Big Picture B in Focus: ULOa.

Analyze the definition, scope, importance, and functions of corporate

governance in an organization

Corporate Governance is the set of structured of rules, practices, processes, and procedures that are
used by management and the board to direct and manage a company.

CORPORATE GOVERNANCE Corporate governance is concerned with holding the balance between
economic and social goals and between individual and communal possible the interests of goals.

It aims to align as nearly as individuals, corporations and society and its framework is there to encourage
the efficient use of resources and equally to require accountability for stewardship of those resources.

It is also a relationship among stakeholders that is used to determine and control the strategic direction
a performance of organizations and it is a major concern for companies as they have to report on their
activities to an often unsympathetic shareholder group whose only interest in the business is whether it
is making money or not.

CORPORATE GOVERNANCE PRINCIPLES

1.) Lay solid foundations for management and
Board oversight.
2.) Structure the Board to add value.
3.) Promote ethical and responsible decision-
making.
4.) Safeguard integrity in financial reporting.
5.) Make timely and balanced disclosures.
6.) Respect the rights of shareholders.
7.) Recognize and manage risk.
8.) Remunerate fairly and responsibly.

The Agency Concept

This concept is the main driver and bases for corporate governance in an organization. The agency
problem occurs when the desires or goals of the principal and agent conflict and are difficult or
expensive for the principal to verify that the agent has behaved appropriately.
CADBURY and GREENBURY CODE OF CORPORATE GOVERNANCE

“Achieving good governance is a major concern for companies as they have to report on their activities
to an often unsympathetic shareholder group whose only interest in the business is whether it is making
money or not.”

CADBURY REPORT

The Corporate Governance Committee headed by Sir Adrian Cadbury was set up in May 1991 by the
Financial Reporting Council, the Stock Exchange and the accountancy profession in response to
continuing concern about standards of financial reporting and accountability.

The final report was published in December 1992 and contained a number of recommendations to raise
standards in corporate governance.

GREENBURY REPORT

In January 1995 the Confederation of British Industry (CBI) established the Study Group on Directors
'Remuneration under the chairmanship of Sir Richard Greenbury with a remit to identify good practice in
determining directors' remuneration and to prepare a code of practice for UK PLCS.

The final report of the group was published on 17 July 1995 and is usually referred to as the Greenbury
report.

THE HIGHLIGHTS OF CADBURY AND GREENBURY REPORT

➢ Every listed company should be headed by an effective Board which should lead and control the
company.

➢ The Board should include a balance of executive and executive directors such that no individual or
small group of individuals can dominate the Board's decision-making.

➢ There should be a formal and transparent procedure the appointment of new directors to the Board.
➢ All directors should be required to submit themselves re-election at regular intervals and at least
every three years

➢ Levels of remuneration should be sufficient to attract, retain and motivate executive directors of the
quality performance needed to run the company successfully but companies should avoid paying more
than is necessary

➢ Companies should establish a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors.

➢ Companies should be ready, where practicable, to enter into a dialogue with institutional
shareholders based on the mutual understanding of objectives.

➢ The Board should present balanced and understandable assessment of the company's position and
prospects.

➢ The Board should maintain a sound system of internal control to safeguard shareholder's investment
and the company's assets.
➢ All directors should have access to the advice and services of the company secretary, who is
responsible to the Board for ensuring that Board procedures are followed and that applicable rules and
regulations are complied with.

➢ All directors should bring an independent judgment to bear on issues of strategy, performance,
resources, including key appointments and standards of conduct.

➢ There should be a clear division of responsibilities between the Board and management to ensure a
balance of power and authority.

➢ Non-executive directors should comprise not less than one third of the Board.

➢ The majority of non-executive directors should be independent of management and free from any
business or other relationship which could materially interfere with the exercise of their independent
judgment.

➢ Management has an obligation to provide the Board with appropriate and timely information, but
information volunteered by management is unlikely enough in all circumstances and directors should
make further inquiries where necessary.

➢ Unless the Board is small, a nomination committee should be established to make recommendations
to the Board on all new Board appointments.

➢ Non-executive directors should be appointed for specified terms subject to reelection and to
Companies Act provisions relating to the removal of a director and that reappointment should not be
automatic.

➢ All directors should be subject to election by shareholders at the first opportunity after their
appointment and to re-election thereafter at intervals of no more than three years.

