Bcu msc cg week 4 risk management

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Risk & Risk Management

Risk & Risk Management

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  • IssuesFuel economy regulation 2012–2016 (United States), fuel economy regulation 2017–2025 (United States), fuel economy regulation (China), fuel economy regulation (European Union), gasoline tax, safety standards, traffic safety, distracted driving, safety recalls, safety regulations, products liability/torts, franchise agreements, international trade, tariffs (China), trade dispute, disaster relief, bankruptcy relief, emissions, subsidies, intellectual property, local protests, rights, governance, union bargaining, consumer information, news media.InterestsOrganizedAutomakers – American, European, Asian United Auto Workers IG MetallTrial Lawyers – NGOs, Sierra Club, Center for Auto Safety, MADD, Saudi Women for Driving, FocusDrivenUnorganizedCar buyers, tax payers, public, nonunion Workers (foreign automakers in the United States), West Bengal FarmersInstitutionsThe principal government institutions are legislatures, the executive branch, the judiciary, administrative agencies, regulatory agencies, and international institutions such as the WTO.InformationAuto companies may have superior information about the preferences of car buyers for higher fuel economy vehicles, and environmentalists may have superior information about the extent of public concern about climate change.

Transcript

  • 1. RISK AND RISK MANAGEMENT Stephen Ong BSc(Hons) Econs (LSE), MBA International Business(Bradford) Visiting Fellow, Birmingham City University Visiting Professor, Shenzhen University MSC ACCOUNTANCY & FINANCE : CORPORATE GOVERNANCE & OPERATIONS RISK ANALYSIS AND CONTROL
  • 2. • Video : Pretty Slick • Discussion : Corporate Governance Research in Accounting and Auditing 1 •Risk and Risk Management 2 • Case Presentation: GENERAL MOTORS3 Today’s Overview
  • 3. VIDEO : PRETTY SLICK
  • 4. 1. Open Discussion • Carcello, Joseph V., Hermanson, Dana R. & Ye, Zhongxia (Shelly) (2011) Corporate Governance Research in Accounting and Auditing: Insights, Practice Implications, and Future Research Directions, Auditing Vol.30 No.3 (Aug 2011): 1-31.
  • 5. 1. Risks, Business Objectives & the Assurance Agenda
  • 6. Learning from the future “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know." Donald Rumsfeld 2003 US Defence Secretary of State
  • 7. Learning from the past “Risk management is an increasingly important business driver and stakeholders have become much more concerned about risk.” Source: A structured approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000 IRM, Alarm, Airmic (2010)
  • 8. Categories of Risk • Fundamental risks (community) • Particular risks (individual) • Speculative risks (upside & downside risks of business ventures) • Pure risks (harmful or act of God)
  • 9. Strategic & Operational Risks STRATEGIC RISKS • Industries/Markets • Economy • Competitors • Product life cycle • Inputs/Resources • Operating gearing (Fixed Costs/Total Costs) • Production Process flexibility • R&D and Innovation • New Technology OPERATIONAL RISKS • Internal control system/ audit losses • Regulations/ internal procedures non-compliance • IT failures • Human error • Key-person loss • Fraud • Business interruptions
  • 10. Types of Organisational Risks 1. Competitor risks 2. Product risks 3. Commodity risks(supply /price) 4. Stakeholder risks (investors/suppliers/ employees/ customers) 5. Environmental & social risks 6. Financial risks (credit/ liquidity/ cash management/ currency/ interest rate/ market/ reporting/ finance provider) 7. Investment risks 8. Legal, political & cultural risks 9. IT risks 10. Knowledge management risks 11. Property risks 12. Health & Safety risks 13. Trading risks (physical/trade/ credit/liquidity) 14. Event risks 15. Cost & resource wastage risks 16. Organisational risks 17. Inadequate systems risks 18. Fraud & employee malfeasance risks 19. Probity risks (unethical behaviour) 20. Reputation risks
  • 11. Board – Essential roles? • Develop strategy • Establish and monitor policy • Ensure compliance with governing documents • Ensure accountability • Compliance with law • Maintain effective board performance • Promote the organisation • Proper fiscal oversight • Respect role of staff • Set up employment procedures • Select and support CEO R I S K
  • 12. Recognising critical business issues • Is progress of the business in line with expectations • Are we achieving objectives - within profit centres - in terms of quality • Are our operations sufficiently transparent? • Do we recognise barriers to progress? • Is customer and supplier feedback appropriate? • All reflect degrees of risk?
  • 13. Governance aspects of risk • Decide on key business objectives • Financial and Non Financial • Identify inherent risks to non achievement of objectives • Agree risk appetite or tolerance limits • Access controls and assurance available • Focus on materiality of gaps and implications for all stakeholders • Treat and review
  • 14. Question : When is a risk not a risk? When it’s too late – it’s reality!
  • 15. Overview of risk management process Source: ISO 31000
  • 16. The Risk Management process(1) The risk management process involves:[3] • Establishing Context: This includes an understanding of the current conditions in which the organization operates on an internal, external and risk management context. • Identifying Risks: This includes the documentation of the material threats to the organization’s achievement of its objectives and the representation of areas to the organization may exploit for competitive advantage. • Analyzing/Quantifying Risks: This includes the calibration and, if possible, creation of probability distributions of outcomes for each material risk.
