CHAPTER 2

CORPORATE
GOVERNANCE
RESPONSIBILITIES AND
ACCOUNTABILITIES

“Corporate culture matters. How management chooses

to treat its people impacts everything – for better or for
worse.”

-Simon Sinek
CHAPTER 2 Corporate Governance Responsibilities and Accountabilities

INTRODUCTION
It is important to recognize that good corporate governance is based on principles underpinned by
consensus and continually developing notions of good practice. There are no absolute rules which must be
adopted by all organizations. “There is no simple universal formula for good governance.” Instead
emphasis is many localities, has been to encourage organizations to give appropriate attention to the
principles and adopt approaches which are tailored to the specific needs of an organization at a given point
in time.
The essence of any system of good corporate governance is to allow the board and management the
freedom to drive their organization forward and to exercise that freedom within a framework of effective
accountability. The key elements within an effective governance framework, and the issues relating to each
element, are set below and are relevant to organizations large and small, in both the private and the public
sectors. The table provides a useful structure for any company to consider its own approach to corporate
governance and the matters which may assist it to achieve its strategic objectives.
RELATIONSHIP BETWEEN SHAREHOLDERS/ OWNER(S) AND OTHER STAKEHOLDERS

Public Corporation Stakeholders

Board of Directors Shareholders/ Owners

Delegate

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 Have
Shareholders Executive Management External Auditors
/ Owners Accountabilities
Responsibilities
Internal Auditors
Operational Management
Society and Others
Regulators

Governance starts with the shareholders/ owners delegating responsibilities

through an elected board of directors to management and, in turn, to operating units with oversight and
assistance from internal auditors. The board of directors and its audit committee oversee management and,
in that role, are expected to protect the shareholders’ rights. However, it is important to recognize that
management is part of the governance framework; management can influence who sits on the board and the
audit committee as well as other governance controls that might be put into place.
In return for the responsibilities and power given to management and the board, governance demands
accountability back through the system to the shareholders. However, the accountabilities do not extend
only to the shareholders. Companies also have responsibilities to other stakeholders. Stakeholders can be
anyone who is influenced, whether directly or indirectly, by the actions of a company. Management and the
board have responsibilities to act within the laws of society and to meet various requirements of creditors,
employees and the stakeholders.
While shareholders/ owners delegate responsibilities to various parties within the corporation, they also
require accountability as to how well the resources that have been entrusted to management and the board
have been used. Such as:
 Financial performance
 Financial transparency
 Stewardship
 Quality of internal control
 Composition of the board of directors and the nature of its activities

CHAPTER 2 Corporate Governance Responsibilities and Accountabilities

Management’s responsibility as to financial reporting:

a. Choose which accounting principles best portray the economic substance of company transactions.
b. Implement a system of internal control that assures completeness and accuracy in financial
reporting.
c. Ensure that the financial statements contain accurate and complete disclosure.
PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE BROAD ROLE
AND SPECIFIC RESPONSIBILITIES
PARTY OVERVIEW OF RESPONSIBILITIES
Broad Role:
Shareholders Provide effective oversight through election of board members, approval of major
initiatives such as buying or selling stock, annual reports on management
compensation, from the board.
Board of Broad Role:
Directors The major representative of stockholders to ensure that the organization is run
according to the organization’s charter and that there is proper accountability.

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 Specific Activities:
1. Overall Operations
 Establishing the organization’s vision, mission, values and ethical standards.
 Delegating an appropriate level of authority to management.
 Demonstrating leadership.
 Assuming responsibility for the business relationship with CEO including his
or her appointment, succession, performance remuneration and dismissal.
 Overseeing aspects of the employment of the management team including
management remuneration, performance and succession planning.
 Recommending auditors and new directors to shareholders.
 Ensuring effective communication with shareholders other stakeholders.
 Crisis management.
 Appointment of the CFO and corporate secretary.
2. Performance
 Ensuring the organization’s long-term viability and enhancing the financial
position.
 Formulating and overseeing implementation of corporate strategy.
 Approving the plan, budget and corporate policies.
 Agreeing key performance indicators
 Monitoring/ assessing assessment, performance of the organization, the
board itself, management and major projects.
CHAPTER 2  Overseeing theCorporate Governance
risk management Responsibilities
framework andbusiness
and monitoring Accountabilities
risks.

