The company is in the financial services sector
and has a large number of consumer loans,
including mortgages, outstanding.
The CEO’s and CFO’s compensation is based on
three components: (a) Base salary, (b)bonus
based on growth in assets and profits, and (c)
significant stock options.
The audit committee meets semiannually. It is
chaired by a retired CFO who knows the company
well because she had served as the CFO of a
division of the firm. The other two members are
local community members – one is the
president of the Chamber of Commerce and
the other is a retired executive from a successful
local manufacturing firm.
This doesn’t reflect poor governance but the
auditor should check risks in the current loan
portfolio.
This doesn't necessarily indicate poor governance,
but the auditor should assess the inherent risk
associated with the existing loan and determine if
this risk could have been reduced through
improved risk management practices within the
company.
That 3 components of compensation are pretty
common to the company and don’t reflect poor
corporate governance
The CEO and CFO compensation structure doesn't
inherently indicate poor corporate governance.
The crucial is how these components are designed
and whether they promote responsible and
sustainable corporate behavior, especially in
significant stock options. The possible loss of
ownership by current shareholders and the limit
of when executives can use these options should
be assessed carefully. Also, the structure should
prevent people from taking too many risks or
altering financial results to raise stock prices
temporarily.
It is an indication of poor corporate governance,
auditors in a company should not limit the
number of meetings to just twice a year. In
auditing, the auditor should devote much more
time to see to it that problems and errors
will be properly addressed to the company
This indicates poor corporate governance because
of the size of the committee, frequency of
meetings, and independence. The committee's
size is relatively small, which can lead to a lack of
diverse viewpoints and expertise. Also, meeting
semiannually might not offer sufficient oversight,
particularly for a complex company. A more
robust governance structure might involve more
frequent meetings or additional committees
dedicated to financial oversight. Lastly, there may
be concerns about the retired CFO's potential
conflict of interest due to her past ties with the
company's executives, which could affect
impartial oversight.
The company has an internal auditor who reports
directly to the CFO and makes an annual report
to the audit committee.
e. The CEO is a dominating personality – not
unusual in this environment. He has been on the
job for 6 months and has decreed that he is
streamlining the organization to reduce costs and
centralize authority (most of it in him).
It is not poor corporate governance and a good
thing that they have an internal auditor but
reporting directly to the CFO is not ideal.
Everything should be performed and disclosed
in transparency
This indicates poor corporate governance because
when there is only one internal auditor with a
direct reporting line to a high-ranking executive
like the CFO, there are fewer safeguards to verify
the accuracy and integrity of financial reporting.
A single internal auditor has limitations in
covering the full spectrum of financial risks and
controls within a large or diverse organization.
They may lack the resources and expertise to
adequately assess all risk areas. Also, with limited
independence and oversight, there is an increased
risk that financial misstatements or irregularities
may go undetected, potentially harming the
company's financial health and shareholder trust.
Audit Activity to Determine if Governance is
actually Poor
- A dominant CEO is note specially unusual,
but the centralization of power in the
CEO is a risk that many aspects of
governance, as well as internal control
could be overridden. The auditor should
look at policy manuals, as well as
interview other members of
management and the board – especially
the audit committee.
Risk Implication of Poor Governance
- The centralization of power in the CEO is
a risk that many aspects of governance,
as well as internal control could be
overridden. This increases the amount of
audit risk.
It is a common scenario in a company but is
has also risk, in relation to this CEO can be
highly influential to any of the organization’s
operations which of course increases the risk
of fraud and the risk faced by the external
auditor.

The Company has a loan committee .It meets
quarterly to approve, on an ex-post basis all loans
that are over $300 million (top 5% for this
institution).
A CEO with a dominating personality can bring
strong leadership to an organization; however,
when a CEO unilaterally centralizes authority
without involving other key stakeholders, such as
the board of directors or senior management
team, it indicates poor corporate governance
because of the lack of transparency and checks
and balances in governance, this increases the
risk of fraud and the risk faced by the external
auditor. Effective corporate governance
encourages collaboration and stakeholder
involvement in decision-making.
Audit Activity to Determine if Governance is
actually Poor
The auditor should observe the minutes of the
loan committee to verify its meetings. The
auditor should also interview the chairman of the
loan committee to understand both its policies
and its attitude towards controls and risk
Risk Implication of Poor Governance
- There are a couple of elements in this
statement that carries great risk to the
audit and to the organization. First, the
loan committee only meets quarterly.
Economic conditions change more rapidly
than once a quarter, and thus the review
is not timely. Second, the only loans
reviewed are (a) large loans that (b) have
already been made. Thus, the loan
committee does not act as a control or a
check on management or the
organization. The risk is that many more
loans than would be expected could be
delinquent, and need to be written
down.
One factor iI see that is indicative of poor
governance is that the loan committee only
meets quarterly. Economic conditions change
more rapidly than once a quarter, and thus the
review is not timely
This is a very high-risk indicator that is indicative
of poor governance. The loan committee is
focused on large loans and may not pay enough
attention to the overall composition of the loan
portfolio, making the company more vulnerable

The previous auditor has resigned because of a
dispute regarding the accounting treatment and
fair value assessment of some of the loans.
to economic downturns and associated risks.
Also, delayed loan approvals due to infrequent
committee meetings can result in missed business
opportunities or borrower dissatisfaction. More
frequent meetings are necessary for the company
to handle a high volume of large loans or operate
in a rapidly changing environment. A well-
structured and effective loan committee can
enhance the organization's risk management and
corporate governance.
Audit Activity to Determine if Governance is
actually Poor
- The auditor should contact the previous
auditor to obtain an understanding as to
the factors that led the previous auditor
to either resign or be fired. The auditor is
also concerned with who led the charge
to get rid of the auditor.
Risk Implication of Poor Governance
- This is a very high risk indicator. The
auditor would look extremely bad if the
previous auditor resigned over a
valuation issue and the new auditor
failed to adequately address the same
issue.
Second, this is a risk factor because the
organization shows that it is willing to get
rid of auditors with whom they do not
agree. This is a problem of auditor
independence and coincides with the
above identification of the weakness of
the audit committee. This action confirms
a generally poor quality of corporate
governance.
This is a very high-risk indicator that is indicative
of poor governance. The auditor would look
extremely bad if the previous auditor resigned
over a valuation issue and the new auditor failed
to adequately address the same issue.
Poor governance practices resulting in disputes
with auditors are a very high-risk indicator of
poor governance. When auditors resign due to
disputes, it harms the company's reputation,
making attracting talent, business partners, and
customers challenging. A damaged reputation
has long-term consequences on the company's
competitiveness and market standing, for
shareholders may suffer financial losses.