CORPORATE

GOVERNANCE-
CHALLENGES AND FAILURE
BY: SHENIAH MAY LAGAS
• Corporate governance is the system of rules, practices, and processes by
which a firm is directed and controlled.
• A company's board of directors is the primary force influencing corporate
governance.
• Bad corporate governance can cast doubt on a company's reliability,
integrity, and transparency—all of which can have implications on its
financial health.
• When the set of rules and processes which form the governance
mechanism of a firm are ineffective or fail, it can have disastrous
consequences for a business.
• Several large organizations such Enron, Satyam, Cadbury, Wal-Mart &
Xerox were severely impacted due to corporate governance failures.
CORPORATE GOVERNANCE FAILURES

• Some of the governance issues faced by the firms which eventually lead to corporate
governance failures are –
• Ineffective governance mechanisms, for example, lack of board committees or
committees consisting of few or a single member.
• Non-independent board and audit committee members, for example where a CEO
fulfilled multiple roles in various committees
• Management, who deliberately undermines the role of the various governance structures by
circumventing the internal controls and making misrepresentations to auditors and the Board.
• Inadequately qualified members, for example, audit committee
members not having appropriate accounting and financial qualifications or
experience to analyze key business transactions, family members holding
board positions without appropriate knowledge or qualifications.
• Ignorance by regulators, auditors, analysts etc. of the financial results and
red flags.
WHY THE AUDITING PROFESSION WAS PARTLY
BLAMED FOR THE RECENT CORPORATE FAILURES?
• The corporate governance failures were broad and a number of difference
parties contributed to those failures.
• Arthur Levit, a former US SEC official summed up the problem as follows:
“Auditors are the public watchdogs in the financial reporting
process. We rely on auditors to put something like the good housekeeping
of approval on the information investors receive. The integrity of that
information must take priority.”
A RENOWNED STANDARD SETTER, ARTHUR
WYATT POINTED OUT THAT:

“Practicing professionals should place the public interest

about the interests of clients, particularly in a process
designed to develop standards expected to achieve fair
presentation… Unfortunately, the auditor is often a
participant in aggressively seeking loopholes. ”
SOME SCRUPULOUS PRACTICES WERE CITED SUCH
AS:
• Improper revenue recognition
• Creative accounting for merges and acquisitions that did not reflect
economic reality;
• Increased use of stock-based compensation that put increased pressure
on meeting earnings targets.
The change proposed was to require auditors to make judgments in the economic substance of
transactions and certify reports of company activities that were fully transparent.

Other observations were:

• Analytical procedures were being used inappropriately to replace direct tests of
account balances
• Audit firms were not thoroughly evaluating internal control and applying substantive
procedures to address weaknesses in control;
• Audit documentation, especially related to the planning of the audit, was not in
compliance with professional standards.
• Auditors were ignoring warning signals of fraud and other problems
• Auditors were not providing sufficient warning to investors about companies that
might not continue as “going concern”
RELATIONSHIP BETWEEN CORPORATE
GOVERNANCE AND RISK TO THE AUDITOR
• Good governance is important to the conduct of an audit for one very simple reason:
companies with good corporate governance are less risky to audit. These companies
generally have the following characteristics:
• Are less likely to engage in financial engineering
• Have a code of conduct that is reinforced by actions of top management
• Have independent board members who take their jobs seriously and have sufficient time and
resources to perform their work.
• Take the requirements of good internal control over financial reporting
• Make a commitment to financial competencies needed.
CONCLUSION

• Essentially, the aim of corporate governance processes is to maintain the rights of

shareholders along with all other stakeholders. This includes a commitment to the
application of standards for disclosure and transparency. Recent financial crises and
failures have motivated countries around the world to publish codes for corporate
governance. These include codes of conduct for ethical behaviour, which act as constant
guides for day-to-day decision making. Adherence to sound ethical values has a number of
benefits, including enhancing the behaviour of managers, positively motivating employees,
protecting an organisation’s reputation, encouraging greater respect for laws and
regulations, and improving business relationships.
• The audit committee plays a major role in corporate governance regarding the
organization’s direction, control, and accountability; part of which is the organization’s
internal control which is used to provide reasonable assurance about the integrity of
management and reliability of the financial reporting.
• The importance of the audit committee’s oversight and monitoring responsibilities to the
organizations’ board of directors, shareholders, and other stakeholders, as well as to
governing and regulating bodies,