One interesting aspect of the audit committee in Germany was the relatively large size of audit committees. This implies that more emphasis was given on preventing financial fraud than other aspects of corporate governance. The scores of companies in the UK and the US were similar, while average score of companies in Australia and Germany were lower.
Some of the lower score in Germany is because of less information, which means that disclosure is relatively poor even though actual practice may not be. Reporting on internal control and risks The data collected regarding with respect to reporting on internal control and risks was converted into a score for each aspect and then added to arrive at a score for each company Refer Appendix III for converting data into scores.
The maximum possible score was 5. All companies in the UK achieved a score of 4, which implies that the average score in the UK was 4 also Figure 9. The requirement to attest is a regulatory requirement in the US under the Sarbanes-Oxley Act of Hence, companies in the UK have not shown an interest in implementing this since it will increase their costs due to payments to the external auditor.
One important issue in the quantitative analysis of reporting on internal control and risks is the difficulty in capturing substantial differences in the amount of coverage given to this aspect in annual reports of companies. All companies state that they have procedures for risk assessment and measuring effectiveness of internal control, but some corporations devote substantial part of their annual report on describing risks and controls.
The information in the annual report of BHP on internal control is very helpful for investors and lenders. The difference in the coverage to risks and controls is also because of the variation in size and risks faced by businesses. BHP faces many international risks than, as an example, Tesco. Therefore, the reporting on internal control and risks should be viewed in light of the risks faced by a business. The score of all 5 companies in the US was 5 Figure Again, same scores reflect the regulatory requirements.
Scores were similar and 4 each in the case of 4 companies in Australia; only Sonic Healthcare had a lower score of 3 Figure This was because there was no summary of process used in reviewing effectiveness of internal controls. The score of each company in Germany was also 4 Figure The reporting on internal control and risk does not show significant differences among companies. All firms mention about their internal control and risk procedures. However, the amount of description of risk assessment and controls varies in annual reports.
Financial reporting quality and effectiveness of controls Financial statements are used by many stakeholders to form an opinion about the financial performance and financial position of the company. Existing and potential investors, lenders, government agencies, employees and suppliers use information in financial statements to make economic decisions.
Shareholders review financial statements to see trends in past performance to form an opinion about the future earnings of the company. Shareholders are interested in capital gains and dividend income, and therefore they are interested in prospective earnings and risks. Lenders want to know whether the debts given by them to the company are secured with sufficient safety margin. Collateral provides the lender with assets that can be used to raise cash if the borrower defaults on the loan Leitner, Lenders also want to know if the business will generate enough cash in the future to make interest and principal repayments because the collateral has value only to the extent of its market value, and therefore reliance on historic costs may not be the best way to ascertain collateral values Therefore, lenders rely on historic information in financial reports as well as risk analysis of the management to estimate future cash flows.
Between shareholders and lenders, shareholders place more emphasis on the future earnings, and therefore are more interested in risk analysis and internal control. Suppliers are interested in assessing the ability of a company to meet its short-term obligations as they arise.
Government agencies typically use the historic data in financial reports to determine tax obligations of a company, and whether the business is solvent. Current and prospective employees use financial reports to determine whether the business would be a going concern in the short and medium term.
They want the company to be profitable to have assurances about their job prospects, but are less concerned than shareholders about the level of profits and returns. The above analysis shows that various stakeholders use financial reports for economic decision making, but some use it more often than others. Investors and lenders use are interested in all financial reports, whereas government agencies are less likely to review reports unless a company declares or is close to bankruptcy.
This suggests that the need for reliability of financial reports is higher in the case of shareholders and lenders. Audit committees, internal control and assessment of effectiveness of internal control measures improve the reliability of financial reports. They give more assurance to users of reports regarding the authenticity of financial statements.
However, it is difficult for an outsider to observe the true effectiveness of these measures. Audit committees and internal control systems are two main components of corporate governance structure to give positive assurance to the users of financial information about financial reporting quality.
The Sarbanes-Oxley Act of expanded the formal responsibilities of audit committees. Krishnan lists three measures to determine audit committee quality: Independence of an audit committee minimises the influence of the management in the preparation of financial statements, and therefore gives higher assurance to external stakeholders.
All companies in the UK, the US and Australia have to show whether members of their audit committees are independent or not. This disclosure increases the reliability of information in financial reports to the users, and suggests that financial statements of the company are useful for decision making. PepsiCo described in its annual report the steps taken by it to ensure the effectiveness of the Audit Committee, including the process to ensure that it consists solely of directors who are not salaried employees and free from any relationship that would interfere with the exercise of independent judgment as a committee member PepsiCo, This increases the assurance to investors and lenders.
