1. Corporate Governance and
Auditing
Their Importance to Enterprises
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Corporate governance is a hot topic now, owing to many popular corporate
failures. The downfall of giant corporations such Parmalat in Italy and Enron in
USA have brought the importance of good corporate governance to the fore.
This is also exemplified from the demand for corporate legal services related to
corporate governance audits. While earlier, corporate governance was thought
of as a system that makes sure that an enterprise’s manager does not exploit the
business or the shareholder’s wealth for private gains, it now has a much
broader meaning. Now, it is believed to be a system that makes sure that
resources are utilized most effectively in order to benefit shareholders while
meeting the expectations of society at the same time. Enterprise risk
management, CSR and strategy audits for instance are important aspects of
corporate governance.
Introduction
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Audit reports on these aspects are of immense importance to investors and
analysts and they base their perception of the enterprises accordingly. It is
therefore essential to have strategic corporate governance audits in place if an
enterprise wishes to survive the intricacies of the corporate world. Realizing this
importance, many companies seek external help from corporate legal services
to ensure they are on the right track.
Introduction
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Corporate governance is defined in many ways. According to the International
Standard on Auditing (ISA) 260, it is defined as “communications of audit matters
with those charged with governance”. It is the way in which an authority is
practiced in a corporate establishment for maximizing the usefulness of
corporate properties in order to hold the interest of shareholders and to justify
the stated core values of the organization. Ask any corporate legal services
provider and he’ll tell you that corporate governance is more about promoting
fair and transparent administration of the corporation in order to meet its
objectives and for achieving control with the aim of fulfilling strategic goals that
not only satisfy financiers and investors, but also customers, owners, suppliers
and the society. Impartiality is the key factor in any internal audit function.
Corporate governance is the responsibility of a company’s board of directors,
audit committee and other supervisory committees depending on the
jurisdiction of the enterprise.
Basics of Corporate Governance
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It is impossible for any governance
system, no matter how well
monitored, designed and
implemented it is, to fully prevent the
exploitation of a company from the
personal interests of some dishonest
and greedy authorities. However,
fraud can be prevented to a certain
extent if strategic steps are taken to
improve corporate governance.
Corporate legal services usually come
to the rescue in these matters.
Corporate Governance is not 100% Fail Proof
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A large number of theories have been proposed for best practice in corporate
governance. Of these, the stakeholder theory and the shareholder theory are
the most popular. The shareholder theory was proposed by Milton Friedman.
According to this theory, the sole responsibility of an enterprise is to increase its
profits. This theory describes that the management is an agent of the
shareholders and that its aim is to run the company for the benefit of these
shareholders. Thus, the management is morally as well as legally responsible for
serving the interests of the shareholders. While maintaining “conformity to the
basic rules of the society, both those embodied in law and those embodied in
ethical custom, the company needs to make as much money as possible. This
theory however has its disadvantages. It pressurizes the management to focus
on greater risk taking and short term strategy so they can increase returns to the
shareholders.
Corporate Governance Theories
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The downfall of Worldcomm and Enron are examples of how focusing on the
interests of shareholders alone can bring about the downfall of thriving
companies. Managers of these two companies manipulated company accounts
to show increased returns to shareholders due to the pressure of keeping
shareholders satisfied.
According to the stakeholder theory proposed by Edward Freeman, a business
owes responsibility to stakeholders as well, not just the shareholders. A
stakeholder could be any person or a group who will be affected by the actions
of the business. These include customers, employees, suppliers, the community
and the competitors as well. This theory is an important element of the concept
of CSR (Corporate Social Responsibility). In light of this theory, companies have
to take not only the legal and economic aspects of their business but also the
philanthropic and ethical aspects into consideration. On the flipside however,
some companies exploit their CSR as PR strategies.
Corporate Governance Theories
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An auditor’s role is to check and make sure the financial information given by
companies to investors is correct and reliable. He does not have direct
responsibility of corporate governance but rather monitors the information
aspects of the corporate governance system. Auditors could be external and
internal. A cost audit is performed to obtain credible data on cost and revenue
on which decisions can be based. Corporate legal services can offer valuable
inputs to companies on how they can manage their audit functions and also
perform them. Cost audits are a source of important analytical information that
can be used by the board of directors to oversee the affairs of the company.
Auditors are required to provide their expert opinion on financial statements
and all other materials related to the financial position, cash flow and operations
of a company. They need to examine financial statements and other company
records using auditing tools.
Auditors and Key Players in Corporate
Governance
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The key players in corporate governance of a company include the auditing
groups, the management, secretaries, the management team and other such
parties. The responsibility of the board of directors is however in a much
broader sense than the auditor. It has to focus on protecting the rights of key
stakeholders including the shareholders, customers, employees, suppliers and
the society. It sets up the strategic aims of the company, leads and supervises its
management. Corporate legal services help companies with relevant documents
pertaining to these factors.
Auditors and Key Players in Corporate
Governance
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In light of popular corporate governance failures, there have been many
proposals regarding the powers and responsibilities of audit committees. The
primary role of these committees is to ensure smooth functioning of the
directors who are within their mandate and to check the data in financial records
thoroughly. They need to be able to explain the personnel structure used for
investigating the authenticity of the company operations. Various strategy tools
are used for internal and external auditing. These include Environment Scanning
– PEST, TOWS, experience curve, competitive analysis etc. for external audit and
SWOT, value chain analysis, strategic risk analysis, performance analysis, financial
models and portfolio models for internal audits. Failure of accounting and
corporate governance results in immense costs for companies. The companies
and their auditors have to face widespread skepticism from stakeholders and the
community; they have to face litigations, etc. Such failures often lead to the
downfall of once thriving companies. Companies therefore need to make sure
their corporate governance audit systems are correctly in place. They can also go
the extra mile and seek corporate legal services or advisory servicesif need be.
Audit Responsibilities