Governance and Responsibility

BAC 4201 PROFESSIONAL ACCOUNTANT

MOHD HANIFF ZAINULDIN

What is corporate governance?

• “the system by which companies are directed and controlled” (Cadbury Report 1992)

• The system by which companies are directed and controlled in the interests of shareholders and other stakeholders

• Companies are controlled and directed from inside and outside of company

Benefits of corporate governance

• Increases accountability of management and maximizes sustainable wealth creation

• More attractive to institutional shareholders

• ‘governance dividend’: share price to rise

• ‘socially responsibility dividend’: socially responsible company may attract more customers and investors and thus lead to increase in share price

Purposes of corporate governance

• Monitor those parties within a company who controlled resources owned by investors

• Ensure balance of power on the BOD

• Ensure executive directors remunerated fairly

• Make BOD responsible for monitoring and managing risks

• Ensure external auditors remain independence

• Address other issues such as CSR, business ethics and protection for whistleblowers

Objectives of corporate governance

• Contribute to improved corporate performance and accountability in creating long-term shareholders value

• Control the controllers by increasing amount of disclosure to all stakeholders

• Increase the level of confidence and transparency in company activities

• Ensure the company is run in a legal and ethical manner

• Build in control at the top that will cascade down the organisation

Key concepts: fairness

• Sense of equality in dealing with internal stakeholders

• Even-handedness in dealing with external stakeholders

• An ability to reach an equitable judgement in a given ethical situation

Key concepts: Openness/Transparency

• One of the ‘building blocks’ that underpin the sound corporate governance

• Transparency is required in agency relationship, transparency means lack of withholding or relevant information unless necessary

• Information provision vs. information concealment

Key concepts: Innovation

• “transforms knowledge and ideas into new products, processes or systems for the benefit of firm and its stakeholders”

• In terms of corporate governance; innovation and experimentation in reporting, move away from rigid compliance, towards better communication

• Much knowledge from which innovation stems is ‘tacit’ @ unique to the company and environment

• The capacity of a firm to integrate external knowledge is crucial

Key concepts: Skepticism

• An attitude which includes a questioning mind, being alert to conditions which may indicate possible misstatement

• Provide critical assessment of evidence

• The UK Corporate Governance Code encourages non-executive to apply skepticism in order to challenge and scrutinize management effectively

Key concepts: Independence

• A quality possessed by individuals referring to avoidance of being unduly influenced by vested interests

• Enables a more objective position to be taken on issues

• Independence from personal influence of senior management

• Independence of the BOD from operational involvement

• Independence of directorship from personal motivation

Key concepts: Probity/honesty

• A foundation of ethical stance in both principles and rules based system

• Honesty in financial reporting

• Perception of honesty from internal and external stakeholders

Key concepts: Accountability

• The obligation of an individual or organisation to account for its actions

• Accounting for business position as a result of acceptance of responsibility

• Providing clarity in communication channels with internal and external stakeholders

Key concepts: Reputation

• Developing and maintaining personal reputation through other moral virtues

• Developing and maintaining the moral stance of the organization

• Developing and maintaining the moral stance of the accounting profession

Key concepts: Judgement

• The ability to reach and communicate meaningful conclusions

• The ability to weigh numerous issues and give each due considerations

Key concepts: Integrity

• A steadfast adherance to strict ethical standards despite any other pressures to act otherwise

• Integrity describes the personal ethical position of the highest standard of professionalism and probity

• It is an underlying and underpinning principle of corporate governance and it is required that all those representing shareholders interests in agency relationship both possess and exercise absolute integrity at all times

Case Study

• Fred is a certified accountant. He runs his own accountancy practice from home, where he prepares personal taxation and small business accounts for about 75 clients. Fred believes that he provides a good service and his clients generally seem happy with the work that Fred provides.

• At work, Fred tends to give priority to his business friends that he plays golf with. Charges made to these clients to be lower than others – although Fred tends to guess how much each client should be charged as this is quicker than keeping detailed time-records.

• Fred is also careful not to ask to many questions about clients affairs when preparing personal and company taxation returns. His clients are grateful that Fred does not pry to far of their affairs, although the taxation authorities have found some irregularities in some tax returns submitted by Fred. Fortunately the client has always accepted responsibility for errors and Fred has kindly provided his services free of charge for the next year to assist the client with any financial penalties.

• Discuss whether the moral stance taken by Fred is appropriate