Narrative: You Will Need A Copy of The Book As Future Reference Material For This Presentation

Essentials Companion © KHS Pickett 2011 Training Slides
Narrative
You will need a copy ACCT7142-Essential Guide to Internal Auditing

of the book as future 2nd Edition
reference material
for this presentation.
Chapter Two
Corporate Governance Perspectives

Narrative Training Aim

This presentation is To present a brief introduction to corporate governance as
aimed at increasing the context for the internal audit role that will give you an
your level of initial understanding of:
understanding of the
following topics. 1.The agency model of accountability.
2.The components of corporate governance.
3.The link to risk management.

Narrative
YOUR CHOICE
Would you chose
one, two or three as
the most appropriate Corporate governance is really about:
response?
1. The way performance is reported to shareholders.
2. The way compliance is managed.
3. The way organizations are directed and controlled.

Narrative
YOUR CHOICE ANSWERED
The best response is
number 3 – ‘the way
organizations are Corporate governance is really about:
directed and
controlled’ as 1. The way performance is reported to shareholders.
described by Sir
Adrian Cadbury in his 2. The way compliance is managed.
seminal work on
corporate 3. The way organizations are directed and controlled.
governance.
Essentials Companion © KHS Pickett 2011
Narrative
We have prepared a
Board of Directors
model of corporate
governance that we are
going to develop over the
course of this training
Managers
presentation. Let’s start
with a simple model of an
organization that has
managers, supervisors (or Supervisors
team leaders) and staff,
overseen by a board of
Operational and Front Line Staff
directors.
See Figure 2.1 of the
book.
Essentials Companion © KHS Pickett 2011 SHAREHOLDER
S
Narrative
The managers are driven
Board of Directors
by KPIs or the key
performance indicators to
KPIs
reflect the extent to
which they have achieved
Managers
their objectives. The
board then reports the
overall results to the
shareholders who own Supervisors
the entity. This is the
essence of the agency
theory where managers
act on behalf of owners.
book.
Essentials Companion © KHS Pickett 2011 STAKEHOLDER
S
Narrative
We cam now add
PERFORMANCE Board of Directors ACCOUNTABILITY
performance and
accountability to our
Objectives KPIs
model. The board will set
Policies Directors Report
objectives and a strategy
Managers Performance Review
for the business. Strategies
Meanwhile, the board will Plans Final Accounts
report back to Procedures A/c Policies
stakeholders through the Training & Supervisors Corp Gov Disclosures
annual report and Development
corporate disclosures.
Page 16 describes this
idea of stakeholders.
book.
Narrative
A short Task
Write down the
attributes of a good
published annual
report.
What makes for a good published annual report?
Narrative
A short Task Answered
Have a look at some
of the attributes of a Focused; Highlight important messages, transactions
good report from and accounting policies and avoid distracting readers
page 52. with immaterial clutter.
But the published Open and honest; Provide a balanced explanation of
reports will also the results – the good news and the bad.
need to be audited Clear and understandable: Use plain language, only
to ensure they are well defined technical terms, consistent terminology
reliable and this is and an easy-to-follow structure.
dealt with in the Interesting and engaging: Get the point across with
next slide. a report that holds the reader’s attention.
Narrative
Financial Accounts
The annual report
will contain a set of If the accounts do not show a true and fair view
financial accounts for that reflects all realised losses then dividends may
the period in be paid out to the shareholders that diminishes the
question. It is funds that are left for the creditors.
essential that these
accounts are not
fudged to inflate
profits or the entire
governance model
breaks down.
Essentials Companion © KHS Pickett 2011 STAKEHOLDER Final Accounts
Legislation, Rules & Regs S External Audit
Narrative
The governance regime is
CONFORMANCE Board of Directors ACCOUNTABILITY
PERFORMANCE
strengthened by
Audit Committee
regulations, external
Objectives KPIs
auditing of the final
Policies Directors Report
accounts and ethical
standards. The board Strategies
relies on a specialist audit Plans Final Accounts
committee to help them Procedures A/c Policies
oversee these Training & Supervisors Corp Gov Disclosures
arrangements. S.I.C. is the Development S. I. C.
published statement on
internal control. See
Ethical Standards
Figure 2.3 of the book.
Narrative
A short Task
Our governance
model contains
many features to
support the agency
theory. But, even What could go wrong even with the governance
with these things in model we have established so far?
place, what might go
wrong to undermine
an organization.
Narrative What could go wrong?