 Monitoring developments in the industry and the operating environment

 Oversight of the organization, including its control and accountability
systems.
 Approving and monitoring the progress of major capital expenditures, capital
management and acquisitions and divestitures.
3. Compliance/ Legal Conformance
 Understanding and protecting the organization’s financial position.
 Requiring and monitoring legal and regulatory compliance including
compliance with accounting standards, unfair trading legislations,
occupational health and safety and environmental standards.
 Approving annual financial reports, annual reports and other public
documents/ sensitive reports.
 Ensuring an effective system of internal controls exists and is operating as
expected.
Non-Executive or Broad Role:
Independent The same as the broad role of the entire board of directors.
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 Specific Activities:
 Understand the organization, its business, its operating environment and its
financial position
 Apply expertise and skills in the organization’s best interests
 Assist management to keep performance objectives at the top of its agenda
 Understand that his/her role is not to act as auditor, nor to act as a member of
the management team
Directors
 Respect the collective, cabinet nature of the board’s decisions
 Prepare for and attend board meetings
 Seek information on a timely basis to ensure that he/she is in a position to
contribute to the discussion when a matter comes before the board, or alert
the chairman in advance to the need for further information in relation to a
particular matter
 Ask appropriate questions relative to operations
Broad Role:
Operations and accountability. Manage the organization effectively; provide
accurate and timely reports to shareholders and other stakeholders.
Specific Activities:
Management  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
 Develop, implement and update policies and procedures

 Assume day to day responsibility for the organization’s

Audit Committees of the
Board of Directors
conformance with relevant laws and regulations and its
compliance framework
 Develop, implement and manage the organization’s risk
management and internal control frameworks
 Be alert to relevant trends in the industry and the organization’s
operating environment
 Provide information to the board
 Act as conduit between the board and the organization
 Developing financial and other reports that meet public,
stakeholder and regulatory requirements
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.

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 Specific Activities:
 Selecting the external audit firm
 Approving any non-audit work performed by the audit firm
 Selecting and/ or approving the appointment of the Chief Audit
Executive (Internal Auditor)
 Reviewing and approving the scope and budget of the internal
audit function
 Discussing audit findings with internal auditor and external
auditor and advising the board and management on specific
actions that should be taken
Regulators
a. Board of Broad Role:
Accountancy 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
 Interpreting previously issued standards implementing quality
control processes to ensure audit quality
 Educating members on audit and accounting requirements
b. Securities and
Exchange Broad Role:
Commission
Ensure the accuracy, timeliness and fairness of public reporting of
financial and other information for public companies.
CHAPTER 2 Corporate Governance Responsibilities and Accountabilities
CHAPTER 2 Corporate Governance Responsibilities and Accountabilities

Specific Activities:
 Reviewing filings with the SEC
 Interacting with the Financial Reporting Standards Council in setting
accounting standards
 Specifying independence standards required of auditors that report on
public financial statements
 Identify corporate frauds, investigate causes, and suggest remedial actions
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
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  Audits of nonpublic company financial statements
 Other services such as tax or consulting
Internal Auditors Broad Role:
Perform audits of companies for companies 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
LET’S TALK MORE!
Write your answers on the space provided.
1. “Small business enterprises do not need good governance.” Do you agree? Explain.
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2. Does good governance require absolute rules that must be adopted by all organizations? Why?
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3. What is the essence of any system of corporate governance?
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-END-
"For the LORD gives wisdom; from his mouth come knowledge and understanding." – Proverb 2:6

-j.c.p., cpa, ctt ♥