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ADMINISTRATIVE CONTROL “Governance Structure, Organizational Structure”

By: Eka Darmadi Lim 3094802 Gerry Geraldo Y 3094806 Reni Handuweni 3104011 Isa Tridjojo 3105802 Class: Y

University of Surabaya Faculty of Business and Economics International Class (IBN & PA) 2012

As the governance structure can be designed in many ways in any given organization. 1990. 158). organization design and structure (Abernethy and Chua. 1996. we include it as it is something managers can change. as well as the systems which are in place to ensure that representatives of the various functions and organizational units meet to co-ordinate their activities both vertically and horizontally. Governance includes the formal lines of authority and accountability (Abernethy and Chua. Emmanuel et al. 1987). as by using a particular structural type an organization can encourage certain types of contact and relationships (Abernethy and Chua. but instead study how they link to each other and to other controls. 2004. Alvesson and Karreman. 1996).. Meetings and meeting schedules.Administrative Control Administrative control systems direct employee behavior through the organizing of individuals and groups. increasing its predictability” (p. Although many researchers consider organizational design to be a contextual variable. 1996). 1980). and not part of organizational controls. and the process of specifying how tasks or behaviors are to be performed or not performed. as well as its various management and project teams. Alvesson and Karreman.. 1987. and contributes to control through “reducing the variability of behavior and. Organizational design can be an important control device. 1990). The governance structure relates to the company’s board structure and composition. researchers should not group them together. the monitoring of behavior and who you make employees accountable to for their behavior. 1996. in turn. governance structures within the firm (Abernethy and Chua. Flamholtz (1983) argued that organizational structure is a form of control which works through functional specialization. as opposed to something that is imposed on them. Simons. and the procedures and policies (Macintosh and Daft. Otley and Berry. for example. We consider three groups of administrative controls. Policies and procedures include . create agendas and deadlines which direct the behavior of organization members. Emmanuel et al. The use of policies and procedures is the bureaucratic approach to specifying the processes and behavior within an organization. 2004.

pre-action reviews. its board. management. customers. its shareholders and other stakeholders. fairness. . As Merchant and Van der Stede’s (2007) action controls constitute only part of what we have labeled administrative controls. therefore. has an obligation to approve all decisions that might affect the long-run performance of the corporation that means that the corporation is fundamentally governed by the board of directors overseeing the top management. behavioral constraints.such approaches as standard operating procedures and practices (Macintosh and Daft. Management who runs the company don’t have the responsibility to provide the funds personally so the laws has been passes that give shareholders limited ability and correspondingly. employees. and the goals for which the corporation is governed. with the concurrence of the shareholder so corporate governance refers to the relationship among these three groups in determining the direction and performance of the corporation. and the roles and relationships between a company’s management. and transparency in a company's relationship with its all stakeholders (financiers. Corporate Governance A corporation is a mechanism established to allow different parties too contribute capital. expertise. The board of directors. It involves regulatory and market mechanisms. i. and labour for their mutual benefit while the investor/shareholder only participate in the profits of the enterprise without taking responsibility for the operations. 1987). as compared to their object of control framework. our typology provides a more complete conception of the administrative tools managers use to control behavior. Policies and procedures include what Merchant and Van der Stede (2007) call action controls. limited involvement in a corporation’s activities include the right to elect directors who have a legal duty to represent the shareholders and protect their interest. Corporate governance is the framework of rules and practices by which board of directors ensures accountability. government. 1987) and rules and policies (Simons. and the community). and action accountability.e.

• Rights and equitable treatment of shareholders : Organizations should respect the rights of shareholders and help shareholders to exercise those rights. privileges. and roles. and (3) procedures for proper supervision. control. Interests of other stakeholders: Organizations should recognize that they have legal. Corporate governance adds the concern for controlling the behaviors of top management. • • Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. Corporate governance systems and management control systems are linked. and policy makers. The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. investors. is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports. creditors. An MCS’s focus takes the perspective of top management and asks what can be done to ensure the proper behaviors of employees in the organizations. . local communities. the Principles of Corporate Governance (OECD. through their direction. the Sarbanes-Oxley Act of 2002 (US. A corporate governance focus is slightly broader than is an MCS’s focus. those of all the controlling the other employees in the firm. suppliers. The Sarbanes-Oxley Act. customers. social. 2002).The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities. contractual. rights. and market driven obligations to non-shareholder stakeholders. 1998 and 2004). and information-flows to serve as a system of checks-and-balances. including employees. informally referred to as Sarbox or Sox. and rewards. The corporate governance focus is on controlling the behaviors of top management and. 1992). Principles of corporate governance Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK. (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties.

