Corporate Governance Pertemuan 06

Matakuliah : F0122 – Seminar AkuntansiTahun : 2009

Corporate Governance

Accounting SeminarWeek 6

Prepared by: Gatot Soepriyanto, SE., Ak., M.Buss

(Acc)

The Corporate Governance Environment

• Corporate governance practices signal the potential for earnings management—permissive structures indicate that manipulation is more likely

• The board of directors sets overall policy & provided oversight for operating activities

• Historically, boards were composed mainly of owners, managers & other insiders

• It is now clear that a majority of independent board member is essential for effective oversight

Analyzing Corporate Governance• Analysis of corporate governance is a qualitative

analysis, based on structures & policies of the board

• The primary source of information is the Proxy statement, usually issued after the annual report (& associated with the upcoming annual stockholders’ meeting)

Areas of Corporate Governance Analysis

• The CEO & board of directors—composition, independence & policies

• Executive compensation—what forms, how much, relation to performance

• Auditing—the role of the audit committee, the external auditor, non-audit fees

• Related-party transaction—potential conflicts of interest• Insider trading—patterns that suggest abuse• Investment banking relationships• Evidence of past abuse such as earnings restatements

Concerns with the Board of Directors• Is the CEO also the chairman of the board?• Evidence of CEO oversight abuse• Are a majority of board members independent?• What are the board committees & is there

evidence that they’re active & effective• Evaluate board compensation—is it based on

performance & active participation

Concerns with Executive Compensation

• Evaluate the compensation committee for independence & competence

• Analyze the executive compensation (especially the CEO) by component: base pay, bonuses, stock options (& other forms of ownership-related compensation) & perks

• Is compensation based on performance? Evaluate based on earnings & stock price performance

• Particular concerns are for over-compensation of CEO for poor performance & impact of previous accounting-related abuses

Concerns with Auditing• Evaluate the audit committee for independence,

competence with financial information, how many times the committee meets & other evidence of diligence

• Review audit procurement practices, including the external auditor (usually a Big 4 firm), non-audit fees, the audit opinion & timeliness of reports

Other Concerns• Are there related-party transactions? If so, do they

signal potential manipulation or a permissive environment?

• Evaluate insider trading (buying & selling of corporate stock by senior executives)—are there patterns that suggest abuse?

• Do investment banking relations exist that suggest potential abuse?

• Is there evidence of past accounting abuse (e.g., earnings restatements) or on-going problems (such as SEC investigations)

AssignmentsDiscuss and present the following paper:• Earnings Management and Corporate Governance

in Asia’s Emerging Markets– By Chung-Hua Shen and Hsiang-Lin Chih (Corporate

Governance: An International Review, 2007 - papers.ssrn.com)