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  • 1. Corporate Governance and Accountability
  • 2. Corporate governance
    • Protects the rights of shareholders to trade shares, to obtain timely and regular information about corporate well being, participate and vote in general shareholder meetings, elect and remove members of the board, and share in corporate profits.
    • Recognises and protect the rights of stakeholders.
  • 3. Ethical principles supported by law
    • Honesty and Transparency
    • Responsibility and Accountability
    • Fairness and Justice
    • Avoidance of conflicts of interest and related party dealings
    • Application of the principles of good corporate governance
  • 4. Corporate governance underpins corporate survival
    • Not just formal accountability but vital for investor confidence - affects capitalisation, regulation, reputation
      • Now measured by GovernanceMetrics International cf. Corporate Governance Authority, Transparency International.
      • http://www.gmiratings.com/(svoakc45be23zh450xr2pw45)/Default.aspx
      • World Bank sponsored Global Corporate Governance Forum <http://www.gcgf.org/>
  • 5. Why is good corporate governance important? It can lower the cost of capital. It promotes investor confidence. It is important to respond to global best practice.
  • 6. How is good corporate governance achieved? There are various models of good corporate governance. Most recently, the OECD has set guidelines. The Cadbury Committee in the UK, benchmarked CG and then the General Motors Guidelines on Significant Corporate Governance Issues. The Canadians and the ASX Corporate Governance Council have espoused similar principles.
  • 7. OECD recommendations 2004
    • Disclosure of
    • The financial and operating results of the company.
    • Company objectives.
    • Major share ownership and voting rights.
    • Remuneration policy for members of the board and key executives, and information about board members, including whether they are independent.
    • Related party transactions.
    • Foreseeable risk factors.
    • Issues regarding employees and other stakeholders.
    • Governance structures and policies
  • 8. Good corporate governance and development
    • 1991 - following collapse of firms declared healthy in audited returns, the Financial Reporting Council, the London Stock Exchange and the UK accountancy profession established the Cadbury Committee to inquire into financial aspects of corporate governance.
  • 9. What is corporate governance? Corporate governance is the system by which companies are directed and managed. Good corporate governance structures add value to corporations and provide accountability and control systems.
  • 10. Good corporate governance and development
    • 1991 - following collapse of firms declared healthy in audited returns, the Financial Reporting Council, the London Stock Exchange and the UK accountancy profession established the Cadbury Committee to inquire into financial aspects of corporate governance.
  • 11. Cadbury Report Recommended
    • Conformity with its Code of Best Practice. This was voluntary.
    • More clear and detailed financial reporting in order to:
        • Inspire public confidence in corporations
        • Enable directors to advance the best interests of the company and to avoid concentrations of power.
    • The clear separation of the responsibilities of CEO and chair of the board.
  • 12. Non-executive directors should
    • Have a stronger role on boards
    • Should be selected according to formal processes
    • Be clearly independent from the management of the company
    • Not have business interests which could conflict with those of the company
  • 13. Cadbury also recommended
    • The establishment of an Audit Committee with at least 3 non-executive directors and access to independent audit advice
  • 14. Implementation
    • Since 1993, the London Stock Exchange has, required listed companies to include in annual reports statements of compliance with the Code of Best Practice or, give reasons for not doing so.
    • In December 1994, Guidance to the interpretation of the Cadbury Code was issued. This was perceived as a watering down of the Code.
  • 15. Implementation 2
    • The Code had called upon the directors to report on the effectiveness of the company’s system of internal control, the Guidance requires only that directors state :
          • that directors are responsible for the company’s system of internal financial control
          • that such a system is only relatively secure, not absolutely so
          • the most important procedures for internal financial control
          • that directors have reviewed the system of control
            • Ernst and Young, The Cadbury Codes Requirements on Internal Control at http:/www.ernsty.co.uk/accting/ifc/ifc2.htm.
  • 16. ASX principles
    • Derived substantially from the lead of Cadbury, but good practice in any setting.
  • 17. Formalise and disclose the functions reserved to the board and those delegated to management. Adopt a formal board charter that details the functions and responsibilities of the board or a formal statement of delegated authority to management. Principle 1: Lay solid foundations for management and oversight
  • 18. Principle 2: Structure the board to add value A majority of the board should be independent directors. An independent director is independent of management and free of any business or other relationship that could materially interfere with – or could reasonably be perceived to interfere materially with – the exercise of their unfettered and independent judgment.
  • 19. Principle 3: Promote ethical and responsible decision-making
    • Clarify the standards of ethical behaviour required of company directors and key executives
    • Establish a code of conduct
    • Promote integrity
  • 20. Principle 4: Safeguard integrity in financial reporting Require written statements from the CEO and the CFO to the board that the company’s financial reports present a true and fair view of its financial condition in accordance with relevant accounting standards. Establish an audit committee of at least 3 non-executive directors, not chaired by chair of board.
  • 21. Principle 5: Make timely and balanced disclosure Develop continuous disclosure policies and procedures.
