ETHICS AND CORPORATE GOVERNANCE GROUP PRESENTATION

AUDITORS AND AUDITS

NORHAYATI M LUI JAYAKUMAR SALLIAH MOHD ZIA AZMAN IBRAHIM JOEHARY SULAIMAN

CGA 080021 CGA 070127 CGA 070040 CGA 060021 CGA 040189

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

PRESENTATION OUTLINE
‡ROLE OF AUDITING AND AUDITORS IN CORPORATE GOVERNANCE ‡AUDIT AND AUDITOR ‡MALAYSIAN CODE OF CORPORATE GOVERNANCE ‡CORPORATE GOVERNANCE PRACTICES ‡CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (IFAC Code) ‡THE LEGAL ENVIRONMENT ‡CASE REFERENCES ‡FUTURE OF AUDIT ‡CONCLUSION ‡OPEN THE FLOOR FOR OTHER OPINION

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

ROLE OF AUDITING AND AUDITORS IN CORPORATE GOVERNANCE
Understanding Corporate Governance

ZIA

‡Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. It includes the relationships among the many stakeholders involved and the goals for which the corporation is governed ‡The principal stakeholders are the shareholders, management and the board of directors, along with other stakeholders like employees, suppliers, customers, banks and other lenders, regulators, and the community at large ‡Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

STAKEHOLDERS OF CORPORATE GOVERNENCE

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

ROLE OF AUDIT COMMITTEE
‡ An effective Audit Committee is a vital component of an effective corporate governance system ‡ The Audit Committee and the Auditors need to maintain an ongoing dialogue independent of management and the the Board of Directors ‡ Audit Committee members must have ³Financial Compitence´, miminum a financial background ‡ Major Audit Committee roles include:
± Include mainly non-executive directors ± Enterprise¶s Risk Management (ERM) ± Approve the appointment of the Auditors ± Establish the audit fees ± Critical accounting judgments

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

AUDIT AND AUDITOR
‡ Audit:
± Audit is an expert opinion on the fairness with which financial statements present, in all material respects, a company¶s financial position, results of operations, and cash flows in conformity of GAAP

‡ Auditor:
± Auditor is a certified person/firm that performs the auditing activity ± The auditor does not have direct corporate governance responsibility but rather provides a check on the information aspects of the governance system ± Auditors¶ primary role is to check whether the financial information given to investors is reliable, thus contributing in decision making, accountability, and monitoring of the system

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

INTERNAL AUDIT AND AUDITOR
‡ Internal auditing is an activity involved in advising organizations regarding how to better achieve their objectives. Internal auditing involves the utilization of a systematic methodology for analyzing business processes or organizational problems and recommending solutions. ‡ Professionals called internal auditors are employed by organizations to perform the internal auditing activity. ‡ The scope of internal auditing may involve internal control topics such as the efficacy of operations, the reliability of financial reporting, investigating fraud, safeguarding assets, and compliance with laws and regulations.

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

INTERNAL AUDITORS AND ENTERPRISR RISK MANAGEMENT (ERM)
‡ Enterprise Risk Management (ERM) is one of the major activities of Internal Auditing System ‡ According to the Institute of Internal Auditors:
± ERM ³is a structured, consistent and continuous process across the whole organization for identifying, assessing, deciding on responses to and reporting on opportunities and threats that affect the achievements of its objectives.´

‡ ERM is a complex process requiring an appropriate corporate culture and creativity stemmed of a variety of experiences ‡ It recognizes interdependencies environmental factors among corporate, financial, and

‡ Strives to determine and implement an optimal strategy to achieve the primary objectives i.e. optimize the value of the firm
CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

INTERNAL AUDITORS AND ENTERPRISR RISK MANAGEMENT (ERM)
‡ Key roles of Internal Auditing regarding ERM are: ‡ To provide independent and objective assurance for Board on effectiveness of ERM ± Identify/assess/manage key risks ± Internal controls ‡ Assurance regarding, and evaluation of, the risk management process ± Risk reporting, evaluation, management

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

EXTERNAL AUDIT AND AUDITOR
‡ The primary role of external auditing is to provide a judgment on whether an entity¶s financial statements are free of misstatements ‡ Where, this judgment or opinion is given by audit professionals, called external auditors, who are independent of the entity being audited ‡ Users of the entities' financial information, such as investors, government agencies, and the general public, rely on the external auditors¶ reports ‡ The independence of external auditors is crucial to a correct and thorough appraisal of an entity's financial controls and statements ‡ Any relationship between the external auditors and the entity must be disclosed in the external auditor's reports

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

INTERNAL VS EXTERNAL AUDITORS
‡ Internal Auditors: ± Internal auditors¶ primary responsibilities include appraising an entity's risk management strategy and practices, management control frameworks and governance processes, but they do not express an opinion on the entity's financial statements ‡ External Auditors: ± The primary role of external auditors is to express an opinion on whether an entity's financial statements are free of material misstatements ± Moreover, they must also investigate any material issues raised by inquiries from professional or regulatory authorities

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

What is Corporate Governance?

JAYA

Corporate Governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, whilst talking into account the interest of other stakeholders.
-Malaysian definition as per Finance Committee on Corporate Governance (Report on Corporate Governance, February 1999)

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Good governance is not simply about corporate excellence. It is the key to economic and social transformation. The corporation of today are no longer sheer economic entities. These are engines of economic and social transformation.