also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and more commonly called Sarbanes–Oxley. The act contains 11 titles. public company boards. the Public Company Accounting Oversight Board. Tyco International. Senator Paul Sarbanes (D-MD) and U. Firms are prohibited from retaliating against anyone reporting wrongdoing. Adelphia. Representative Michael G. • The Sarbanes-Oxley Act of 2002 designed to protect shareholders from the excesses and failed oversight that characterized failures. or sections.S. corporate . The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron. inspecting and disciplining accounting firms in their roles as auditors of public companies.• Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing corporate officers and board members Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. ranging from additional corporate board responsibilities to criminal penalties. Peregrine Systems and WorldCom. led the SEC in the adoption of dozens of rules to implement the Sarbanes–Oxley Act. management and public accounting firms. which cost investors billions of dollars when the share prices of affected companies collapsed. or PCAOB. The act also established formal procedures for individuals (known as ‘whistleblowers’) to report incidents of questionable accounting and auditing. shook public confidence in the nation's securities markets. regulating. The Sarbanes–Oxley Act of 2002. the 26th chairman of the SEC. is a United States federal law that set new or enhanced standards for all U. Sarbox or SOX. charged with overseeing. These scandals. Several key elements of SarbanesOxley were designed to formalize greater board independence and oversight. It is named after sponsors U.S.S. Harvey Pitt. and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the law. It created a new. Oxley (R-OH). quasi-public agency. The act also covers issues such as auditor independence.

summarized below. Sarbanes–Oxley contains 11 titles that describe specific mandates and requirements for financial reporting. Roosevelt. SOXtype laws have been subsequently enacted in Japan. and enhanced financial disclosure." In response to the perception that stricter financial governance laws are needed. Australia. completed extensive research studies to help support the foundations of the act. The era of low standards and false profits is over. The act was approved by the House by a vote of 423 in favor. France. It also creates a central oversight board tasked with registering auditors. and Turkey. and 8 abstaining and by the Senate with a vote of 99 in favor. defining the specific processes and procedures for compliance audits. 3 opposed. Bush signed it into law. 1. 1 abstaining. stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. saying SOX has introduced an overly complex regulatory environment into U. no boardroom in America is above or beyond the law. internal control assessment. Public Company Accounting Oversight Board (PCAOB) Title I consists of nine sections and establishes the Public Company Accounting Oversight Board. . Each title consists of several sections. inspecting and policing conduct and quality control. Italy. Germany. to provide independent oversight of public accounting firms providing audit services ("auditors"). India. Proponents of the measure say that SOX has been a "godsend" for improving the confidence of fund managers and other investors with regard to the veracity of corporate financial statements.governance. financial markets. Opponents of the bill claim it has reduced America's international competitive edge against foreign financial service providers. Debate continues over the perceived benefits and costs of SOX. Financial Executives Research Foundation (FERF).S. President George W. South Africa. The nonprofit arm of Financial Executives International (FEI). and enforcing compliance with the specific mandates of SOX.

Section 302 requires that the company's "principal officers" (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports. It requires internal controls for assuring the accuracy of financial reports and disclosures. pro-forma figures and stock transactions of corporate officers. consulting) for the same clients. Analyst Conflicts of Interest Title V consists of only one section. to limit conflicts of interest.. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance.g.[4] 4. Corporate Responsibility Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports.2. It also addresses new auditor approval requirements. It restricts auditing companies from providing non-audit services (e. and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. and auditor reporting requirements. including off-balance-sheet transactions. 3. and mandates both audits and reports on those controls. For example. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest. which includes measures designed to help restore investor confidence in the reporting of securities analysts. audit partner rotation. Auditor Independence Title II consists of nine sections and establishes standards for external auditor independence. Enhanced Financial Disclosures Title IV consists of nine sections. Commission Resources and Authority . 6. It describes enhanced reporting requirements for financial transactions. 5. It defines the interaction of external auditors and corporate audit committees.