Our model of governance •Boards dominated by a powerful chief executive officer (CEO).
appears robust on paper •Boards that are ineffectual and consist simply of a network of friends.
but in practice many •Boards that are incompetent and or who are over-committed.
things could, and have in •CEOs and chief finance officers (CFO) who conspire with other board
the past gone wrong. members to distort the published results.
Some of these problems •Compensation schemes which encourage high rewards for excessive
are noted here and the short-term risk taking based on huge bonuses.
remainder are described •Employees who are regularly able to abuse company resources and
in pages 19 to 20. exploit loopholes.
•Short-term measures such as dumping waste or skipping important
safety checks.
•Organizations with great emphasis on success where bad news is not
tolerated and losses, problems.
•External audit fails to challenge unreliable financial accounts.
Narrative What could go wrong?

As a result of these
potential problems there •BCCI
have been many scandals •Barings Bank
over the years where
•Daiwa Bank.
governance has fallen
down, a few of which are •Equitable Life.
noted here. •Enron.
Pages 20 to 26 (and 48 to •WorldCom.
50) contains a full account •Madoff.
of these and other •Parmalat.
corporate scandals,
•Lehman Brothers.
including the infamous
Credit Crunch. •Northern Rock.
Narrative Key Principles:

The international business
1.Rights of shareholders. CG framework should protect shareholders’ rights.
community has been
trying to improve 2.The equitable treatment of shareholders. CG framework should ensure the equitable
governance by making the treatment of all shareholders, including minority and foreign shareholders.
agency concept more
robust for many years. 3.The role of stakeholders in corporate governance. CG framework should ensure that
timely and accurate disclosure is made of all material matters regarding the
For example the corporation, including the financial situation, performance, ownership and governance
Organization for of the company.
Economic Cooperation
and Development has 4.Disclosure and transparency. CG framework should ensure that timely and accurate
prepared five key disclosure is made on all material matters regarding the corporation.
principles of corporate 5.Responsibility of the board. CG framework should ensure the strategic guidance of
governance. See pages 27 the company, the effective monitoring of management by the board, the board’s
to 28. accountability to the company and the shareholders.
Narrative External audit

A great deal of reliance is
placed on the reports
from the managers of the The external auditor seeks to test the underlying
company via the board of
transactions that form the basis of the financial statements.
directors and the owners
and other stakeholders. In this way they may form an opinion on whether or not
The external auditor will these statements show a true and fair view. Reliance may be
report on whether the placed on those systems that produce the accounts so that
final accounts show a true less testing will be necessary where the system is found to
and fair view of the be sound. The systems are, however, perceived as a short-
business. The concept of
cut to examining all the financial transactions for the period
external audit is dealt
with in pages 33 to 39. in question.
Narrative The Audit Committee

