CHAPTER 2

CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITY

- In financial reporting, the management’s
Introduction responsibility is to:
- The characteristics of good governance are • Choose which accounting principles
relevant to both SME’s and large listed best portray the economic substance
public companies. of company transactions.
- Good corporate governance is based on • Implement a system of internal control
principles underpinned by consensus and that issues completeness and
continually developing notions of good accuracy in financial reporting.
practice. • Ensure that the financial statements
- “There is no simple universal formula for contain accurate and complete
good governance”. disclosure.
- The essence of any system of good
PARTIES INVOLVED IN CORPORATE
corporate governance is: to allow the board GOVERNANCE: THEIR RESPECTIVE
and management the freedom to drive their BROAD ROLE AND SPECIFIC
organization forward and to exercise that RESPONSIBILITIES
freedom within a framework of effective 1. Shareholders
accountability. Broad Role:
- Provide effective oversight through
RELATIONSHIP BETWEEN
election of board members, approval
SHAREHOLDERS/ OWNER(S) AND OTHER of major initiatives such as buying or
STAKEHOLDERS
selling stock, annual reports on
- Governance starts with the shareholders management compensation, from the
delegating responsibilities through an board.
elected board of directors, then to 2. Board of Directors
management and in turn, to operating units Broad Role:
with oversight and assistance from internal - The major representative of
auditors. stockholders to ensure that the
- The Board of Directors and its audit organization is run according to the
committee are expected to protect the organization’s charter and that there
shareholder’s rights. is proper accountability.
- Governance demands accountability Specific Activities:
1. Overall Operations
back through the system to the
shareholders. • Establishing the organization’s
vision, mission, values and
- Management and the board have ethical standards.
responsibilities to act within the laws of • Demonstrating leadership.
society and to meet various requirements of 2. Compliance/ Legal Conformance
creditors, employees and the stakeholders. • Understanding and protecting
- Stakeholders have interest in the quality of the organization’s financial
corporate governance because it has a position
relationship to economic performance and • Ensuring an effective system of
the quality of financial reporting. internal controls exist and is
- Regulators are a response to society’s operating as expected.
wishes to ensure that organizations will act 3. Performance
responsibly and operate in compliance with • Ensuring the organization’s
relevant laws. long term viability and
enhancing the financial
- Shareholders/owners demand position.
accountability on: • Agreeing the key performance
• Financial Performance indicators (KPIs)
• Financial Transparency 3. Non-Executive or Independent Directors
• Stewardship Broad Role:
• Quality in Internal Control - The same as the broad role of the
entire board of directors.
• Composition of the board of directors
Specific Activities:
and the nature of its activities
• to understand the organization, its
- The owners want an accurate and business, its operating
objectively verifiable disclosures from environment and its financial
management. position.
- Management has always had the primary • to assist management to keep
responsibility for the accuracy and performance objectives at the top
completeness of an organization’s of its agenda.
financial statements.
4. Management
Broad Role:
- Operations and accountability.
Manage the organization effectively;
provide accurate and timely reports to
shareholders and other stakeholders.
Specific Activities:
• recommend the strategic direction
and translate the strategic plan into
the operations of the business
• manage the company’s human,
physical and financial resources to
achieve the organization’s
objectives - run the business.
8. Internal Auditors
Broad Role:
- Perform audits of companies for
compliance with company policies
and laws, audits to evaluate the
efficiency of operations, and periodic
evaluation and tests of controls.
Specific Activities:
• Reporting results and analyses to
management (including
operational management) and
audit committees
• Evaluating internal controls.

5. Audit Committees of the Board of

Directors
Broad Role:
- Provide oversight of the internal and
external audit function and the
process of preparing the annual
financial statements as well as public
reports on internal control.
Specific Activities:
• Selecting the external audit firm
• Approving any non-audit work
performed by the audit firm.
6. Regulators
a. Board of Accountancy (BOA)
Broad Role:
- Set accounting and auditing
standards dictating underlying
financial reporting and auditing
concepts; set the expectations of
audit quality and accounting quality.
Specific Activities:
• Conducting CPA Licensure Board
Examinations
• Approving accounting principles
• Approving auditing standards
b. Securities and Exchange
Commission (SEC)
Broad Role:
- Ensure the accuracy, timeliness and
fairness of public reporting of financial
and there information for public
companies.
Specific Activities:
• Reviewing filings with the SEC
• Identify corporate frauds,
investigate causes and suggest
remedial actions.
7. External Auditors
Broad Role:
- Perform audits of company financial
statements to ensure that the
statements are free of material
misstatements including
misstatements that may be due to
fraud.
Specific Activities:
• Audit of public company financial
statements
• Audits of nonpublic company
financial statements.