It describes specific criminal penalties for manipulation. 8. Studies and Reports Title VII consists of five sections and requires the Comptroller General and the SEC to perform various studies and report their findings. securities violations and enforcement actions. This section is also called the "White Collar Crime Penalty Enhancement Act of 2002. destruction or alteration of financial records or other interference with investigations. or dealer. Corporate and Criminal Fraud Accountability Title VIII consists of seven sections and is also referred to as the "Corporate and Criminal Fraud Accountability Act of 2002". It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense." This section increases the criminal penalties associated with white-collar crimes and conspiracies. advisor. White Collar Crime Penalty Enhancement Title IX consists of six sections. 7. and whether investment banks assisted Enron. while providing certain protections for whistle-blowers. Global Crossing and others to manipulate earnings and obfuscate true financial conditions. 9. the role of credit rating agencies in the operation of securities markets. It also defines the SEC's authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker.Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. . Studies and reports include the effects of consolidation of public accounting firms.

10. objectives and overall direction. Section 1001 states that the Chief Executive Officer should sign the company tax return. Board of directors is the one who determine and pay the dividend and issue additional shares of the company . It also revises sentencing guidelines and strengthens their penalties. evaluate. finance. 11. Corporate Tax Returns Title X consists of one section. Section 1101 recommends a name for this title as "Corporate Fraud Accountability Act of 2002". adopt bylaws. hire. Board of Directors The role of the board of directors in corporation. and enthusiasm to do an adequate job of monitoring and providing guidance to top management. name members of the advisory. The member of board of directors usually includes executive directors as well as expert or respected person chosen from the wider community called non-executive directors. The board has the ultimate decision-making authority and in general board of directors is empowered to set the company policy. also fire the managing director and senior executives. executive. monitor. involvement. Board of directors is governing body (called the board) of a company that usually selected by stakeholders of the company from the annual general meeting to govern the firm and look after the subscribers’ interests. and other committees. This enables the SEC to resort to temporarily freezing transactions or payments that have been deemed "large" or "unusual". they concerned that inside board members may use their position to feather their own nests and that outside board members often lack sufficient knowledge. It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. Corporate Fraud Accountability Title XI consists of seven sections.

Board of directors have a fiduciary duty to foster the long-term success of the corporation for the benefit of shareholders. employees. broads must ensure that they are independent and accountable to shareholders. First. suppliers. France. the corporation is in some way harmed. Finland. and failure to act. or the society at large) by ensuring that the employees in the corporation act in a legally and socially responsible manner. and they must exert their authority for the continuity of executive leadership with proper vision and values. Second. competitors. and Venezuela) has been interviewed and they revealed strong . customers. the careless directors or directors can be held personally liable for the harm done) • • Duty of loyalty: duty to advance corporate over personal interest Duty of good faith: duty to be faithful and devoted to the interests of the corporation and its shareholders • Duty not to “waste”: duty to avoid deliberate destruction of shareholder value To carry out their responsibilities. Germany. 200 directors from eight countries (Canada. they safeguard the equity investors’ interests by ensuring that management seeks to maximize the value of the shareholders’ stakes in the corporation. Switzerland. the entire board is held liable under the doctrine of collective responsibility for the consequences of the firm's policies. the United Kingdom. as a result. they protect the interests of the other corporate stakeholders (such as. There are two main control responsibilities of board of directors. and also sometimes for debt holders and the basic fiduciary duty has multiple elements such as: • Duty of care: duty to make decisions in an informed way (If a director or the board as a whole fails to act with due care and. Responsibility of board of directors vary from country to country depending on the state in which in which the corporate charter is issued. the Netherlands. actions.Though all its members might not be engaged in the company's day-to-day operations.

S. Setting corporate strategy. monitoring. benefits and/or stock options. or supervising top management. officer or stakeholder in the company. Caring for shareholder interest. Research from large and small corporation reveals a negative relationship between board size and profitability. and corporate governance. Hiring and firing the CEO and top management. strategic planning.agreement on the following of five board of directors responsibilities which are: 1. 5. These results are in agreement with a survey by the National Association of Corporate Directors. in which U. Controlling. While the Stewardship Theory . There is no clear evidence indicating that a high proportion of outsiders on a board result in improved financial performance. 2. CEO succession. inside directors typically officers or executives employed by the corporation. overall direction. Outside directors are paid an annual retainer fee in the form of cash. Reviewing and approving the use of resources. Inside directors sometimes called management directors. Corporate governance standards require public companies to have a certain number or percentage of outside directors on their boards as they are more likely to provide unbiased opinions. • Outside directors is any member of a company's board of directors who is not an employee or stakeholder in the company. The Agency Theory states that the problems arise in corporations because the top management is not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation. 4. CEOs reported that the four most important issues boards should address are corporate performance. The boards are divided into two ways: • Inside directors is a board member who is an employee. vision and mission. 3.