➢ Remuneration committee should consider the advantages of providing explicitly in the initial contract
their directors' contracts of service, if any, would entail in the event of early termination except in the
case of removal due to misconduct.

➢ Where initial contract does not explicitly provide for compensation commitment, remuneration
committee should, within legal constraints, tailor their approach in individual early termination cases to
the nature of circumstances.

➢ Remuneration committee should consist exclusively of non-executive directors who are independent
of management and free from any business or other relationship which could materially interfere with
the exercise of their independent judgment.

➢ The Board itself or, where required by the Articles of Association, the shareholders should determine
the remuneration of the non-executive directors, including members of the remuneration committee.

➢ The Board should report to the shareholders each year on remuneration as part of, or be annexed to,
the company's annual report and accounts.
➢ The Chairman of the Board should arrange for the chairman of the audit, remuneration and
nomination committees to be available to answer questions at the annual general meeting (AGM).

➢ Companies should arrange for the Notice of the AGM and related papers to be sent to shareholders
at least 20 working days before the meeting.

➢ Companies should count all proxy votes and, except where a poll is called, should indicate the level of
proxies lodged on each resolution, and the balance for and against the resolution, after it has been dealt
with on a show of hands.

➢ The directors should explain their responsibility for preparing the accounts, and there should be a
statement by the auditors about their reporting responsibilities.

➢ The directors should, at least annually, conduct a review of the .effectiveness of the group's system of
internal controls and risk management.

➢ The Board should establish an audit committee of at least three directors, all nonexecutive, with
written terms of reference which deal clearly with its authority and duties.

➢ The duties of the audit committee should include keeping under review the scope and results of the
audit and its cost effectiveness and the independence and objectivity of the auditors.

➢ Where the auditors also supply a substantial volume of non-audit services to the company, the
committee should keep the nature and extent of such services under review, seeking to balance the
maintenance of objectivity and value for money.

CODE OF CORPORATE GOVERNANCE

The Philippine Securities and Exchange Commission (SEC) in is Resolution No. 135, Series of 2002,
approved the promulgation and implementation of the Code of Corporate Governance (Code) for the
purpose of actively promoting corporate governance reforms aimed to raise investor confidence,
develop capital market and help achieve high sustained growth for the corporate sector of the economy.
The Code is applicable to corporations whose securities are registered or listed, corporations which are
grantees of permits / licenses and secondary franchise from the SEC public companies and branches or
subsidiaries of foreign corporations operating in the Philippines whose securities are registered or listed.

Among the important provisions of the Code are:

• The Board of Directors (Board) is primarily responsible for the governance of the corporation ensuing
that the corporation.

o complies with all relevant laws, regulations and codes of best business practices

o Adopts a system of internal checks and balances; identify key risk areas and key performance
indicators and monitor these factors with due diligence

• The management is obliged to supply the board with complete, adequate information on a timely
manner. The information may include the background or explanatory information regulating to matters
to be brought before the board, copies of disclosure documents, budgets, forecasts and monthly
internal financial statements.
• The board shall constitute committee in aid of good governance:

o Audit and Compliance Committee to ensure compliance with the Code and report any
violations committed or non-compliance thereto before the SEC.

o Nomination Committee to review and evaluate the qualifications of all persons nominated to
the Board as well as those nominated to other positions requiring appointment by the Board.

o Compensation or Remuneration Committee to establish a formal and transparent procedure

for developing a policy on executive remuneration and for fixing the remuneration packages of
corporate officers and directors.

• The Board shall be committed to respect the rights of the stockholders (like voting right, pre-emptive
right, power of inspection, right to information, right to dividends and appraisal right).

• The Board is primarily accountable to the Shareholders and Management is primarily accountable to
the Board.

CONSTITUENTS OF CORPORATE GOVERNANCE

The Board of Directors

Is the policy-makers and principal decision-makers.

Is accountable to shareholders and stakeholders
Directs management.