The experience and skills of the Board of Directors is also useful in analysing whether audit committee members have right skills in assessing financial reports. Tesco stated that at least two members of its audit committee had skills to fully review financial statements and other members of the audit committee had an appropriate understanding of financial matters Tesco, This is useful in giving assurance to investors since the skills of the audit committee members would be useful in detecting and preventing financial statement frauds.
However, it is difficult to assess the effectiveness of audit committee members as Fiolleau et al. The implication of this statement is that members of audit committees are likely to be less effective than expected by external stakeholders. This is difficult to test in real cases but field experiments regarding the procedure adopted by companies for selecting auditors have found limited involvement of the audit committee in the auditor selection decision Fiolleau et al.
This behaviour of audit committee reduces assurance of investors and lenders regarding financial reports. Internal controls have gained importance after the failure of firms like Enron. Internal control and risks disclosure increase information of stakeholders regarding earnings in the future. A sound system of internal control in a company depends on a regular evaluation of the business and financial risks Turnbull guidance, Risks are uncertainties which can have a negative impact on profits.
Therefore, risk management can positively influence on profits of the firm. It is argued that the perceived lack in risk management, especially by the financial services firms, resulted in the financial crisis in ASX, This has increased the emphasis on risk management through effective oversight and internal control ASX, The disclosure of risk management processes provide further positive assurance to investors as it shows that the management is taking steps to safeguard their wealth.
A review of the annual reports of companies shows more emphasis on internal control in the recent year. The assessment of internal controls by external auditors is a regulatory requirement in the US. The auditors of PepsiCo defined stated that internal control provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes PepsiCo, This gives higher assurance to external stakeholders. The objective of the internal control audit by an external auditor is to assess the risk that a material weakness exists within the functions of an organisation, which can have a negative impact on its valuation.
The description appears to be customary, but the company discloses the fee structure and roles of governments in determining revenue of the firm in different countries Sonic Healthcare, This is useful for an investor who wants to analyse the impact of government austerity measures on future revenues of the firm.
However, there are inherent limitations in internal controls which imply that they may not prevent or detect financial misstatements. The reporting of the internal control function to the senior management creates doubt about its effectiveness. External stakeholders will be sceptical about the ability of the internal control function to report frauds being conducted by the management.
Olympus fraud in Japan resulted in heavy losses for investors. The fraud went on for more than a decade before it became public news. This shows that internal control measures were not effective in preventing the management from committing the fraud. The above analysis shows that audit committee and internal reporting on control and risks increase assurance regarding the quality of financial reports to external stakeholders. The audit committee disclosures are useful in increasing assurance regarding the quality and truthfulness of the historic information.
The disclosure of internal control and risk reporting gives higher assurance regarding the future earnings of the business. However, there are some limitations in both disclosures, but it is better to have these disclosures than not having them.
Recommendations This section of the report discusses how current disclosures can be made more informative to assist in assessing the transparency and accountability of corporations.
A number of recommendations are made to increase transparency and accountability. One of the main observations was the way information was presented in the majority of annual reports.
All companies had information as required by their national corporate governance codes. However, in many cases the information seemed to be included in annual reports to meet the obligations of being seen as a good corporate entity rather than being done for the purpose of enhancing transparency.
As an example, all annual reports had information about the Board of Directors in terms of their skills and experience. However, it was only in the case of BHP Billiton that the management had taken extra effort to present the information in a graphical and user-friendly manner.
The annual report of BHP Billiton showed pie charts with age, skill and location distribution of its Board of Directors. This was much easier to grasp than the descriptions seen in the majority of the cases.
Users of annual reports would find it much easier to look at these graphics for analysing the diversity and experience of the Board of Directors, and therefore it is recommended that companies should adopt similar presentation formats. Currently, the management of a company is responsible for its internal control over financial reporting. This has both advantages and disadvantages. The advantage is that the internal control function can quickly get in touch with the management if any issue needs to be reported.
This may allow the risk or fraud to continue for a longer duration. The disadvantage of this reporting structure is that the internal control may find it difficult to highlight an issue if the senior management engages in financial frauds.
It is also expected that employees appointed in the internal control function may have been with the company for some time, and therefore may have developed a personal relationship with the senior management. This also makes it difficult to report any violation by the senior management. It is recommended that the annual report of a company should disclose all financial frauds over a certain amount or percentage of equity of the company.