  • 22. Principle 6: Respect the rights of shareholders Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings.
  • 23. Principle 7: Recognise and manage risk Establish a system to identify, assess, monitor and manage risk inform investors of material changes to the company’s risk profile. The CEO and CFO should certify to the board that the company’s risk management and compliance systems are operating effectively.
  • 24. Principle 8: Encourage enhanced performance Disclosure of performance evaluation of the board. Induction program for new directors. All board members to have direct access to company secretary. Board members to have access to independent advice at company expense.
  • 25. Principle 9: Remunerate fairly and responsibly Disclose company’s remuneration policies including cash, fees and other benefits. The board should establish a remuneration committee
  • 26. Why were not such measures already in place?
    • Why did it take the collapse of Enron, WorldCom, HIH Insurance and many other firms to move the industry, investors and governments to act?
    • Was it because of the accepted dogma that high risk is good for business because it produces high returns?
  • 27. Such rules are a floor, not a ceiling
    • The GM Corporate Governance Guidelines by contrast, place a stronger emphasis on Directors’ skills and suitability for the Board, eg. Item 4, Director Orientation and Continuing Education
    • The Board and Management will conduct a comprehensive orientation process for new Directors to become familiar with the Corporation's vision, strategic direction, core values including ethics, financial matters, corporate governance practices and other key policies and practices .... The Board also recognizes the importance of continuing education for its directors and is committed to provide such education in order to improve both Board and Committee performance.
  • 28. Classic Symptoms Preceding Collapse Overstatement of the value of assets, and understatement of liabilities in financial reports. Use of related party transactions to disguise the reality, e.g. to create a false impression about earnings. Delays in financial reporting.
  • 29. Continuing financial losses and cash flow deficiencies Weak management Inadequate management succession planning Looming debt payments & concealment of bad debts Inadequate capital expenditure programs Lack of adequate information systems Shareholder disputes
  • 30. The case of Enron
    • Kenneth Lay, former chairman and CEO of Enron, claims that he and the board were misled by CFO, Andrew Fastow (who has pleaded guilty to fraud and is to be sent to jail).
    • A clutch of Enron officers have pleaded guilty to crimes, so what does that say about the CEO and board’s governance?
  • 31. Fastow
    • Fastow joined Enron in 1990 and promoted to CFO in 1998 after designing innovative financial structures that reduced Enron’s debt allowing it to diversify its activities.
    • He began building off-the-books partnerships in 1997 to increase its capital and hide debt.
    • Fastow’s take from his deals was $30 million.
  • 32. Not just rotten apples
    • Enron’s culture, which included strategies such as the ‘war for talent’, licenced officers to act on their own initiative but to act without regard for probity. This made it possible for Enron to manipulate the Californian energy market.
    • It adopted a veritable thicket of questionable accounting practices, such as booking its energy trades at full value rather than at the value of its margin, thus inflating profits.
  • 33. The culture at Enron
    • It was clear that Enron routinely engaged in sharp practice, that it sought to disguise this from investors and the financial world by a complex and all but unintelligible structure of accounts and partnerships.
    • It is clear that Enron encouraged maverick behaviour by sacking the lowest performing 10% of staff and promoting the best 10%. Results were all that counted.
  • 34. Deliberate deception
    • Enron’s auditor was Arthur Andersen. It signed off the accounts each year as a true and fair representation of the corporation’s financial condition for which it received over $20 million. It received over $20 million also in consulting fees.
    • The SEC received Enron’s reports year after year, but no one there was alert to the danger.
    • Hence the resort to legislative reform of the formal accountability mechanisms.
  • 35.  
  • 36.  
  • 37.  
  • 38.  
  • 39. Sherron Watkins, Enron heroine, interviewed in June, 2004
    • Do you think that post-Enron America is a more ethical place?
    • “ Not really. We are building more Enrons, but we don't want to admit it. I fall into Warren Buffett's camp when he says that C.E.O. pay is the acid test. When C.E.O. pay has been reduced, then I'll believe that our business leaders have adopted a spirit of corporate reform.”
    • If the government were to demand a pay ceiling for C.E.O.'s in this country, what should it be?
    • J.P. Morgan said that C.E.O.'s should not make more than 20 times the average hourly worker. We're above 500 times right now! The average worker gets, let's say, $20 an hour. So the highest C.E.O. salary should be -- $1 million a year.
        • Interviewed by Deborah Solomon , NYT .
  • 40. Sarbanes - Oxley Act
    • Sarbanes-Oxley (2002) passed in wake of Enron and other collapses to strengthen corporate governance and restore investor confidence and public trust in accounting and reporting practices.
    • Establishes enhanced governance and management standards for all US publicly listed companies and public accounting firms.
    • Establishes the Public Company Accounting Oversight Board under the SEC to oversee public accounting firms and issue accounting standards.
  • 41. SOA 2
    • CEOs and CFOs now have to sign off on all company financial statements, the audit committee of the board must be made up of independent outside directors, and companies have to have thier audit of internal financial controls audited externally.
