Financial Aspects of Corporate Governance
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Transcript of Financial Aspects of Corporate Governance
Presented To: Prof Abhay Singh
Financial Aspects of Corporate Governance
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Group MembersGroup Members
Fiona D’Souza A-21
Janice Pinto A-25
Jigar Patel A-27
Lynette Crasto A-31
Vivek Trivedi A-57
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Committee on Financial Aspects Committee on Financial Aspects of Corporate Governanceof Corporate Governance
May ‘91 by Financial Reporting Council and LSE
Reasons of Setting UpSponsors Concern at Perceived Low Level of
Confidence in Financial Reporting & Ability of Auditors
Underlying FactorsLooseness of Accounting StandardsNo clear framework to keep Directors under reviewCompetitive Pressures on Companies & Auditors
Recent HappeningsUnexpected failures of Major CompaniesCriticism of Lack of Effective Board
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Corporate GovernanceCorporate Governance It is the System by which companies are Directed and
Controlled
Board of DirectorsResponsible for Corporate Governance and setting
up overall frameworkSetting up, Implementing the Financial Policy
Shareholders Role- Appoint BOD & Auditors
Auditors Roles- Provide Shareholders an External and Objective check on Directors Financial Statements.
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Code of Best PracticeCode of Best PracticeDirected to BOD of all listed companies
registered in UK
Statement of ComplianceListed Companies Reporting in respect of
years ending June 30, 1993 should state in their report and accounts whether they comply with the Code and identify and give reasons for any areas of Non-Compliance
Responsibility of complies lies directly with the Board Of Directors
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Basis of Code of Best PracticeBasis of Code of Best Practice Openness
On the part of the company becomes basis for the confidence which needs to exist between Business and all Stakeholders
Done throughDisclosing InformationAllowing stakeholders to scrutinize the companies more
thoroughly Integrity
Means Straight forward dealing and CompletenessFinancial Reports should be honest and present a balanced picture
of the State of Company’s Affairs Accountability
BOD are accountable to their ShareholdersBoth BOD and Shareholders should make this accountability
effectiveBOD does it through the Quality of Information they provide to
ShareholdersShareholders by, willingness to exercise their responsibilities as
Owners
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THE BOARDTHE BOARDCombination of Executive and Non-executive Directors
All Public companies should have effective Board
Headed by Chairman Primarily responsible for the working of the board Chairman’s role should be different from that of chief
executive
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Board EffectivenessBoard EffectivenessTesting the Board EffectivenessAll Directors are equally responsible in LawBoard as a whole is the Final AuthorityContribution of Non-executive Directors:- 1-To review the performance of the board and
the executive directors 2-To take the lead where potential conflicts
arise
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Non-Executive DirectorsHave an Important place on the BoardMinimum of three Non-Executive DirectorsIndependence of judgementAppointed for a specific term
Professional Advice--To furtherance their duties
Director’s Training--especially for directors with no previous board
experience
Board Structures and Procedures
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Company Secretary--plays an important role on board
Standards of Conduct--all employees should know their standard of conduct
Nomination Committees--approach to make board appointments
Internal Controls
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Audit CommitteeAudit Committee plays crucial role in ensuring integrity of financial
reports
assurance to the shareholders
minimum three members
external auditor should attend all audit meetings
authority to investigate and full access to the information
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Duties of Audit Duties of Audit CommitteeCommittee
Making recommendations to the board
Review financial statements before submission
Discussion with external Auditor
Review of any findings of internal investigation
Chairman should answer question at the AGM
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Board RemunerationBoard Remuneration
Transparency
Future service contracts
Appointing remuneration committee
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Financial ReportsFinancial ReportsShow a true and fair view
Advantage to investors, analysts and company
Publishing financial statements
Financial statements should be reviewed by auditors
Inclusion of Cash Flow Statement
Simplified version of statements
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“Auditing is the independent examination of financial information of any entity whether profit oriented or not & irrespective of its size or legal
firm when such an examination is conducted with a view to expressing
an opinion thereon. ”
- Auditing & Assurance Standard (AAS) by ICAI
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AuditsAuditsThe annual audit is one of the cornerstones of
corporate governance.
The audit provides an external and objective check on the way in which the financial statements have been prepared and presented.
It is the most direct method of ensuring that companies actions is properly stated by boards and against strict accounting standards.
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Issues in AuditingIssues in AuditingAlthough the shareholders formally appoint the
auditors, the shareholders have no effective say in the audit negotiation.
Companies too are subject to competitive pressures.
lack of understanding of the nature and extent of the auditors’ role.
The central issue is to ensure that an appropriate relationship exists between the auditors and the management whose financial statements they are auditing. 17
Issues in AuditingIssues in Auditing
Various frauds in the management system is difficult to detect. Another problem for the auditors is when they suspect that top management itself is implicated in the fraud, without having the necessary evidence to back up their suspicions.
