What is corporate governance
Describe the control and direction of corporations. (a set of processes, policies, laws and institutions affecting the way of a corporation is directed, administered or controlled). Includes the relationships among the stakeholders involved and the goals for the corporation is governed. It is about how shareholders and agencies external to a corporation control influence those responsible for directing and managing the affairs of the corporation.What has been concerned primarily with management and stewardship issues
??? Corporate strategy: every organization has its objective; particular strategy helps to achieve its objective.
??? Succession planning: it is a process for identifying and developing internal personnel with the potential to fill key or critical organizational positions. Succession planning ensures the availability of experienced and capable employees that are prepared to assume these roles as they become available.
??? Integrity of internal control structure: the idea behind internal control is org can reach its objective.
??? Remuneration policy.Essential corporate governance principlesPrinciple 1: Lay solid foundation for management and oversight
Recognize and publish the respective and responsibilities of board and managementPrinciple 2: Structure the board to add value
Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.Principle 3: Promote ethical and responsible decision making
Actively promote ethical and responsible decision marking.Principle 4: Safeguard integrity in financial Reporting
Independently verify and safeguard the integrity of the company??™s financial reporting.Principle 5: Make timely and balanced disclosure
Promote timely and balanced disclosure all material matters concerning the companyPrinciple 6: Respect the rights of shareholdersPrinciple 7: Recognize and manage risks
Establish a sound system of risk oversight and management and internal control.Principle 8: Encourage enhanced performance
Fairly view and actively encourage enhanced board and management effectiveness.Principle 9: Remunerate fairly and responsiblyPrinciple 10: Recognise the legitimate interests of stakeholders
Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
??? Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
??? Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
??? Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure.
??? Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the companys financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.Mad Hatter??™s TEA PARTY – ArticleThe article talks about the recent major corporate collapses in the Australian Corporate History (OneTel, Harris Scarfe and HIH Insurance). The author has mentioned referred to the character of Dormouse (The Regulators), Alice (The Auditors and Accountants), The Marsh Hares and Hatters (CEOs and Directors). The corporations have been criticized to falsify their book in order to show exaggerated profits whereas they actually suffered a loss. Unfair Remuneration of the directors and the CEOs have been discussed following the corporate greed among all the characters mentioned above to cause the collapses. The author has named the corporate greed as the new religion of materialism in which the only thing important for the CEOs, Directors, the auditors and accountants is material (economic) value and nothing else. The corporate collapses had an adverse affect on the shareholders who lost trust in the stock markets (Capital markets). Under the religion of materialism the ethical standards lost their importance in the society.The corporate governance issues have been discussed which caused the major corporate collapses of HIH, OneTel and Harris Scarfe. These corporations breached the Corporations Law and thus fell into administration and subsequently liquidation.ONETEL
??? Placed into administration
??? Went into Liquidation MAY 2001-AUG 2002
??? Estimated Debts of $600 Million
??? Joint Directors Received $7 Million each the year before when OneTel reported a loss of $291 Million
??? At one time company only had $500000 in their account and $33 Million Bills Due
??? Creative accounting of capitalizing expensesHARRIS SCARFE
??? Was in operation from around 150 years
??? Under Administration in April 2001
??? Irregularities dating back 6 Years
??? Overstatement of Profits funded by increased debt (showed to both the banks and creditors)
??? CFO altered company??™s accounts to inflate profits which created a false picture of harris scarfe being in good health to the stakeholders
??? Accounts were being changed by the CFO in order to attain the profit results required by managing director or chairman of the company.
??? ANZ Bank (Creditor) sued E&Y and PricewaterhouseCoopers for not detecting the fraudulent financial reporting and irregular entries in the management accountsHIH INSURANCE
??? Placed into provisional liquidation with losses of $800 Million
??? Excessive discounting was one of the failure factors
??? Hostile takeover of FAI Insurance for $300 Million (Overpriced) without proper due diligence investigations
??? Major losses in UK and USA sectors of the company
??? Undesirable Corporate Governance Practices and failure to disclose properly about the financial health of HIH
??? Appropriateness of the manner in which powers were exercised
??? BREACH OF CORPORATIONS ACT (Case against three officials for improper use of company funds and breach of duty
??? Brought about major changed in the Australian Corporate Regulatory Environment
ROLE OF AUDITORSIn case of OneTel it was revealed that bonuses of $14 Million were paid to the founders of the company and these bonuses were recorded as deferred expenses and were treated as setup costs for OneTel??™s operations across Europe and Australia through questionable accounting practices. Auditors were also found to be supportive of the questionable accounting practices used to falsify the company accounts.In case of Harris Scarfe it was found that the accountants were running two set of books and which was not being detected by the auditors (Fraudulent Financial Reporting). Alongside there were also independence issues with the audit committee of Harris Scarfe. Two of three officers on the audit committee were internal directors and only one was external and they only met twice a year. Auditors were sued for negligence in detecting fraud.In case of HIH also there were problems with Audit committee of the Board (auditor independence). Chairman and another member of the committee were both former senior executives of Arthur Anderson (Auditors). Also two other members of the audit committee had business relationships with the company and the finance director was former Arthur Anderson partner. Miscalculation of insurance claim reserves was also a factor of demise of HIH although the US regulators already warned the company in this regards for US operations. Board was never informed about the recommendations by actuaries (Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms) to increase the reserve.Therefore it is clear from the investigations that the auditors and accountants in ONETEL, HARRIS SCARFE and HIH were also involved with the directors and managers of the company for the greed of materialism and were involved in the fraud which led to the collapse of these organizations. They were suppose to act as ethical gatekeepers of the company??™s information provided to the public whereas they also joined the mad hatter??™s tea party to falsify the company accounts and acted with negligence. THERE WAS EXTENSIVE PRACTICE OF CREATIVE ACCOUNTING.Read Good CORPORATE GOVERNANCE And Bad CORPORATE GOVERNANCE From Article
Read Black Letter Law versus Principles from Article
Surbanes Oaxley Act
Clerp 9Expectation gap
??? The gap results from differences between the views of auditors and other stakeholders regarding:
??“ The roles and responsibilities of auditors
??“ The performance of auditorsCauses ??“ Expectation gap
The nature of auditing
Application of hindsight
Self-interest of complainants
Self-interest of auditors
Changes in social expectations
Misunderstanding / ignorance of rolesThe Code of Ethics for Professional
Accountants includes both general statements of ideal conduct and detailed rules to ensure those principles are applied??? Code of ethics are formal, systematic statement of rules and principles developed by the community to promote its well-being and punish undermining behaviour.??? Five fundamental principles contained in the codes of ethics:
3. Professional competence and due care
5. Professional behaviour