This would increase the knowledge of investors and lenders regarding the state of corporate governance within the company. It is also recommended that each company should establish a guideline which should state that if a corporate fraud is more than a certain amount or percentage of its equity, then the internal control function would report to the audit committee with regards to investigation of that fraud.
This would increase the independence of the internal control function without overburdening the audit committee with small frauds. This step will increase the faith of investors in the financial reports of the company.
It is also recommended that companies should make effort to ensure that users of annual reports find it easier to obtain information on risks and internal control measures.
Risk is an important topic in the majority of annual reports, but information on risk is not typically available in one place in annual reports. Some firms, such as Siemens, provided clear links but others failed to point properly to look for material on risk management. The content on risk and internal control can be overwhelming for investors, especially individual investors who wish to know about the future prospects of a company but find it too time consuming to go through all content in an annual report.
Since risk has a material impact on the future earnings and cash flows, it is recommended that major risk elements and controls in place to mitigate them should be presented in a bulleted summary somewhere ideally in early chapters in an annual report.
This will help investors in gaining a better understanding of risks of investing in a business. Annual reports of companies list a number of risk factors which may influence the performance and financial position of the business in the short and long-term. Listing of risks is useful for investors and lenders but again the effort seems to be on meeting the obligatory requirements under the national corporate governance codes of countries. The effectiveness of risk disclosure can be improved by including a risk-ranking matrix in annual reports.
This will allow investors to focus quickly on major risks and look for steps being taken to mitigate them. It will also help users of annual reports to see if the management of the firm is prioritising more on areas that need greater attention. Firms should design and put into practice strong whistle-blowing systems to ensure that employees with knowledge of frauds within the company can report them to the Board of Directors without the fear of being prosecuted.
In the case of Olympus, the board of the company fired its CEO for questioning suspicious transactions. If this was the treatment given to the CEO, employees at lower level could not have thought of reporting the fraud without being severely reprimanded. Protection of employees is important because most external whistle-blowers first blow the whistle internally Kaptein, Thus, developing a system that encourages internal whistle blowing could result in early detection of frauds.
In terms of accountability, there should be more emphasis placed on the accountability of independent and non-executive directors. Currently, accountability rests with the executive board. It is recommended that the non-executive directors are also made more accountable because of the impacts of their actions. In the event of failure of the audit committee, the designated independent director should be approached first and his actions should be reviewed.
This will increase accountability of independent directors and they will take their role more seriously. There is a risk that some experienced people may not wish to take non-executive director roles because of the increased accountability. This has to be weighed in, but the loss of wealth of shareholders in a large company due to fraud is more important. Conclusion The purpose of this report was to analyse and compare corporate governance practices in countries and companies in three main areas: Board of Directors, audit committee, and internal control and risks.
Corporate governance is a useful tool to increase faith in capital markets, especially in the case of firms where owners are different from managers. The corporate governance systems across the world have shown convergence, but there are some differences.
The corporate governance developments in four countries were briefly reviewed. The Cadbury Committee played an important role in the development of corporate governance code in the UK. The US code is stricter after the Enron scandal. The main difference with the German code on corporate governance is that companies in Germany have two-tier boards. Independence of directors is important in all countries and was reflected in individual company analysis also. Size of Board of Directors and diversity skills are also important.
Actual independence depends upon actions taken by the Board of Directors and is not possible to analyse with the data in annual reports. Shareholders use historic data to predict future earnings, so they are interested in risks which may reduce earnings and cash flows in the future. Therefore, they rely on audit committees and internal reporting to assure themselves about the quality of financial reporting. All companies had some members on their audit committees who had financial experience.
Some companies disclosed the lead person in audit committees with financial expertise. It was difficult to observe skills in the case of German companies, as they did not disclose individual audit committee members in their annual reports. Emphasis on internal control has increased and companies disclosed summary of policies for the management of business risks.
Management also reported the effectiveness of their management of material business risks. This gives users of annual reports more comfort about the quality of internal controls present in a firm to mitigate risks.
However, it is difficult for users to comprehend the actual steps being taken. There should be effort to present major risks and internal control steps in a user-friendly manner to improve the disclosure of risk information. The report recommended a number of actions which can be taken to increase the effectiveness of disclosures.
Firstly, companies should try to present some key information about directors in a user-friendly visual manner to help readers of annual reports make better judgements.
