global corporate governance rules
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A CASE FOR GLOBAL CORPORATE GOVERNANCE RULES : AN AUDITOR’S PERSPECTIVE
Robert S RousseyUniversity of Southern California, USA
Presented By
Mukund Prasad JoshiMFC 2nd Semester
SOMTU
Abstract The articles emphasizes on need of global corporate
governance rules The paper considers the importance of Corporate
Governance and auditor’s involvement in it The paper also considers the new initiatives of OECD
and World Bank for development and implementation of global CG rules
The paper describes the use of Global Shares by global enterprises and how it compels to a movement for global rules
Finally, the paper recommends International securities Regulators to seriously consider the formation and implementation of global CG rules
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Introduction
“Once a business entity lists its shares outside of its national boundary, it should be subject to a set of global corporate governance rules” - Roussey
Corporate governance has been practiced since a long time
But, CG has been practiced mostly on a nation by nation basis
Globalization and the changing scenario of corporate structure create imperatives regarding the need of global CG rules
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Financial statement frauds, rampant corruption and expanding money laundering has increased the need of corporate governance
CG plays important role to protect global capital markets
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What is CORPORATE GOVERNANCE?
Governance in the private sector is generally referred to as “Corporate Governance”
The ethical corporate behavior by directors or others charged with governance in the creation of wealth for all stakeholders
It is how stewardship is provided over business of an entity to
o achieve corporate objectives,
o balance such activities with expectation of society ; &
o provide appropriate accountability to stakeholders
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Why CORPORATE GOVERNANCE?
Shareholders are being away from the management and control of enterprise
Large companies employee professional managers who may involve in mismanagement or financial statement fraud
There are many ways to control over professional operating management
The most important way is to hire the directors who
o Accept stewardship responsibilities
o Oversee the actions of professional managers
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Why CORPORATE GOVERNANCE?
CG responsibilities are focused more on non executive directors since they are true representatives of the stakeholders
They are independent from
o the day to day operations of the entities
o the actions of the professional managers
They have interests of stakeholders
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Contd…
Studies showed that firms having outside directors have less financial statement fraud
A study, sponsored by COSO (Committee of Sponsoring Organizations of the TreadwayCommissions), focused on fraudulent financial reporting. As related to governance, the study found that
1. Top management was usually involved
2. Boards and Audit committees were weak
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Contd…
1. Top management was usually involved
oThe CEO was named in 72% of cases
oThe CFO was named in 43% of cases
o Either CEO or CFO were associated in fraud in 83% of cases
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Contd…
2. Boards and Audit committees were weak
o25% of companies had no audit committee
oThe median number of meeting each year was just 1 (where audit committee existed)
o65% of audit committees had no accounting or financing expertise
60% of directors were insiders or ‘gray’ directors (outsiders with ties to the company or management)
39% of boards had no directors that had served as an outside or gray director on another company’s board, suggesting they had little board experience
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Who are the stakeholders ?
Some of the stakeholders of a typical business entity are
Shareholders : who make an equity investment in an enterprise and who expect share investment growth and dividend distributions
Banks : who provide loans and who expect to be repaid
Executive management and employees : who provide services to an entity and who expect to be paid for the services and to receive various employee benefits
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Who are the stakeholders ?
Suppliers : who provide goods and services and who expect to be paid from them
Other companies : who have cross-holding interests, who have a vested interest in the entity and who can significantly influence the corporate behavior of the company
National and Local governments : who provides services to the entity and the society and who need to receive revenue through taxation
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Do we need CG always ?
We might not need CG,
o If all the companies has the most outstanding business managers as the executive management who truly had the stakeholders interest foremost
o If we did not have fraud and corruption in the world
There is need not only for representatives to assists overall strategies and development of business enterprises but also to eliminate these illegal acts
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Governance activities relates to
o Entity strategy development and implementation
o Economic development , including mergers and acquisitions
o Appointment of professional operating management executives
o Compensation of these executives
o Formation of adequate accounting systems and related internal controls over financial reporting, operations and compliance with laws and regulations
o Engaging independent auditors
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Role of Auditor…
To be effective corporate governance, principles have to be applied in good faith, consistently, ethically and with skills needed to apply the principles
This is when the auditor can play an important role in the governance process
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
The Auditor’s Involvement in Governance Process
An auditor primarily focuses on an entity’s financial reporting process
Encourage executive management to adopt appropriate accounting systems and internal controls
But, auditors have not any power to direct executive management
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What is the effect of CG ?