Likewise the audit An audit committee will be established by the main board to perform those duties that
the board decides should be properly allocated to this specialist forum such as:
committee has a key role •Ensuring that financial statements are understandable, transparent, and reliable.
in corporate governance •Ensuring the risk management process is comprehensive and ongoing
and is covered in pages 39 •Helping achieve an organization-wide commitment to strong and effective controls.
to 42. •Reviewing corporate policies relating to compliance with laws and regulations, ethics,
conflicts of interest, and the investigation of misconduct and fraud.
•Reviewing current and pending corporate governance-related litigation or regulatory
proceedings to which the organization is party.
•Continually communicating with senior management regarding status, progress, and
new developments, as well as problematic areas.
•Ensuring the internal auditors have access to the audit committee and encouraging
communication beyond scheduled committee meetings.
•Reviewing internal audit plans, reports, and significant findings.
•Establishing a direct reporting relationship with the external auditors.
•Balancing their role as advisor and counselor to management with their fiduciary duty
to monitor and oversee management is challenging for most audit committees.
Narrative
Corporate Governance Codes
Corporate governance codes lead
to Corporate structures to ensure
compliance with these codes.
Disclosure arrangements will cover
Internal Corporate Structures
the annual report including the
audited accounts, external audit
Control
report, directors’ report and
operational review. This also Framework Disclosure Arrangements
includes disclosures on compliance
with corporate governance codes,
risk management arrangements
and a SIC. All large organizations
should adopt a control framework
Risk Internal
that sets out its vision of control.
This provides a road map regarding Management Controls
the control environment, how
people relate to each other and Corporate
communicate, corporate structures Strategies &
and governance processes. Review
Narrative
Corporate Governance Codes
Risk management. Within the context of
the control framework, the organization
should employ a process for identifying,
assessing and managing risk. Internal Corporate Structures
Control
Internal controls. After having assessed
key risk, they will need to be managed in
line with a defined risk management
strategy. One major component of this
strategy is appropriately derived internal Framework Disclosure Arrangements
controls that seek to mitigate
unacceptable levels of risk. Each control
will address a defined risk or be part of a
regulatory requirement that in turn
addresses the risk of breaching law,
procedures and rule.
Risk Internal
Corporate strategies and review: The
strategy for managing risk and ensuring
Management Controls
controls do the job in hand should then
be incorporated into an overall strategy Corporate
that drives the organization towards the Strategies &
achievement of its objectives. Review
Narrative Principle 1: The board’s fundamental objective should be to build long-

term sustainable growth in shareholder value for the corporation, and the
The New York Stock board is accountable to shareholders for its performance in achieving this
Exchange issued their ten objective.
principles of corporate Principle 2: While the board’s responsibility for corporate governance has
governance on 23rd long been established, the critical role of management in establishing
September 2010. These proper corporate governance has not been sufficiently recognized. The
principles are noted in the Commission believes that a key aspect of successful governance depends
next three slides. upon successful management of the company, as management has
primary responsibility for creating an environment in which a culture of
performance with integrity can flourish.
Principle 3: Shareholders have the right, a responsibility and a long-term
economic interest to vote their shares in a thoughtful manner, in
recognition of the fact that voting decisions influence director behavior,
corporate governance and conduct, and that voting decisions are one of
the primary means of communicating with companies on issues of
concern.
Narrative
Principle 4: Good corporate governance should be integrated
Principles 4 – 6. with the company’s business strategy and objectives and should
not be viewed simply as a compliance obligation separate from
the company’s long-term business prospects.
Principle 5: Legislation and agency rule-making are important
to establish the basic tenets of corporate governance and
ensure the efficiency of our markets. Beyond these fundamental
principles, however, the Commission has a preference for
market-based governance solutions whenever possible.
Principle 6: Good corporate governance includes transparency
for corporations and investors, sound disclosure policies and
communication beyond disclosure through dialogue and
engagement as necessary and appropriate.
Principle 7: While independence and objectivity are necessary attributes of board