Secondly, the annual report should disclose all financial frauds over a certain amount or percentage of equity of the company. Thirdly, companies should establish a guideline that if a corporate fraud is more than a certain amount or percentage of its equity, then the internal control function would report to the audit committee with regards to the investigation of that fraud.
This would increase the independence of the internal control function and reduce the potential of financial statement frauds by the management.
Finally, in terms of accountability, it is recommended that independent directors should be held more accountable for their work as the lack of their effective actions can cause substantial losses to shareholders and lenders.
Guidance on audit committee. Principles of contemporary corporate governance. A project report on Corporate Governance. This report will help you to learn about: Introduction to Corporate Governance 2. Meaning of Corporate Governance 3. Corporate is a single word used for multiple components and working together and providing direction is governance. There are three broad categories of corporate and each one has its own method of governance and fair-unfair practices: Some companies are very tightly held by individuals or family members.
Both small and big companies are in this category and managed under authoritative leadership. There will be many types of unfair practices pertaining to statutory payments, disparity in payments, hiring-firing and opportunism. There is heavy emphasis to business and profits and no emphasis to society related activities.
This category consists of state owned, central government owned public sector enterprises, some of the very old private companies running on the lines of Public Sector Enterprises.
This is almost opposite type of private corporations. Lack of accountability more concern for employee welfare and lack of competitiveness in product and marketing. There will be many cases of bribery and unethical practices in various corporate related activities. They are competent in their industry, do-well, grow well and take care of the Corporate Social Responsibilities to the maximum possible extent. The morale of employees is very high and job satisfaction is yet to achieve. The key issues that guide a company as to how and who are managing is based on the finance structure of the company which has direct bearing on ownership or who is the boss?
The institutional environment inside and outside the organisation plays a crucial role in decision making issues. Indian corporate is yet to achieve success in corporate governance, setting values and flextime working. This is due to the facts that Indians follow discipline under regulations of rules. Ethical values cover various aspects like fair competition, social responsibility, consumer care and corporate image.
If ethics committee is active that itself is enough caution for employees to refrain from unethical practices. Social audit is a systematic assessment of ethical behaviour and actions and reporting on some meaningful activities of the company having social impact. For example, pollution control, social programmes, customer care etc. The concept of corporate Governance has been used in different perspectives. Corporate governance has been defined in many different ways by scholars and agencies.
Deveshwar, Chairman of ITC corporate governance refers to the structure, systems, and processes in a corporation, that are considered most appropriate to enhance its wealth generating capacity. A review of various definitions and views brings out that in its simplistic form corporate governance is an umbrella term encompassing various issues concerning senior management, board of directors, shareholders and other corporate stakeholders.
Corporate governance is collective term encompassing various issues concerning top management, board of directors, shareholders and the corporate stakeholders. It includes ethics and values of the company and its top management. There is no single definition of corporate governance. The definitions are evolving. Definitions by experts in the field are noted. This is often limited to the question of improving financial performance.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Others use the expression as if it were synonymous with shareholders democracy.
Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edges…….
Integrated framework frame work whereby people formally organise themselves for a defined purpose in a corporation, and they apply systemic processes consistently to achieve predicted performance for sustainable development. A continuous process through which conflicting or diverse interests may be accommodated and cooperative action may taken. The governance frame work is there to encourage the efficient use of resources.
Corporate governance is management of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy its stakeholders namely shareholders, creditors, employees, customers, suppliers and those connected. Corporate governance prescribes a code of conduct in relation to all the stake holders.
Hence sets a framework of effective accountability to its stake holders. Good corporate governance serves several important objectives. It enhances corporate performance by creating an environment that motivate managers to maximise returns on investment, enhance operational efficiency and ensure long-term productivity growth basis.
It also ensures that corporations conform with the interests of investors and society by creating fairness, transparency and accountability in business activities among employees, management and the board. Corporate Governance is a systemic process by which the companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, governance process should ensure that these companies are managed in a manner that meets stake-holders aspiration and societal expectations.
Corporate Governance is based on the principles of integrity, fairness, equity transparency, accountability and commitment to values. Good governance practices stem from the culture and mindset of the organisation. As stakeholders across the globe evince keen interest in the practices and performance of companies, Corporate Governance has emerged on the centre stage. Introduction of Corporate Governance in a company brings order and methods in decision making process and fixes who should own the responsibility.
That is the goal and role classification emerge. The company will focus on its mission, vision and not an personal likes and dislikes of few top officers.
The benefits of corporate governance are difficult to quantity in short range. Accounting jugglery and showing profits give a company short term gains but they are not long term policies for financial credibility.