-Dr Madhav Mehra President of World Council For Corporate Governance

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Malaysian Code on Corporate Governance

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Principles of Corporate Governance

Directors

Directors Remuneration

Shareholders

Accountability & Audit

The Board Board Balance Supply of Information Appointments to the Board Re-election

Level & Make Up of Remuneration Procedure Disclosure

Financial Reporting Dialogue between companies & investors Annual General Meeting Internal Control Relationships with Auditors

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Principles & Best Practices For CG

Shareholder Voting

Dialogue between Companies & Investors

Evaluation of Corporate Governance

External Auditors

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Best Practices in Corporate Governance

The Board of Directors

Principal responsibilities of the Board Constituting an effective board Size of non-executive participation Board structures & procedures Relationship of the board to management

Accountability & Audit

Shareholders The audit committee The relationship between the board & shareholders

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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CORPORATE GOVERNANCE PRACTICES

Role of the Board
- To focus on guidance and strategic oversight while management run the company business - Increasing shareholder value for the long term - To ensure company is running effectively in accordance with the boards basic fiduciary oversight requirement The specifics of the board s role will vary with size, stage and strategy of the company and talents and personalities of the CEO and the board

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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Code of Ethics for Professional Accountants (IFAC Code)
‡
±

AZMAN

IFAC Code includes changes in three important aspects:
The code establishes five fundamental principles of professional ethics which all professional accountants must comply. Five fundamental principles are a) Integrity, b) Objectivity, c) Professional competence and due care, d) Confidentiality e) Professional Behavior. The conceptual framework approach is now extended to all the fundamental ethical principles. Professional accountants, whether in public practice, in business or employment are required to apply the conceptual framework approach to ethic. The revised code now has the authority of an international standard. As an international benchmark, it requires that national ethical standards developed by IFAC member body must be based on the IFAC Code. They are not allowed to apply less stringent standards than those stated in the IFAC Code unless certain rules are prohibited by their local laws and regulations.

±

±

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

THE LEGAL ENVIRONMENT

1) Liability to clients-Breach of Contract 2) Liability to clients and third parties-Negligence
a) The auditor owed a duty of care to the plaintiff to confirm to a required standard of care. b) There is failure to act in accordance with that duty of care c) There is a causal relationship or connection between auditor¶s negligence and the plaintiff damage d) The plaintiff suffered actual loss or damage.

3) Duty to report breach of laws

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

AUDIT AND AUDITORS Case References YATI

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

CORPORATE SCANDALS
‡ Infamous US cases: Enron, WorldCom, Tyco, etc. ‡ Malaysia : Transmile, Oilcorp, Megan Media, etc

Accounting Fraud

Money laundering

Insider Trading

Asset Misappropriation

Creative Accounting Earnings management

Conspiracy

Asset Embezzlement

Accounting Irregularities Financial Statement Manipulation

Where are the auditors??? What are they doing??
CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

CASES:MALAYSIAN CORPORATIONS ‡ Transmile Scandal, 2007
http://www.transmile.com/

‡ Transmile Air Services- cargo airline, premier express freight and charter company ‡ Founded in 1993 , founder cum CEO: Gan Boon Aun ‡ Major shareholders: Kuok Brothers Sdn Bhd 17.3%, Pos Malaysia & Services Holdings Bhd 15.3%, Capital Group Intl 9.78% ‡ Chairman: Tun Dr Ling Liong Sik (former Transport Minister) ‡ Overstated earnings of FY 2006

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

CASES:MALAYSIAN CORPORATIONS ‡ Oilcorp Saga, 2008
http://oilcorp.com.my/ ‡ Oilcorp Berhad ± incorporated on 12 July 2001- listed on main board on 5 August 2003. ‡ An investment holding company, main activities: oil & gas, hotel & property, marine related activities, etc ‡ Issue: Oilcorp vs. BTMH (auditors):
OILCORP

BTMH

HORWARTH

Management of Oilcorp bid to remove BTMH and to replace with Horwarth (May 2007 ~)
CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

FUTURE OF AUDIT

JOE

‡ The objective and techniques of auditors have changed during the four hundred years of recognizable existence of auditors ‡ The lack of understanding of the auditors¶ role among the public may have harmful implications to the audit profession as the public may not be able to recognize the contribution of auditors to society.

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

FUTURE OF AUDIT
‡ Fall of Enron-The Sarbanes-Oxley Act was implemented. ‡ The Public Company Accounting Oversight Board ‡ The collapse of HIH Insurance-Ramsay Report ‡ Practice Review Programme and Public Oversight Board (PCAOB) (Malaysia)

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

THE ROLE OF AUDITORS IN THE FUTURE
‡ Audit has gone from the backwater from an inspection focused, box-ticking environment and is now on a massive journey to meet new challenges. ‡ Auditor needs to focus on how they can take audit function forward and add value to the business. ‡ Auditor needs to consider what their function should look like, alongside the regulatory agenda, and how they can influence that agenda. ‡ Auditor can¶t afford to become the old inspection groups of 20 years ago. They need to hire from a pool that can do analysis.

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

SUMMARY AND CONCLUSION
‡ Good corporate governance is not simply about the avoidance of financial shocks nor should the emphasis be on the negative impact of poor corporate governance. ‡ Good corporate governance is not simply about fairness in the allocation of a limited pie but rather about the enlargement of that pie, the adoption of solid and correct business strategies, and the effective management of the firm.

CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

‡ ³An auditor can improve and analyze the books, but in the end, the key is for management to practice good governance´. The Edge Malaysia, 4 February 2008

THANK YOU
CSGB6102 ETHICS AND CORPORATE GOVERNANCE 20TH OCTOBER 2008

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