The Shareholders and Stakeholders

Participate in the appointment of directors

Hold the BOD accountable for governance through proper disclosures
The Management

Acts on the direction of the BOD

Provides requisite information to the BOD for decision-making
Implements and monitor control systems

FOUR CORE CATEGORIES OF GOOD GOVERNANCE

This categories are characterized by on-going monitoring and evaluation and should be central to the
corporate governance framework of an organization and integrated into key governance related
organizational documentation which may include, for instance:
a.) Strategic and Business Plans
b.) Risk Management Plans
c.) Marketing and Business Development Plans
d.) Stakeholder Management Plans
e.) Board Governance Manual or Charter or Code of Conduct
f.) Operational Policy and Procedure Manuals, and an Organizational Code of Conduct
g.) Quality Assurance Manuals
THE FOUR PILLARS OF CORPORATE GOVERNANCE

Accountability

Management is accountable to the Board .

The Board is accountable to shareholders and stakeholders
Independence

Procedures and structures are in place so as to minimize, or avoid complete conflicts of interest

Fairness

BOD should protect shareholders' rights

BOD treats all shareholders including minorities equitably
Provide effective redress for violations
Transparency

BOD should ensure timely, accurate disclosure of all material matters, including the financial
situation, performance, ownership and corporate governance

THE ELEMENTS OF CORPORATE GOVERNANCE

Good Board Practices

• Clearly defined roles and authorities • Appropriate composition and mix of skills
• Duties and responsibilities of Directors • Appropriate Board procedures
understood • Director Remuneration in line with best
• Board is well structured practice
• Board self-evaluation and training conducted

Well-Defined Disclosure

• Financial Information disclosed • Companies Registry filings up to date

• Non-Financial Information disclosed • High-Quality annual report published
• Financials prepared according to International • Web-based disclosure
• Financial Reporting Standards (IFRS)
Well-Defined Shareholders

• Minority shareholder rights formalized • Policy on related party transactions

• Well-organized shareholder meetings • Policy on extraordinary transactions
conducted • Clearly defined and explicit dividend policy.
Board Commitment

• The Board discusses corporate governance
issues and has created a corporate governance
committee
• The company has a corporate governance
champion
• Corporate governance improvement plan has
created
• Appropriate resources are committed to
corporate governance initiatives
Control Environment
• Policies and procedures have been formalized
and distributed to relevant staff
• Corporate governance code has been
developed
• Code of ethics has been developed
• Company is recognized as a corporate
governance leader

• Internal control procedures • Independent audit committee established

• Risk management framework present • Internal Audit functions
• Disaster recovery systems in place • Management Information systems established
• Media management techniques in use • Compliance Function established
• Independent external auditor conducts audits

Stakeholders are classified as to influence and interest to the organization.

Those who have direct influence on the organization's future activities.

✓ Investors
✓ Customers
✓ Regulators
✓ Shareholders
Those who have interest in the organization.

✓ Media
✓ Business leaders
✓ Competitors
✓ Local communities
Global Problems of Corporate Governance
The Philippines’ Response
By Rene B. Benitez and Juan Carlos del Rosario
http://kwrintl.com/library/2002/global.html

Corporate governance has greatly evolved in importance as well as style since the stock market
boom during the 1990s. In a market where the economy was in an up-trend, corporate governance
hardly affected the value of a company. However, when the market collapsed, the importance of good
governance became clear. Companies with efficient board of directors can be better thriving during
difficult times. In fact, based on Business Week’s inaugural ranking of the best and worst boards in 1996,
the stocks of the companies with the best boards our performed those with the worst boards by two to
one. However, as the economy slowed in 2000, companies with the best boards retained much more of
their value at 51.7% for the worst board companies.

With the recent eruption of the Enron case, corporate governance issues were revisited the
world over. As the list of flailing large corporations, such as Tyco and WorldCom, grows, corporations are
looking at how they can make their respective boards of director more effective. For instance, Computer
Associates International, Inc. (CA) recruited the Securities and Exchange Commission’s (SEC) former top
accountant for its audit committee and prohibited directors from selling stock until they leave. In
addition to having a tarnished reputation for having paid US $1.1 billion to top executives four years ago.
CA is currently undergoing investigation for its accounting practices.

Sanjay Kumar, CA’s CEO, plans to save the company by improving its relationship with
customers, investors and employees. He has set-up a 650-person customer-care organization and
launched annual customer-satisfaction surveys, tying pay of 500 senior executives to the results.
Furthermore, the company’s accounting policies was slightly change to allow the depreciation of
software-license revenues to occur over the life of the contract compared to having recognized earnings
when the deal was concluded. Finally, changes on the board of directors shall include expansions from
eight to eleven members as well as retiring several veteran members and adding seven new
independent directors. A lead outside director shall also be appointed and terms limits shall also be set
in place.