The unethical policies or mismanagement by CEO or director of a company will be exposed by adhering to corporate governance principles. Corporate governance will throw light on excessive remunerations given to directors or CEO. It improves, investor confidence and relations. The occurrence of frauds and mismanagement can be detected early for remedial actions. It is also agreed that no system can remove fraudulent practices fully.
Corporate governance is open democratic system. They may appear long winded or time consuming or individual decision making is hindered. The risk of fraud is much bigger and damage to a company.
Introduction of corporate governance has a publicity images or snob value where the companies with corporate governance are treated by investors and the general public as prosperous and forward looking. Corporate governance helps institutional investors. The autocratic ways of working by top brass is removed. Corporate governance creates a new open culture in the organisation.
The trust generated by corporate governance will improve participative performance of the organisation. More and more will come forward to provide financial capital, supply goods, buy goods and service and join the company.
The market capitalisation of a company comes down drastically whenever a company is known to follow unethical practices. This was seen in the cases of Satyam and Sun group cases in recent past.
The society is investing its resources in a company, naturally it will be duty of the company to provide its stakeholders a honest and clear performance account. To achieve this company has to initiate corporate governance and follow-up effective implementation.
The corporate governance policies and methods vary around the world through the basic principles remain the same. In addition to written laws and codes on proper governance the companies should have its voluntary codes matching its mission and objectives.
The corporate governance helps in removing unnecessary controls by vested interests. Late nineteenth century in USA the then large companies like Standard Oil and Rail Road Company top brass collected pay-checks and perks unheard in history and used them to build lavish mansions in islands.
The resources of a company were clearly siphoned off for private luxury. The excesses of the tycoons became too large to ignore.
Since s Government of USA is incrementally putting regulations in place of large industries and rein in the power of robber barons. It is the beginning of Corporate Governance. Nixon who was thirty seventh President of United States. He was first to resign from the office for his involvement in Water gate Scandal.
He arrogantly forgot that he was representative of people. Power made him to think that he was above all laws of the land. This exactly what happens to many chief executives of companies, more so, in private or family owned companies. A modern regulatory state must make guidelines, code of conduct; make rules, regulations, laws and train personnel needed to prevent corporate abuse.
The idea is that the top officers like MD. The top officers should behave as trustees of the company. They should not use their money and positional power for enhancing their personal cause like amassing wealth, diverting resources and using company information for their personal gains, benefiting their families by getting self-approved fat salaries, bonuses, perks and other luxuries. Few industry barons enter political arena or indulge in costly habits like flying daily company aircrafts and the like.
In few family owned companies all of these used to go in small measure. The clever accounting practice used to cover up them. Now the shareholders, governments and general public gets all the details and information and it will be difficult for public limited companies to indulge in above activities thanks to the general awakening awareness and fast or rather up to minute availability of information to all stakeholders of the company.
Economic development and gains of company should not be allowed to be frittered away by a small group of top officers of a company for their personal glorification. The popularity, brand image and longevity of a company apart from high market capitalisation show good corporate governance in the particular company.
Corporate Governance has to be built brick by brick and consolidated so that it becomes part and vision and a way of life in a company. The growth of corporate form small business house is seen more in India. All Indian top corporate are family business. Good family business houses developed many excellent corporate based on values and social responsibilities. Most of Indian family owned companies have their shareholding in the range of 10 to 20 percent.
The families enjoy percent ownership. The families also started taking undue advantage for the positions taken by the family member. Used the clout to use and miss-use the resources of the company for enhancing further family benefits and political power.
Corporate Governance. Executive Summary. The main goal of the report is to evaluate the current corporate governance of a certain organization. In this report, the company that has given emphasis is a food retailing company which operates in UK.
(a) Introduction. Effective corporate governance mechanism, professional and ethical board of directors and senior management, proper internal control system and sound legal system and regulatory framework are the conditions leading to .
This essay has been submitted by a law student. This is not an example of the work written by our professional essay writers. Corporate Governance. Corporate Governance Corporate Governance is the relationship between the shareholders, directors, and management of a company, as defined by the corporate character, bylaws, formal policies and rule laws.
Introduction. Corporate governance has re-emerged as one of the most talked about business topics in the twenty-first century after the failure of some of the large public-listed companies (Banks, ). - Corporate Governance Corporate Governance is the relationship between the shareholders, directors, and management of a company, as defined by the corporate character, bylaws, formal policies and rule laws.