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The Corporate and Corporate Governance

The aims and process of a corporation and the goals of the different interest groups involved. The aims and objectives of the corporation: Firms exist to supply goods and services to consumers as efficiently as possible. (Social point of view) The firm exists to supply income, power, prestige, creative satisfaction, or a combination of these to those who work for it or with it. (Individual point of view)

Goal of interest group (stakeholders)

Stake holder Shareholders Suppliers of materials Banks and other lenders Government agencies Employee and unions Goal To receive bigger dividends To have a fair deal with clients To receive prompt repayment of debt To enforce the laws of the land To have safe working environment and Fair negotiation corporate with management To buy safe products To have fair competition and avoid restraints of trade To have safe environment

A leverage buyout is a restructuring strategy whereby a party buys all of a firms assets in order to take the firm private. Once the transaction is completed, the companys stock is no longer traded publicly. Significant amounts of debt are usually incurred to finance the buyout. To support debt payments and to down scope the company to concentrate on the firms core businesses, and the new owners may immediately sell a number of assets. It is not uncommon for those buying a firm through an LBO to restructure the firm to the point that it can be sold at a profit within a five to eight year period.

Management buyouts(MBOs) / Employee buyouts (EBOs) / Whole firm buyouts

These are the three types of LBOs where a company or partnership purchases an entire company instead of a part of it. MBOs have been found to lead to downscoping(divestiture, spin off, or some other means of eliminating businesses that are unrelated to a firms core businesses) and to greater entrepreneurial activity and growth.

Customers Competitors Communities and society at large

Audit committee
The audit committee shall be composed of at least three (3) Boar members, preferably one of whom shall be an independent director and another should have related audit experience.(code of corporate governance) Role of Audit committee Provide oversight over the senior managements activities in managing credit, market, liquidity, operational, legal and other risks of the corporation. Provide oversight of the corporations internal and external auditors. Review and approve audit scope and frequency, and the annual internal audit plan Discuss with the external auditor before the audit commences the nature and scope of the audit, and ensure coordination where more than one audit firm is involved. Setup an internal audit department and consider the appointment of an internal auditor as well as an independent external

Goal Congruence
Corporate goals must be in alignment with the goals of the different interest groups so they could have a common framework which can serve as a basis in monitoring the attainment of the goals established. Goal congruence can be achieved by focusing on the corporate vision and the intent of the different interest groups. Interest groups need to fit their intent with the corporate vision and long term strategy

Leverage Buyouts (LBOs)

Is commonly used as restructuring strategy to correct for managerial mistakes or because the firms managers are making decisions that primarily serve their own interest rather than those of shareholders.

auditor, the audit free and any question of resignation or dismissal Monitor and evaluate the adequacy and effectiveness if the corporations internal control system Receive and review reports of internal and external auditors and regulatory agencies where applicable and ensure that management is taking appropriate corrective actions, in a timely manner in addressing control and compliance functions with regulatory agencies Review the quarterly, half-year and annual FS before submission to the board, focusing particularly on: o Any change/s in accounting policies and practices o Major judgmental areas o Significant adjustments resulting from the audit. o Going concern assumptions o Compliance with accounting standards o Compliance with tax, legal and stock exchange requirements Coordinate, monitor and facilitate compliance with existing laws, rules and regulations Evaluate and determine non-audit work by external auditor and keep under review the non-audit fees paid to the external auditor both in relation to their significance to the auditor and in relation to the companys total expenditure on consultancy Establish and identify the reporting line of the chief audit executive so that the reporting level allows the internal audit activity to fulfill its responsibilities.

Chief Financial Officer

Responsibilities towards Board of Directors The CFO is required to furnish necessary and classified information to the board of directors along with his/her analysis and suggestions. Attends board meetings and discusses any issue with financial implications. External Auditor Information required from the CFO: 1. Annual business plans, cash flows An external auditor shall be selected and projection, forecast and long term plans. appointed by the stockholders upon 2. Budgets include capital, manpower and recommendation of the audit committee overhead budgets along with variance The reason/s for the resignation, dismissal or analyses. cessation from service and the date thereof of an

3. Quarterly operating results of the company as a whole and in terms of its operating divisions or business segments 4. Details of joint ventures or collaboration agreements with distributors, agents, etc. 5. Default in payment of principal and / or interest including penalties on late payments and other dues, to a creditor, bank or financial institution, or in default in payment of public deposit 6. Failure to recover material amounts of loans, advances and deposits made by the company, including trade debts and intercorporate finances 7. Significant public or product liability claims likely to be made against the company, including any adverse judgment or order made on the conduct of the company Responsibilities toward shareholders The CFO must ensure the ff: 1. The FS, prepared by the management of the company, present fairly its states of affairs, the results of its operation, cash flows and changes in equities. 2. Proper books of accounts of the company have been maintained 3. Appropriate accounting policies have been consistently applied in preparation of FS and accounting estimates are based in reasonable and prudent judgment 4. International accounting standards, as applicable in the Phil., have been followed in the preparation of FS and any departure therefrom has been adequately disclosed. 5. The system of internal control is sound in design and has been effectively implemented and monitored. 6. There are no significant doubts upon the companies ability to continue as a going concern. 7. There has been no material departure from the best practice in the corporate governance code.