Similarly, Ericson is facing problems in its operations as well as its ownership structure.
Erickson’s revenue for this year is expected to be 40% less than the US$ 24 billion two years ago. In
order to remedy this problems, Erickson’s CEO, Kurt Hellstrom, shall engage in outsourcing activities for
its manufacturing and research and development operations a well as the company’s software labs.
Erickson has also entered into joint venture with Sony Corp. to produce a new line of mobile handsets
that will offer both Erickson’s technology and its links to wireless networks as well as Sony’s talents in
consumer electronics and marketing. Hellstrom plans to repackage the company image into “a wireless
specialist that depends on service more than manufacturing, on know how more than metal”, shifting
the value from hardware to software services. Finally, Erickson may face problems recruiting investors in
the future with its current ownership structure. Investor and Industrial warden are two of the
company’s shareholders and they control close to 78% of the votes at the company with only 11% of the
equity. They have major votes through special A shares that have 1,000 times the votes of ordinary B
shares. A reduction in voting ratio from 1,000:1 to 10:1 between the A and B shares are being
considered. This would reduce the two major shareholders’ votes to 30%.

Other corporations across the U.S., such as Apple Computer, Inc. and Quest Communications
International, have prohibited outside auditors from performing nonaudit work for their companies. At
Xerox Corp., three out of eight directors are sitting in too many boards and two members of their audit
committee had attendance problems last year. At American International Group (AIG), the CEO, Maurice
R. Greenberg, sits at the board of a private company that got US $77 billion of AIG’s business last year

Similarly in Europe, three major corporations involved in their respective financial scandals have
affirmed the need for corporate governance reforms. One of which is Vivendi, which has acquisitions in
Seagram, Canal Plus, mp3.com, and Vizzavi. Vivendi, which was originally formed as water company
under the name Compagnie General des Eaux, has been accused of trying to hide U S$1.5 billion worth
of losses. Its share price has dropped by 40% when it was revealed that Andersen was also responsible
for the company’s accounts.

Other European companies with scandalous affairs include ABB, and engineering firm and Elan,
a pharmaceutical company that recently diversified into biotechnology. ABB was forced to shift to
“generally accepted accounting principles” in October 2001 after which, it was revealed that 28% of its
reported operating income was in fact from one-off sales. Furthermore the company’s ex-chairman,
Percy Barnevik, gave himself a severance package of US $78 million without board approval while
another board member received a pension of US$ 160 million. Elan, on the other hand, was involved in
dubious accounting techniques and was responsible for a 16% drop in the Irish ISEQ marketing index.
The company entered into agreements with 50 “Qualified Special Purpose Entities”, allowing Elan to sell
future royalties in return for cash to inflate revenues. The U.S. SEC subpoenaed Credit Suisse and
Morgan Stanley for their involvement in the special purpose entities scheme. It’s Chairman and CEO,
Donal Geaney, gave himself a salary and bonus amounting to US $2.99 million.

In the Philippines, corporate scandals did not lag behind the gloal trend in governance mishaps.
Well-established companies from sugar ills to banks to gambling enterprises have been facing various
cases of bankruptcy and audit issues. Among this include Urban Bank, which was forced to service
approximately Php2.5 billion in withdrawals within a span of two weeks brought about by its recent
downgrade from a universal bank to a thrift bank as a result of its failure to meet increase capitalization
requirements. In a notice to the Philippine Stock Exchange (PSE), the bank reported withdrawals
reaching Php4.5 billion in addition to the Php1 billion prior to its closure. The Banko Sentral ng Pilipinas
(BSP) finally ordered that the bank be placed under receivership by the Philippine Deposit Insurance
Corporation. Also included in the receivership are Urban Development Bank, a thrift bank subsidiary of
Urban Bank. In addition, Urbancorp Investment Corporation declared a suspension of payments and has
requested the BSP and the SEC to appoint a rehabilitation receiver for the company.

In August 2001, the Export and Industry Bank and Urban Bank merge into Export and Import
Bank allowing the resumption of operations in its central office in Makati as well as 25 branches around
the country.