“If governance responsibilities are taken seriously and performed with intelligence, competence and due regard for the stakeholders, society stands a better chance of being protected from financial statement fraud, money laundering, and other ills embedded in some entities”
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Global CG rules – WHY ?
A task force of ICMG (International Capital Markets Group) studied international corporate governance in 1994-95
It concluded that ‘it was not appropriate to prescribe an international standard for CG
But, during the year 1995-2000 the global market capitalization has increased by $18 trillion and the need for global governance rules was felt
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Why global CG Rules ?
There is no doubt that CG has to be implemented at the national level
But, global investors and other stakeholders would be better protected if all countries required, at least initially, a prescribed set of corporate governance principles for an entity desiring to list its shares in a country outside of its national securities jurisdiction
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Any Progress on global CG ?
There are several new initiatives that may further the development of governance rules on a global basis
A new initiative of IAPC (International Auditing Practice Committee) of the IFA (International Federation of Accountants)
A new initiative of the OECD and the World Bank
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
The initiative of IAPC
IAPC considered the role of auditors with respect to governance
communication between the audit team and the people who accepted the governance responsibilities
The IAPC developed an exposure draft of an International Standard on Auditing (ISA) and finalized it on 1999
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What does ISA tell ???
Auditor should communicate audit matters arising from the audit of financial statements
The auditor has to communicate these matters in all audit situations and not just in audits of publicly traded entities
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What if governance people are not identified ? The auditor has to use judgment in this
determination, taking into account such matters as
The governance structure of an entity(for e.g. in entities with supervisory boards or with audit committees, the relevant person may be those bodies)
The circumstances of the audit committees(for e.g. owner-managed entities)
Relevant legislation; and(for e.g. that defines certain aspects of governance communications)
The legal responsibilities of those persons
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
The matters to be communicated
The general approach and the overall scope of the audit
The selection of, or changes in, significant accounting policies and practices
The potential effect on the financial statements of any significant risks and exposures that are required to be disclosed in the financial statements;
Audit adjustments, if any
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
The matters to be communicated
Material uncertainties that may cast significant doubt on the entity’s ability to continue as a going concern;
Disagreements with management
Expected modifications to the auditor’s report;
Other matters warranting attention by those charged with governance; and
Any other matters agreed upon in the terms of the audit engagement
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
The initiative of OECD and the World Bank
An important agreement was reached between OECD and the World Bank on 21 June 1999
Agreement for new initiatives to co-operate and improve CG
The initiatives include holding an annual Global Corporate Governance Forum and a series of Policy Dialogue and Development Round Tables
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
GCGF and PDDRT
Objective of Global Corporate Governance Forum will be ‘to provide a framework for international cooperation and create synergies for the design and implementation of joint or individual projects by participating countries and institutions’
The Policy Dialogue and Development Round Tables will be run on a regional and, where appropriate, national basis to “provide the framework for continuing policy dialogue and a multilateral process of exchange of experience”
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Key points of the agreement… The agreement also includes the
establishment of a senior Private Sector Advisory Group (PSAG)
PSAG will be part of obtaining support and input from the private sector
The agreement intends new set of CG principles that has recently been issued by the OECD
The principles focus primarily on public traded entities, but may be of use to other entities and government owned enterprises
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What does OECD document cover?
FIVE AREAS, FOLLOWED BY SUPPORTING RECOMMENDATIONS
1. The rights of shareholders;
2. The equitable treatment of shareholders;
3. The role of stakeholders;
4. Disclosure and transparency; and
5. The responsibilities of the board
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Global Shares Organizations following a global business model are
starting to use global shares, i. e. using the same form of shares for listing in a home country and in non-home country capital markets
Global Shares enable virtually seamless cross-border trading allowing non-U.S. companies to increase liquidity and pricing efficiency in the U.S. market while permitting U.S. investors access to the home market shares on the same terms as local investors
- NYSE (July 2, 2000)
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
What are global shares…???
According to NYSE, Global shares
Are actual shares of a company that trade and transfer freely across borders;
May be used to raise capital or as currency for U.S. acquisitions. The same shares may be listed and traded on stock exchanges around the world;
Are quoted, traded and settled in U.S. dollars
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
Conclusion
Global corporate governance rules should be
developed and implemented, at a minimum, for business entities whose shares are listed in international capital markets
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
I liked it…
“Good corporate governance matters” !!!
It matters to business because it contributes to sustainable long-term success.
It matters to shareholders – and others interested in the company – because it ensures them a transparent and productive relationship with the enterprise concerned”
- Byeres
Mukund Prasad Joshi | MFC 2nd Semester | SOMTU
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