• Codes of corporate

governance
Corporate • Audit committees
governance • Internal control
effectiveness
• Communication with
those charged with
governance

00
MO
NT
H
000
0

BPP LEARNING
MEDIA
 Overview

Corporate governance

OECD
Principles and Audit committees
the UK
Corporate
Governance
Code Communicatin
Internal
g to those
control
charged with
effectiveness
governance

BPP LEARNING
MEDIA
 Codes of corporate governance

Corporate governance is the system by which companies

are directed and controlled.

Why do companies need corporate governance?

Corporate governance is important because it ensures that
all stakeholders with a relevant interest in a company's
business are fully taken into account.

The OECD Principles of Corporate Governance serve as a

reference point for countries and companies to develop
their own codes of corporate governance, such as the UK
Corporate Governance Code.
OECD :Organisation for Economic Cooperation and
Development

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle I
The corporate governance framework should
promote transparent and clearly articulate the
division of responsibilities among different
supervisory, regulatory and enforcement
authorities.

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle II
The corporate governance framework should
protect and facilitate the exercise of
shareholders' rights.

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle III

The corporate governance framework should
ensure the equitable treatment of all
shareholders, including minority and foreign
shareholders.

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle IV
The corporate governance framework should
recognise the rights of stakeholders established
by law or through mutual agreements and
encourage active co-operation between
corporations and stakeholders in creating
wealth, jobs and the financially sustainability of
the enterprises.

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle V
The corporate governance framework should
ensure that timely and accurate disclosure is
made on all material matters regarding the
corporation, including the financial situation,
performance, ownership, and governance of the
company.

BPP LEARNING
MEDIA
 Codes of corporate governance

OECD Principle VI
The corporate governance framework should
ensure the strategic guidance of the company,
the effective monitoring of management by the
board, and the board's accountability to the
company and the shareholders.

BPP LEARNING
MEDIA
 Audit committees

An audit committee is a sub-committee of the board of

directors, usually containing a number of non-executive
directors.

For example, the UK Corporate Governance Code states

that an audit committee should consist of at least three
independent non-executive directors.
Roles and responsibilities of audit committee members
should be set out in written terms of reference.

BPP LEARNING
MEDIA
 Audit committees

What does the audit committee do?

• Monitors the integrity of the financial statements and
any announcements about the company's financial
performance
• Reviews the company's internal financial controls and
the control and risk management systems
• Monitors and reviews the effectiveness of the internal
audit function

BPP LEARNING
MEDIA
 Audit committees

What does the audit committee do? (continued)

• Makes recommendations about the appointment,
reappointment and removal of external auditors
• Reviews and monitors the independence and objectivity
of the external auditors
• Develops and implements policy on the engagement of
the external auditors to supply non-audit services
• Reports to the board how it has discharged its
responsibilities

BPP LEARNING
MEDIA
 Audit committees

What are the benefits of having an audit committee?

• Improves the quality of financial reporting, by reviewing
the financial statements on behalf of the board
• Creates a climate of discipline and control which will
reduce the opportunity for fraud
• Enables the non-executive directors to contribute an
independent judgement and play a positive role

BPP LEARNING
MEDIA
 Audit committees

What are the benefits of having an audit committee?

(continued)
• Strengthens the position of the external auditor by
providing a channel of communication
• Strengthens the position of the internal audit function,
by providing a greater degree of independence from
management
• Increases public confidence in the credibility and
objectivity of financial statements

BPP LEARNING
MEDIA
 Audit committees

What are the drawbacks (limitations) of having an audit

committee?
• Executive directors may not understand the purpose of
an audit committee and may perceive that it detracts
from their authority.
• There may be difficulty selecting sufficient non-
executive directors with the necessary competence in
auditing matters for the committee to be really effective.
• Costs may be increased.

BPP LEARNING
MEDIA
 Communication with those charged with
governance
Why do auditors need to communicate with those charged
with governance?
• Communication assists the auditor and those charged
with governance to understand audit-related matters in
context and allows them to develop a constructive
working relationship.
• Communication allows the auditor to obtain information
relevant to the audit.
• Communication assists those charged with governance
to fulfil their responsibility to oversee the financial
reporting process, thus reducing the risks of material
misstatement in the financial statements.

BPP LEARNING
MEDIA
 Communication with those charged with
governance
Matters to be communicated
• The auditor's responsibilities in relation to the audit
• The planned scope and timing of the audit
• Significant findings from the audit
• Auditor independence

BPP LEARNING
MEDIA
 Communication with those charged with
governance
Examples of how auditors communicate with those
charged with governance
• Audit engagement letter
• Planning letter
• Report to management
• Meetings

During the audit itself there should be ongoing

communication between the audit team and management
as issues arise.

BPP LEARNING
MEDIA
 Case study: Enron

Poor corporate governance directly contributed to the

Enron scandal in 2001.
Enron's CEO, Jeffrey Skilling, and Chairman, Ken Lay,
were responsible for the scandal which led to the
company's demise, and that of its external auditors,
Arthur Andersen.
Enron used irregular accounting practices, which made
it seem a lot more profitable than it actually was.

BPP LEARNING
MEDIA
 Case study: Enron (cont'd)

Enron's Chief Financial Officer, Andrew Fastow, misled

the board of directors and the audit committee about
the irregular accounting practices. He also put pressure
on the external auditors to ignore the issues.
The Enron scandal led to the implementation of the US
Sarbanes-Oxley Act which sets out provisions on
corporate governance that American companies need
to adhere to.

BPP LEARNING
MEDIA