Victorias Milling Co. (Vicmico) dealt with audit issues surrounding lost inventory accumulating to
400,000 bags of sugar. The difference from doctored sugar content reports was a result of a deliberate
attempt of misrepresentation to make the miller appear more efficient. The firm guaranteed varying
amounts for cane per ton knowing that their crops are substandard as part of its marketing ploy to
attract enough planters to keep the mill running all year around. Furthermore, SyCip Gorres Velayo &
Co. (SGV) admitted that its reports on the firm were based on false figures presented by the company
officials.

However, the most devastating about these scandals was that of BW Resources. Dante Tan
formed Best Worlds Gaming and Entertainment Corporation (BWGE) in early 1998. At the same time
Greater Asia Resources, a leisure and tourism company headed by Eduardo “Moonie” Lim, changed its
name to BW Resources. Tan became the major shareholder of BW Resources in 1999 when it acquired
the Sheraton Marina Square near Manila Bay. Rumors of merger between BW Resources and BWGE
spread. Within a span of couple of months, Pagcor announced its intention to operate a casino in
Sheraton Marina Square. BW Resources also brought in Stanley Ho, Macau’s casino mogul. The
company’s stock price rose from Php 2 to Php107 during this time. However, shortly after Ho’s visit to
Manila, wherein he faced strong opposition from Catholic church and was accused of being a part of
triad gangsters, BW Resource’ share prices plunged to below Php30. The SEC and PSE, then, began
investigations and uncovered heavy buying by Tan. He then sold shares at a discount to friends and
clients. These transactions were reported on PSE board at prices that were over twice the amount
actually paid.

Furthermore, half of the daily turnover circulated around 10 brokerage firms. As a result, fines
and penalties amounting to Php30.05 million from the infraction of the Securities Regulation Code (SRC),
the Corporation Code, and related laws have been enforced. In addition, as of March the Department of
Justice has charged four brokers and five individuals in relation to this case.

Corporate America is responding to this mess through various corporate governance reforms.
Boards of directors are firing CEOs left and right.

Other changes being implemented by various corporations include reducing the number of
company executives included in the board, facilitating executive sessions of outside directors, increasing
the meetings of the members, and requiring more time and know-how especially from the audit
committee. Evidences of these include head hunters’ reports on greater demand for independent
directors as well as a rising trend in training seminars for directors. More changes yet to be seen include
the certification of financial statements by CEOs, a ban on loans to offers and directors, and faster
reporting of insider trading.

Even the market is contributing to the effort with greater capital being fed to companies that
have transparent, easy to understand financial statements. As a result, more than 1,000 companies in
the U.S. have restated previous incomes and are trying to establish more credible financial base lines.

Furthermore, the SEC ordered the CEOs and CFOs of the 1,000 largest U.S. companies to attest
personally to the accuracy of their financial statements. In addition, the New York Stock Exchange has
put into place new rules on corporate governance that would require majority of board members to be
independent and give the right to shareholders to vote on executive compensation.

More importantly, the Bush administration recently passed the Sarbanes-Oxley Act that would
require faster disclosures and directs the SEC to issue rules requiring the disclosure of information
previously not asked for. The Act also establishes new rules for the composition and duties of audit
committees, new rules affecting other areas of corporate governance with strong emphasis on officer
and director compensation as well as stock trading, new crimes and increases in the maximum penalties
for existing crimes, provisions affecting securities and other civil litigation as well as SEC administrative
enforcement, establishment of the Public Company Accounting Oversight Board, And rules addressing
conflict of interest involving securities analysts.

The European Union (EU) has proposed a code of conduct on the independent auditors, which
includes five-year auditor rotation. Member states also endorsed the Market Abuse Directive to
harmonize and strengthen rules against insider dealing. It aims to address definitions of insider trading,
requiring investment analysts to disclose share ownership, as well as comprehensive public disclosure
issues and fair representation of investment research. In July, the British government released a white
paper proposing reforms to the Company Law. These changes include harsher penalties for misleading
auditors, redefining the roles of the directors and creating standards for boards in accounting
supervision and other disclosure issues. Furthermore, the British government is also reviewing the roles
of non-executive directors and is considering the regulation of audit committees.

In the Philippines, various corporations have also made conscious efforts in the improvement of
corporate governance. These steps include the appointment of independent directors to the board as
well as ensuring the skills; knowledge and expertise of the members are at par with industry standards.

Furthermore, the private sector, headed by the Jesus Estanislao, established the institute of
Corporate Directors (ICD) after the 1997 financial crash. The purpose of this World Bank-funded non-
profit organization is to advocate corporate governance in the Philippines and in Asia.

