company.
To review the IA programme
Consider RPT’s
Consider major findings of internal
investigations & mgt’s response
Consider other topics as defined by the BOD
4 - 31
Recommendations of Finance
Committee Report (Contd.)
Audit Committee meetings
Shall be attended by a representative of the IA function
& external auditors
Other BOD members may attend meetings at the
invitation of the AC
At least once a year, the AC will meet with external
auditors without the presence of executive BOD
members
Companies should consider having an IA function
External auditors should communicate matters of
governance to those in charge (ISA 260)
4 - 32
Recommendations of Finance
Committee Report (Contd.)
Directors’ Report on Internal Control
Directors should report on internal controls
Auditors should report on the effectiveness of
the controls
Annual Report should contain a statement of
how the company applies CG principles &
explanation of policies. Also include
circumstances justifying departure from best
practice.
4 - 33