external auditor shall be reported in the Potential agency conflict between stockholders companys annual and current reports. and creditors The external auditor of the company shall not at Creditors have fixed financial claim on the the same time provide the services of and internal companys resources in the form of long term auditor to the same client. The corporation shall debt, bank loans, commercial papers, leases, ensure that other non-audit work shall not be in accounts payable, wages payable, taxes payable conflict with the functions of the external auditor. etc. The companys external auditor shall be rotated or Returns to stockholders are variable the handling partner shall be changed every five Potential conflict: owners may attempt to increase (5) years or earlier the riskiness of the companys investment hoping If an external auditor believes that the statements to receive greater returns. I this happens, made in the companys annual report, information bondholders suffer because they do not have an statement or proxy statements filed during his opportunity to share in the higher returns. engagement is incorrect or incomplete, he shall Effects of the agency theory on corporate present his views in said reports. governance Internal auditor Principle: managers wont work for owners unless The corporation shall have in place an it is in their best interest independent internal audit function which shall be The agency problem arises from the separation of performed by an internal auditor or a group of management and ownership of the firm internal auditors. Managers may make decision that are not in line The internal auditor shall provide the board, with the goal of maximization of shareholders senior management, and stockholders reasonable wealth assurance that the corporations key Definition of terms organizational and procedural controls are Board of directors refers to all collegial body effective, appropriate and complied with that exercises the corporate powers of all The internal auditor shall report to the audit corporations forms under the corporation code. It committee conducts all business and controls or holds all the The minimum internal control mechanism for property of such corporations. managements operational responsibility shall Independent director refers to a person other center on the CEO, who is ultimately accountable than an officer or employee of the corporation, its for the corporations organizational and parent or subsidiaries, or any other individual procedural controls having any relationship with the corporation Board of directors which would interfere with the exercise of Primarily responsible for the governance of the independent judgment in carrying out the corporation responsibilities of a director. Sets the policies for the attainment of corporate Public company refers to any corporation with a objectives and provides an independent check on class of equity securities listed in the exchange or management with assets in excess of fifty million pesos Composition of the board (50,000,000) and having 200 or more stockholders At least five but not more than 15 and to be each holding at least one hundred (100) shares of elected by the stockholders a class of its securities. At least two independent directors or 20 % of the Corporate governance refers to a system members of the board, whichever is lesser. whereby shareholders, creditors, and other The combination of executive and non-executive stakeholders of a corporation ensure that directors in the board will discourage a director or management enhances the value of a corporation a small group of directors to dominate the as it competes in an increasingly global market decision making process. place

Management refers to the body given the authority to implement the policies determined by the board in directing the course/business activities of the corporation Executive director refers to a director who is at the same time appointed to head a department / unit within the corporate organization. Non-executive director refers to a board member with non-executive functions Non-audit work refers to other services offered by the external auditor to a corporation that are not directly related and relevant to its statutory audit function. o Examples of non-audit work include: accounting, payroll, bookkeeping, reconciliation, computer project management, data processing, or information technology outsourcing services, internal auditing, and services that may compromise the independence and the objectivity of the external audit Internal control - refers to the process effected by a companys board of directors , management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, the reliability of financial reporting, and compliance with applicable laws, regulation and internal policies Internal control environment refers to the framework under which internal controls are developed, implemented, alone or in concert with other policies or procedures, to manage and control a particular risk or business activities , to which the company Is exposed Internal auditing refers to an independent objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance and processes Internal audit department- refers to a department division, team of consultants, or other practitioners that provide independent objectives assurance and consulting services designed to add value and improve an organizations operations

Chief audit executive refers to the top position within the organization responsible for internal audit activities. This may refer to the internal audit director, general auditor, chief internal auditor, or inspector general. Independence refers to that environment which allows the person to carry out his/ her work freely and objectively. Objectivity refers to unbiased mental attitude required the person to carry out his / her work in such a manner that he/ she has an honest belief in his / her work product and that no significant quality compromises are made. Standard for the professional practice of internal auditing (SPPIA) refers to the criteria by which the operation of and internal auditing department are evaluated and measured.

Ethical and socially responsible behavior

Leadership by example Written code of conduct Formal mechanism to

Awareness to cross-cultural influences.