The Philippine government adopted the Guidelines for Good Corporate Governance Practices
endorsed by the Asia-Pacific Economic Cooperation (APEC) last October. These guidelines drafted by the
Pacific Economic Cooperation Council, stresses the importance of fairness, transparency and
accountability.

These three principles have been incorporated in the SEC’s Code of Corporate Governance
which was issued in April in its Memorandum Circular No. 2. The code addresses issues dealing with
board of directors, the Audit Committee, the nomination and compensation of committees, the
auditors, and the disclosure and the transparency of the corporations. In particular, it requires public
companies to have at least two independent directors or 20% of the members of the board, whichever is
lesser. The Code also requires each corporation to document its corporate governance rules and
principles in a manual and submit it to the SEC.

Directors who do not attend board meetings regularly, do not disclose the extent of their
business interest, and do not meet any other requirements may be disqualified or suspended from the
board. Companies are also advised to rotate their auditors regularly. Finally, the code mandates the
formation of four board committees i.e. the audit and compliance committee, the nomination
committee, the compensation committee, and the risk management committee. At least three members
of the Audit Committee should be board members. A performance evaluation system on the board as
well as top management must also be put into place by the respective corporations.

Another action taken by the SEC involves the amendments made to the SRC Rule 68, the Special
Accounting Rules, to conform to International Accounting Standards (IAS). This rule shall be fully
compliant with the IAS by 2003. A special rating system called the SEC MILEAGE is also under
development. It shall be implemented on listed companies to warn investors of firms that have poor
corporate governance. The SEC is also preparing for an IT-driven risk-oriented monitoring device called I-
Mode, which shall track corporations’ compliance to laws, policies, and rules and regulations including
the Anti-Money Laundering Act of 2001, among others

The Capital Market Development Council, a private-public sector policy group that includes the
SEC and BSP, launched the Corporate Governance Reform Program for 2002 to 2004. The program sites
various proposals for corporate governance reforms, such as better protection for minority
shareholders’ rights, adherence to international auditing standards, and increase transparency and
disclosure of public companies.

The Philippines response to the global problem of corporate governance is adequate; it is yet to be
concretized in the Filipino corporations’ everyday functions. In fact, a survey conducted by SGV involving
75 top executives showed that 70% of their companies do not have a conduct in place that defines the
best practices of good governance. Furthermore, majority of the respondents are not confident that
their internal audit functions are effective and efficient for internal controls. Processes involving risk
management, succession planning and, investor relations and communication have yet to be improved.

In order to address this problem and improve implementation, regulatory institutions need to be
reformed and strengthened and banking and financial sector standards upgraded. The concept of single
regulator must also be considered.

Corporations must also move towards increased accountability, transparency, integrity and higher
ethical standards. Disclosure of both financial and non-financial information material to shareholders
must be practiced extensively. Auditing bodies should continuously re-examine and raise standards to
internationally accepted levels. Finally, global practices should also be revisited time and again.

With the Public and private sector each doing their share towards excellence in corporate governance,
the Philippines will remain globally competitive and its corporations recognized and respected the world
over.

IDEAS TO PONDER:

"Investment in Reputation is an Investment with Real Return" By: Manglicmot and Dayon, 2011

A firm's reputation is often its most valuable asset. Reputation is a socially shared impression, a
consensus about how a firm will behave in any given situation, I based on a set of collectively held
beliefs about a company's ability and willingness to satisfy the interest of various stakeholders.

Although reputation is an intangible concept a good reputation research universally shows that
demonstrably increases corporate worth and provides sustained competitive advantage. If an
organization is well regarded by main customers, they will be preferred to deal with than another. And
these people will influence other potential customers by word of mouth. Suppliers will be more inclined
to trust in the organizations ability to pay and provide fair trading terms. If any problems occur in their
trading relationship, the suppliers will be more inclined to give the benefit of the doubt when a
reputation for fair dealing is present. And also a potential employee will be more likely to sign up if a
company has good reputation for treatment of staff compared with an employer who may have an
equivocal reputation.

Profits and good reputation go hand in hand. Though both influence the other, it stands to reason that a
company with good reputation will likely enjoy higher profits. Essentially companies that actively protect
their reputations often realize a substantial return on their investment

Big Picture B in Focus: ULOb. Prepare fraud investigation audit report of an organization.