Narrative members, companies must also strike the right balance between the appointment of
independent and non-independent directors to ensure that there is an appropriate
A full copy of the report is range and mix of expertise, diversity and knowledge on the board.
available on nyx.com
Principle 8: The Commission recognizes the influence that proxy advisory firms have on
the market, and believes that such firms should be held to appropriate standards of
transparency and accountability. The Commission commends the SEC for its issuance of
the Concept Release on the U.S. Proxy System, which includes inviting comments on how
such firms should be regulated.
Principle 9: The SEC should work with the NYSE and other exchanges to ease the burden
of proxy voting and communication while encouraging greater participation by
individual investors in the proxy voting process.
Principle 10: The SEC and/or the NYSE should consider a wide range of views to
determine the impact of major corporate governance reforms on corporate
performance over the last decade. The SEC and/or the NYSE should also periodically
assess the impact of major corporate governance reforms on the promotion of
sustainable, long-term corporate growth and sustained profitability.
Narrative
A short Task
We have a
governance model,
now note down
where the internal
audit function fits Where does Internal auditing fit into the
into this model. governance equation?
Narrative
We can now turn to the
PERFORMANCE
full model (see Figure 2.9)
Audit Committee
of corporate governance
Objectives KPIs
and the underlying
Directors Report
t
en
components. The risk Policies
em
Int
management process will
ern
Strategies
ag
an
a
capture all risks that systems of internal Final Accounts
lA
M
Plans
ud
k
control
Ris
undermine our model. A/c Policies
iti
Procedures
ng
While internal audit will Training & Supervisors Corp Gov Disclosures
want to review the extent Development Performance Management S. I. C.
to which these risks are
being addressed.
Ethical Standards
But what about
commitment and
COMMMITMENT AND CAPABILITY
capability?
Narrative
Commitment is the
PERFORMANCE
embodiment of corporate
Audit Committee
governance values into the
Objectives KPIs
hearts and minds of
Directors Report
t
en
everyone connected with Policies
em
Int
the organization.
ern
Strategies
ag
an
a
Capability relates to the systems of internal Final Accounts
lA
M
Plans
ud
k
control
Ris
training, budgets, time A/c Policies
iti
Procedures
ng
and understanding that Training & Supervisors Corp Gov Disclosures
are needed to make any Development Performance Management S. I. C.
new arrangements, such
as control self-assessment,
Ethical Standards
work. The full model is
explained on pages 54 to
COMMMITMENT AND CAPABILITY
56.
Narrative
SHAREHOLDERS AND THE BOARD
A great deal of good Minority Risk
Challenging
questions
Stewardship
rights role
governance hinges on appetite
the relationship and Risk and

Annual SHAREHOLDERS
Voting
controls rights
functioning of the report
shareholders and their Agenda Code of

Long versus
relationship with the short term and ethics
minutes
board of directors. goals
THE Succession
planning
Appointments BOARD
policy
Remuneration
Balanced Non
Chair and policy
scorecard Assurance executives
CEO role
routines directors
split
Narrative
GOVERNANCE
One point we need to
make is that corporate THE PUBLIC SECTOR VERSUS THE PRIVATE SECTOR
governance also
applies to the public
and not for profits
sector where the
owners become the
general public(which
may be via Trustees)
and the CEO is the
Accountable Officer.
Narrative
The private sector is engaged in a constant struggle
To close, let’s ask to gain and hold the trust of society; to represent
‘how are we doing the acceptable face of capitalism. Meanwhile, the
on the governance need to maintain public confidence in the corporate
front?’ sector and credibility in government and not-for-
profit sectors has never been stronger. There are
calls from all quarters to maintain this pressure to
improve, develop and progress corporate
governance arrangements as far as possible. The
internal audit task of reviewing the governance
process sets a tremendous challenge as this has to
be about assessing governance processes.
Narrative Training Aim

We hope that this To present a brief introduction to corporate governance as
presentation has the context for the internal audit role that will give you an
increased your level initial understanding of:
of understanding of
the following topics. 1.The agency model of accountability.
2.The components of corporate governance.
3.The link to risk management.

Narrative
You will need a copy Essential Guide to Internal Auditing 2nd Edition
of the book as future
reference material
for this presentation. Chapter Two
Corporate Governance Perspectives

Narrative: You Will Need A Copy of The Book As Future Reference Material For This Presentation

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Essentials Companion © KHS Pickett 2011 Training Slides

You will need a copy ACCT7142-Essential Guide to Internal Auditing

Corporate Governance Perspectives

Narrative Training Aim

2.The components of corporate governance.

3.The link to risk management.

2. The way compliance is managed.

3. The way organizations are directed and controlled.

Narrative What could go wrong?

Narrative What could go wrong?

Narrative Key Principles:

Narrative External audit

Narrative The Audit Committee

Narrative Principle 1: The board’s fundamental objective should be to build long-

Principle 7: While independence and objectivity are necessary attributes of board

the relationship and Risk and

shareholders and their Agenda Code of

Narrative Training Aim

2.The components of corporate governance.

3.The link to risk management.

Corporate Governance Perspectives

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