Rhia Pixie T.

Cañaveral 3rd Year 2nd Semester

BS Accounting in Information System
Governance, Risk Management and Internal Control

CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

Governance
The process of decision-making and the process by which decisions are
implemented (or not implemented) through the exercise of power or authority by
leaders of the country and/or organizations.
Can be used in several context (corporate governance, international
governance, national governance, and local governance).

Characteristics of Good Governance

1. Participation, participation of both men and women is a key cornerstone of
good governance. It can be either direct of through legitimate institutions or
representatives. Representative democracy does not necessary mean that the
concern of the most vulnerable in society would not be taken into
consideration in decision making.
Participation needs to be informed and organized. Freedom of
association and expression in one hand and an organized civil society.
2. Rule of Law, fair legal frameworks that are enforced impartially. Also
requires full protections of human rights (particularly minorities). Impartial
enforcement of Laws requires an independent judiciary and an impartial and
incorruptible police force.
3. Transparency, decisions taken and their enforcement are done in a manner
that follows rules and regulations. Information is freely available and direct
accessible to those who will be affected by such decisions and their
enforcement. Information is provided and it is provided in easily
understandable forms and media.
4. Responsiveness, institutions and processes try to serve the needs all
stakeholders with a reasonable time-frame.
5. Consensus Oriented, mediation of the different interest in society to reach a
broad consensus. It also requires a broad and long-term perspective on what
is needed for sustainable human development and how to achieve goals. This
can only the result from an understanding of the historical, cultural and social
context of a given society or community.
6. Equity and Inclusiveness, ensures that all its members feel that they have a
stake in it and do not feel excluded from the mainstream of society. All
groups particularly the most vulnerable, have opportunities to improve or
maintain their well being.
7. Effectiveness and Efficiency, sustainable use of natural resources and the
protection of the environment.
8. Accountability, key requirement not only to governmental institutions but
also the private sector and civil society organizations. An organization or an
institution is accountable to those who will be affected by its decisions or
actions. Accountability cannot be enforced without transparency and the
rule of law.
Corporate Governance
System of rules, practices and processes by which business corporations are
directed and controlled. Balancing the interest of a company’s many stakeholders
(shareholders, management, customers, suppliers, financiers, government, and
community.)

Corporate governance is a topic that has received growing attention in the public in
recent years as policy makers and others become more aware of the contribution good
corporate governance makes to financial market stability and economic growth. Good
corporate governance is all about controlling one's business and so is relevant, and
indeed vital, for all organizations, whatever size or structure.

The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as the board,
managers, shareholders, and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it also provides
the structure through which the objectives are set and the means of attaining those
objectives and monitoring performance.

Purpose Of Corporate Governance

The purpose of corporate governance is to facilitate effective, entrepreneurial and

prudent management that can deliver long-term success of the company. In simple
terms, the fundamental aim of corporate governance is to enhance shareholders' value
and protect the interests of other stakeholders by improving the corporate
performance and accountability. It is also about what the board of directors of a
company does, how it sets the values of the business firm.

Objectives Of Corporate Governance

The following are the basic objectives of corporate governance:

1. Fair and Equitable Treatment of Shareholders

A corporate governance structure ensures equitable and fair treatment of all

shareholders of the company. In some organizations, a group of high net-worth
individual and institutions who have a substantial proportion of their portfolios
invested in the company, remain active through occupation of top-level positions that
enable them to guard their interest. However, all shareholders deserve equitable
treatment and this equity is safeguarded by a good governance structure in any
organization.

2. Self-Assessment

Corporate governance enables firms to assess their behavior and actions before they
are scrutinized by regulatory agencies. Business establishments with a strong
corporate governance system are better able to limit exposure to regulatory risks and
fines. An active and independent board can successfully point out deficiencies or
loopholes in the company operations and help solve issues internally on a timely
basis.

3. Increase Shareholders' Wealth

Another corporate governance's main objective is to protect the long term interests of
the shareholders. Firms with strong corporate governance structure are seen to have
higher valuation attached to their shares by businessmen. This only reflects the
positive perception that good corporate governance induces potential investors to
decide to invest in a company.

4. Transparency and Full Disclosure

Good corporate governance aims at ensuring a higher degree of transparency in an

organization by encouraging full disclosure of transactions in the company accounts.

Basic Principles Of Effective Corporate Governance

Effective corporate governance is transparent, protects the rights of shareholders and

includes both strategic and operational risk management. It is concerned in both the
long-term earning potential as well as actual short-term earnings and holds
directors accountable for their stewardship of the business.

The basic principles of effective corporate governance are threefold as presented

below:

Positive answers to the following questions indicate a firm's conformance and

compliance with the basic principles of good corporate governance:

A. Transparency and Full Discloure 

a) Does the board meet the information needs of investment communities?
b) Does it safeguard integrity in financial reporting?
c) Does the board have sound disclosure policies and practices?
i. Does it make timely and balanced disclosure?
ii. Can an outsider meaningfully analyze the organization's actions and
performance?

B. Accountability
a) Does the board clarify its role and that of management?
 i. Does it promote objective, ethical and responsible decision making?
ii. Does it lay solid foundations for management oversight?
iii. Does the composition mix of board membership ensure an appropriate
range and mix of expertise, diversity, knowledge and added value?
iv. Is the organization's senior official committed to widely accepted
standards of correct and proper behavior?

C. Corporate Control
a) Has the board built long-term sustainable growth in shareholders' value for
the corporation?
b) Does it create an environment to take risk?
i. Does it encourage enhanced performance?
ii. Does it recognize and manage risk?
iii. Does it remunerate fairly and responsibly?
iv. Does it recognize the legitimate interests of stakeholders?
v. Are conflicts of interest avoided such that the organization's best
interests prevail at all times?

Illustrative Application Of The Basic Pronciples Of Corporate Governance And Best

Practice Recommendations
CHAPTER 2: CORPORATE GOVERNANCE RESPONSIBILITIES AND
ACCOUNTABILITIES

Relationship between shareholders/owner(s) and other stakeholders

The relationship between the shareholders/ owners, management and other

stakeholders in a corporation is shown below.

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.

A broad group of stakeholders has an interest in the quality of corporate governance

because it has a relationship to economic performance and the quality of financial
reporting. For example, it is likely that many employees have significant funds
invested in pension plans. Those pension plans are designed to protect the interests of
those employees in their retirement. We use the word society in the diagram to
indicate those broad interests. In a similar fashion, employees and creditors have a
vested interest in the organization and how it is governed. Regulators are a response
to society's wishes to ensure that organizations, in their of returns for their owners, act
responsibly and operate in compliance with relevant laws.

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 and the board have been used. For example, the owners want
accountability on such things as:
a. Financial performance
b. Financial transparency, financial statements that are clear with full
disclosure and that reflect the underlying economics of the company.
c. Stewardship, including how well the company protects and manages the
resources entrusted to it.
d. Quality of internal control
e. Composition of the board of directors and the nature of its activities,
including information on how well management incentive systems are
aligned with the shareholders' best interests.

The owners want disclosures from management that are accurate and objectively
verifiable. For instance, management has & responsibility to provide financial reports,
and in some cases, reports on internal control effectiveness. Management has always
had the primary responsibility for the accuracy and completeness of an organization's
financial statements. From a financial reporting perspective, it is management's
responsibility to:
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
d. disclosure.

Parties Involved In Corporate Governance: Their Respective Broad Role And

Specific Responsibilities.

Corporate governance and financial reporting reliability are receiving considerable

attention from a number of parties including regulators, statement users.