  • 42. Functions of the Public Company Accounting Oversight Board
    • register public accounting firms;
    • establish &quot;auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers;&quot;
    • conduct inspections of accounting firms;
    • conduct investigations and disciplinary proceedings, and impose appropriate sanctions;
    • enforce compliance with the Act, securities laws and rules,and professional standards
  • 43. The Board requires public accounting firms
    • Among other measures to:
    • Maintain audit working papers for 7 years
    • Adopt 2nd partner review and approval of audit reports .
    • Accounting firms to adopt quality control standards.
    • Conduct annual quality reviews for accounting firms with  100 reports & others every 3 years.
  • 44. Section 106: Foreign Public Accounting Firms.
    • Foreign accounting firms who audit a U.S. company are subject to registrations with the Board.
  • 45. Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.
    • Unless specifically approved by the Board, it is unlawful for a public accounting firm to provide any non-audit service to a client undergoing audit, including:
      • services related to its financial statements
      • financial information systems design and implementation
      • internal audit outsourcing services
      • management functions or human resources
      • investment adviser, or investment banking services
  • 46. Section 203: Audit Partner Rotation.
    • The lead audit and the reviewing partners must be rotated every 5 years.
  • 47. Section 206: Conflicts of Interest.
    • The CEO, CFO, Chief Accounting Officer or equivalent cannot have been employed by the company's audit firm during the 1-year period preceding the audit.
  • 48. Section 301: Public Company Audit Committees.
    • Audit committee members are members of the corporation’s board of directors, and shall be independent, i.e. not in receipt of any consulting, advisory, or other compensatory fee apart from a director’s fee.
      • The SEC may make exceptions to this rule.
    • The AC is directly responsible for the appointment, remuneration, and oversight of the corporation’s accounting firm.
    • Audit committee have the authority to engage independent advice, in order to carry out its duties. The corporation shall provide appropriate funding to the audit committee.
  • 49. Section 302: Corporate Responsibility For Financial Reports.
    • The CEO and CFO shall attest to the &quot;appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer.&quot;
  • 50. Section 303: Improper Influence on Conduct of Audits
    • It is unlawful to influence auditors in any way.
  • 51. Section 401 (c): Study and Report on Special Purpose Entities.
    • The SEC shall examine off-balance sheet disclosures to determine a) their extent (including assets, liabilities, leases, losses and the use of special purpose entities); and b) whether generally accepted accounting rules result in transparent financial statements
    • and make a report containing recommendations to the Congress.
  • 52. Section 402(a): Prohibition on Personal Loans to Executives.
    • Generally, it is unlawful for to extend credit to any director or executive officer. Consumer credit companies may issue credit and credit cards to its directors and executive officers on the same terms and conditions made to the general public.
  • 53. Section 404: Management Assessment Of Internal Controls.
    • Requires annual reports to contain an audited internal control report
    • Nature and effectiveness of the internal control structure for integrity in financial reporting.
  • 54. Title VIII: Corporate and Criminal Fraud Accountability Act of 2002.
    • It is a felony &quot;knowingly&quot; to destroy documents or to &quot;impede, obstruct or influence&quot; any existing or contemplated federal investigation.
    • Employees of corporations and accounting firms are extended &quot;whistleblower protection”.
  • 55. Title IX: White Collar Crime Penalty Enhancements
    • Creates a crime for tampering with a record or otherwise impeding any official proceeding.
    • SEC given authority to seek court freeze of extraordinary payments to directors, offices, partners, controlling persons, agents of employees.
    • US Sentencing Commission to review sentencing guidelines for securities and accounting fraud.
  • 56. The effect …?
    • Accounting firms and lawyers are booming on the back of Sarbanes-Oxley.
    • In May 2004, RateFinancials found:
    • That most financial statements did not reflect public companies' true financial states.
    • In November it found that:
    • That related party transactions were still common.
  • 57. By year’s end
    • The Big Four audit firms were moving back into consulting having sole their consulting arms after the Andersens debacle.
    • Since 2002, all have been wary of using the term ‘consulting’ in their literature.
    • Regulators' sanctions have not been as punitive as initially feared. While auditors are not allowed to offer non-audit related services to audit clients but can do so for all other companies. Philip Aldrick Telegraph, 29/12/2004.
  • 58. Misconduct encouraged
    • By lack of a system of laws that clearly state obligations and prohibitions
    • By a diminished sense of personal responsibility
    • By lack of enforcable laws and regulations
    • By a small risk of being detected
    • By insufficient penalties
    • By a climate of sharp practice
    • By a lack of ethical recognition
  • 59. But law and enforcement
    • Will not replace ethics and a personal sense of responsibility
    • Will not prevent corruption by themselves
    • Still rely upon a level of trust: fear will make people risk averse and stifle business.
    • Are expensive means of securing compliance
  • 60. Principle 10: Recognise the legitimate interests of stakeholders The board should set standards of public accountability for the company and oversee adherence to these. Establish a code of conduct to guide compliance with legal and other obligations.