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Solutions ImplementedSolutions Implemented Development of more effective accounting
standards that provide important reference points against which auditors exercise their professional judgments.
Formation by every listed company of an audit committee which gives, the auditors direct access to the non-executive members of the board.
‘Quarantining’ audit from other services
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Solutions ImplementedSolutions ImplementedCompulsory rotation of audit firms should be
introduced, to prevent relationships between management and auditors becoming too comfortable.
One proposal made to the Committee was that auditors should have a duty to report fraud to the appropriate authorities.
Clearly defined role of an auditor.
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ShareholdersShareholders
How to strengthen the accountability of boards of directors to shareholders?
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Building a Stronger Building a Stronger Relationship between BOARD Relationship between BOARD
& Shareholder’s& Shareholder’sSolution Issue
1. Formation of Shareholders’ committee (for appointment of directors and auditors)
1. Tests of legitimacy,(i.e. no evidence of true representation of all the company’s shareholders)
2. Individually or collectively put forward resolutions at general meetings.
2. Legislations required to alter the present thresholds for tabling shareholder resolutions, also reducing the costs for circulating shareholder communications22
Rights of ShareholdersRights of ShareholdersShareholders are not involved in the direction
and management of the company
However, they can call upon the directors who appear to be fail in their duties
Strengthen accountability of the Board to shareholders by ensuring compliance with the Code
Annual General Meeting gives all shareholders, (irrespective of size of shareholding ) direct and public access to their boards
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Rights of ShareholdersRights of Shareholders
Providing forms in annual reports on which shareholders could send in written questions in advance of the meeting
Circulation of a brief summary of points raised at the Annual General Meeting to all shareholders after the event.
The Committee encourages boards to experiment with ways of improving their links
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Institutional ShareholdersInstitutional Shareholders
Institutional shareholders own majority shares of quoted companies
These are shares largely held on behalf of individuals, as members of pension funds, holders of insurance policies and the like
Institutional shareholders use their power to influence the standards of corporate governance
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Responsibilities of Responsibilities of InstitutionalInstitutional
Shareholders in the UK Shareholders in the UK Institutional investors should encourage regular,
systematic contact at senior executive level to exchange views and information on strategy, performance, board membership and quality of management
Institutional investors should make positive use of their voting rights, i.e. registering their votes wherever possible on a regular basis
Institutional investors should take a positive interest in the composition of boards of directors, with particular reference to
concentrations of decision making power not formally constrained by appropriate checks and balances,
and to the appointment of non-executive directors of the necessary experience and independence.26
Shareholder’s Shareholder’s CommunicationsCommunications
ISSUESISSUES
Parity between shareholders (i.e. institutional shareholder and individual shareholder)
Danger of imparting inside information
Long term relationships
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Sound Shareholders Sound Shareholders CommunicationsCommunications
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Shareholder InfluenceShareholder InfluenceInstitutional Shareholders must use
their influence as owners to ensure that the companies in which they have invested, comply with the Code
The obligation on companies to state how far they comply with the Code provides institutional and individual shareholders with a ready-made agenda for their representations to boards
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ConclusionConclusionThe Code should reinforce good corporate
governance ie. raising the standards without stifling entrepreneurial initiative.
making the participants in the governance process accountable.
And this can b done only if All three groups have a common interest in combining to improve the working of the corporate system.
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RecommendationRecommendationAll parties should encourage compliance with the
Code by making a statement in the form of report and accounts and getting it reviewed by the auditors before being published.
The Committee’s sponsors will monitor the progress of the code. It will also determine corporate governance in brief of the new sponsor.
interim reports should be reviewed by the auditors
Fees paid to audit firms for non-audit work should be disclosed.
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There should be a criteria for assessing effective systems of internal control.
The Government should introduce legislation to the auditors of all companies
The Committee supports the lead taken by Auditing Practices Board for the development of auditing practice.
Some issues that successor body may wish to review or consider indept:-
directors’ training role of the shareholders cash flow information into interim reports
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The Code of best practiceThe Code of best practice
The Board of Directors The board should meet regularly There should be a clear division of
responsibilities, power and authority The board should include non-executive
directors with equal power and responsibility There should be an agreed procedure for
directors performance of duties also they should have access to the advice and services of the company secretary
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Non-Executive Directors
Non-executive directors should bring an independent judgement.
The majority should be independent and fees should reflect the time they commit to the company.
Non-executive directors should be appointed for specified Terms and have a formal process of selection
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Executive directors
Their contracts should not exceed three years without shareholders’ approval.
There should be clear disclosure of directors’ total emoluments
Their pay should be subject to the recommendations of wholly or mainly of non-executive directors.
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Reporting and Controls
The board should assess company’s position and ensure a good relationship is maintained with the auditors.
The board should establish an audit committee of at least three non-executive directors
The directors should explain their responsibility and report on the effectiveness of the company’s system of internal control along with assumptions or qualifications as necessary.
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Thank You
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