The question is how trustworthy are these executives? Do they put themselves or the firm first? In the agency theory top management are in effect ‘hired hands’ that may very likely to be more interested in their personal welfare than that of the shareholders. 2. The risk-sharing problem that arises when the owners and agents have different attitudes toward risk. Outside directors may sometimes serve on so many boards that they spread their time and interest too thin to actively fulfill their responsibilities.proposes that. because of their long tenure with the corporation. which are: 1. and when a high percentage of board members are inside directors. Agency theory is concerned with analyzing and resolving two problems that occurs in relationships between the shareholders and their top management. Executives may not select risky strategies because they fear losing their jobs if the strategy fails. the theory suggest that executives tend to be more motivated to act in the best interest of the corporation than in their own self-interests. the value with having more outside board member point out that the term outsider is too simplistic because some outsiders are not truly objective and should be considered more as insiders than as outsiders. . The stewardship theory is in contrast. The stewardship theory argues that in many instances top management may care more about a company’s long-term success than do more short-term oriented shareholders. These problems will occur increases when stock is widely held. these executives are thus most interested in guaranteeing the continued life and success of the corporation. insiders tend to identify with the corporation and its success rather than use the firm for their own ends. when the board of directors is composed of people who know little of the company or who are personal friends of top management. The agency problem that arises when (a) the desires or objectives of the owners and the agents conflict or (b) it is difficult or expensive for the owners to verify what the top management is actually doing.

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Audit committee is a subcommittee of the board of directors that is composed of independent. Corporate Governance Relationships Management Prepare financial statements Auditor Audits financial statement and provides assurance Board of Directors (selected by stockholders) and its audit committee Other Third Parties (e. Attestation itself is a threepart process.Audit Committee Auditing is the process of attesting to assertions about economic actions and events.g. which are gathering evidence about assertions. It has the oversight responsibility on behalf of the full board of directors and its stockholders for the outside reporting of the company . It is therefore frequently referred to as an attestation service. outside directors. evaluating that evidence against objective criteria. and communicating the conclusion reached. creditors. government agencies) Stockholders The audit client should view as the board of directors and its audit committee. suppliers. The auditor communicates to other outside constituencies within the overall governance structure that starts with the board of directors.

staffing and seniority of the official . if required. All members shall be financially literate and at least one member shall have accounting or related financial management expertise Chairman to be an independent director Chairman of Audit Committee shall be present at AGM to answer shareholder queries Finance director. In simple way audit committee is members of a company's board of directors who are responsible for the conduct of internal and external auditors. if any. including the structure of the internal audit department. with the management. with the management. with the management. Reviewing. Oversight of the company’s financial reporting process 2. the quarterly financial statements before submission to the board for approval 6. 3. the replacement or removal of the statutory auditor and the fixation of audit fees. Two-thirds of the members of audit committee shall be independent directors. adequacy of the internal control systems 7. head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee The Company Secretary shall act as the secretary to the committee The role of audit committee of the board of directors assist the board of directors in fulfilling its responsibility such as: 1. Reviewing the adequacy of internal audit function.(including annual financial statements). the annual financial statements before submission to the board for approval. also both internal and external audit functions. with particular reference to: 5. Qualified and independent Audit committee must be: • • • • • • Minimum three directors. the appointment. risk monitoring and control processes. re-appointment and. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. Reviewing. Reviewing. performance of statutory and internal auditors. Recommending to the Board. 4.

The audit committee has a power to investigate any activity within its terms of reference and seek information from any employee. To look into the reasons for substantial defaults in the payment to the depositors. about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. reporting structure coverage and frequency of internal audit 8. . in case the same exists. Discussion with internal auditors any significant findings and follow up there on 9. debenture holders. To review the functioning of the Whistle Blower mechanism. They also obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise. Audit committee should meet at least four times in a year with a gap of not more than four months and the quorum shall be either two members or one third of the members of the audit committee whichever is greater. if it considers necessary. 13. 10.heading the department. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. Discussion with statutory auditors before the audit commences. 12. shareholders (in case of non payment of declared dividends) and creditors. but there should be a minimum of two independent members present. 11. Carrying out any other function as is mentioned in the terms of reference of the audit committee.

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