Fraud is an intentional perversion of truth in order to induce another person to part with something of
value or to surrender a legal right

FRAUD is any illegal act characterized by deceit, conceal or violation of trust. These acts are not
dependent upon threat of violence or physical force. Frauds are perpetrate by parties and organizations
to obtain money, property, services; to avoid payment or loss of services; or to secure personal or
business advantage.

Fraud Equation:

Motive + Means + Opportunity = FRAUD

Reason: (Driving force and / or intention)
Ability: (Presence of technical and other skills
Access: (Chance to conceal the fraudulent act)
COMPONENTS OF FRAUD:

1. CONCEALMENT 3. ATTRACTION
2. OPPORTUNITY 4. MOTIVE

CATEGORIES OF FRAUD

✓ Known and recorded publicly

✓ Known and recorded internally
✓ Undiscovered

CAUSES OF FRAUD (Answers the question: Why FRAUD happens?)

➢ Absence of proper control
➢ Collusion within the department
➢ Failure to observe control procedures
➢ Collusion with persons outside department
➢ Lack of separation of duties

ROLES TOWARDS FRAUD PREVENTION AND DETECTION MANAGEMENT

▪ Set the tone from the top by having a policy that fraud will not be tolerated and fraudsters will be
prosecuted.
 ▪ Have a fraud mitigation strategy to detect and deter would be fraudsters.
▪ Have a fraud response plan setting out exactly what steps to take if a fraud is reported or detected.

INTERNAL AUDIT DEPARTMENT

▪ Reviewing fraud prevention and detection processes put in place by management.
▪ Assisting management to improve those processes
▪ Leading investigations where necessary.
▪ Liaison with the police.
▪ Dealing with whistle-blowers.

TYPES OF FRAUD
A. Theft is a type of fraud characterized by obtaining property by deception and false accounting.
B. Bribery and Corruption is a fraud that is done by inducing or rewarding any money, gift or
consideration paid or received for favor or request from an authority.
C. Forgery is done by using false instrument with the intention to induce someone to accept it as
genuine and for the reason of so accepting it, to do, or not to do some act to his own or some other's
prejudice.
D. Conspiracy is characterized by involving by one person in an unlawful agreement with two or more
persons to carry out an unlawful common purpose or lawful common purpose by unlawful means.

INDICATORS OF FRAUD
- Unexplained; Incomparable Data - Photocopies substituted for originals
- Tipp-Ex (Erasing fluid) - Lavished lifestyle
- Unreconciled records - Missing documents
- Rewritten and / or amended documents - Complaints from clients or suppliers

MEANS TO DETECT FRAUD

- Tip from employees - Tip from vendor

- Internal control - Internal audit
- Anonymous tip - Tip from customer
- By accident - Notification from law enforcement
- External audit

INVESTIGATING FRAUD (answers the question, What to do?)

▪ Call the police ▪ Suspend the suspect

▪ Do nothing
▪ Issue a formal instruction to staff
▪ Check the system of internal control
▪ Instruct disciplinary procedures
▪ Interview the offices in question
▪ Commence a joint management/internal audit
investigation
▪ Commence an audit investigation
▪ Commence a handling inquiry
FRAUD INVESTIGATION AUDIT REPORT FORMAT

First part is the Detailed findings

Executive Summary Thereafter
Followed by Conclusion and recommendation's
Introduction Finally
Then Appendices
Investigation After

Appendices includes the following:

✓ Photocopies of all evidences ✓ Investigator’s checklist
✓ Contact log ✓ Press release

The following are the people who will receive the fraud investigation audit report
• Security director • Operations administrator
• Auditor • Personnel department.
• Legal representative

FRAUD KEY CONTROLS

➢ Good recruitment procedure ➢ Independent checks over work
➢ Supervision ➢ Regular staff meetings
➢ System of management account ➢ Employee code of conduct
➢ Up-to-date accounts ➢ Good management information system
➢ Clear lines of authority ➢ Publicized policy on fraud
➢ Controlled profit margins ➢ Good documentation
➢ Good staff discipline procedure ➢ Financial procedure
➢ Management trail ➢ Good communication
➢ Good controls over cash income ➢ Segregation of duties
➢ Store / equipment control ➢ Anti-corruption measures
➢ Fraud hotline ➢ Good all-round systems of control
➢ Well-trained and alert management