  • 17. The Risk Management Process (2) • Integrating Risks: This includes the aggregation of all risk distributions, and the formulation of the results in terms of impact on the organization’s key performance metrics, through communication and consultation. • Assessing/Prioritizing Risks: This includes the determination of the contribution of each risk to the aggregate risk profile, and appropriate prioritization. • Treating/Exploiting Risks: This includes the development of strategies for controlling and exploiting the various risks. • Monitoring and Reviewing: This includes the continual measurement and monitoring of the risk environment and the performance of the risk management strategies.
  • 18. Or in other words • recognition or identification of risks • ranking or evaluation of risks • responding to significant risks • resourcing controls • reaction planning • reporting and monitoring risk performance • reviewing the risk management framework
  • 19. The wider assurance agenda • Can Board agree risk appetite • What we will accept • What we will not accept • Consider and agree tolerance allowed • Implement effective dashboard of key measures • Agree assurance actions required - to manage short term impact - to ensure longer term viability
  • 20. Sharing understanding • What does impact mean • Its not just financial! • What does likelihood mean • Certain reflects doomsday situation!
  • 21. Components of appetite relating to impact • Quality of services • Customer complaints • Health and Safety • Regulator feedback • Legislation • Staff morale • Finance • Information governance & security
  • 22. Components of appetite relating to likelihood • Has happened in our organisation • Has happened in our industry • Has happened in this country • Global experience • Use of statistical analysis and probability scoring
  • 23. Formal Risk Rating Corporate Risk Rating must reflect a transparent understanding of the risk appetite of the Board IMPACTONBUSINESS Critical 4 4 8 12 16 Unacceptable level of risk exposure, which requires extensive management Major 3 3 6 9 12 Moderate 2 2 4 6 8 4 – 8: Risk management measures need to be put in place and monitored Minor 1 1 2 3 4 Almost Never 1 Unlikely 2 Likely 3 Almost Certain 4 1 – 3: Acceptable level of risk subject to regular monitoring LIKELIHOOD OF OCCURING
  • 24. Informal Risk Rating – by concensus Corporate Risk Rating must reflect a transparent understanding of the risk appetite of the Board IMPACTONBUSINESS Critical Unacceptable level of risk exposure, which requires extensive management Major Moderate Risk management measures need to be put in place and monitored Minor Almost Never Unlikely Likely Almost Certain Acceptable level of risk subject to regular monitoring LIKELIHOOD OF OCCURING 1 2 4 3
  • 25. Set Business & Department objectives Business Plan Consider Risk and performance Targets Agree Assurance Framework Role for Internal Audit Review, Feedback and follow up Assurance Cycle Assurance Cycle Overview
  • 26. So whose responsibility Question 1: Top down vs Bottom up? • Board should lead • Executive Management • Risk Managers • Operational Management • Employees Question 2: Internal or External? • Stakeholder involvement
  • 27. Implementation of controls assurance Board Action Plan Board Reports Assurances on Controls Key Controls Principal Risks Principal Objectives Close gaps Positive Assurance, gaps in control, gaps in assurance Sources of Assurance Map Controls Risk Appetite Business Plan
  • 28. A question • Can executive management do this alone? • The need for a second pair of eyes!
  • 29. Three lines of defence • Executive Management • Internal Control • Independent Assurance Reliance on use of standard management systems - Management Accounts - Appraisal and Development - Staff surveys - Customer feedback
  • 30. Summary “If you are going to play know three things first, ‘the rules of the game, the stakes, and the quitting time” (Chinese proverb)
  • 31. 2. Risk Response
  • 32. Effective Risk Management Stages • Establishing Context within Corporate Objectives • Identifying and recording Risks • Analyzing/Quantifying Risks • Integrating Risks to a whole organisation level • Assessing/Prioritizing Risks • Treating/Exploiting Risks • Monitoring and Reviewing Practical considerations • Need to embed throughout the organisation • Common vision and mission • Definition of risk appetite • Reporting and communication
  • 33. Components of appetite relating to IMPACT • Quality of services • Customer complaints • Health and Safety • Regulator feedback • Legislation • Staff morale • Finance • Information governance & security
  • 34. Components of appetite relating to LIKELIHOOD • Has happened in our organisation • Has happened in our industry • Has happened in this country • Global experience • Use of statistical analysis and probability scoring
  • 35. Formal Risk Rating Corporate Risk Rating must reflect a transparent understanding of the risk appetite of the Board IMPACTONBUSINESS Critical 4 4 8 12 16 Unacceptable level of risk exposure, which requires extensive management Major 3 3 6 9 12 Moderate 2 2 4 6 8 4 – 8: Risk management measures need to be put in place and monitored Minor 1 1 2 3 4 Almost Never 1 Unlikely 2 Likely 3 Almost Certain 4 1 – 3: Acceptable level of risk subject to regular monitoring LIKELIHOOD OF OCCURING
  • 36. Informal Risk Rating – by concensus Corporate Risk Rating must reflect a transparent understanding of the risk appetite of the Board IMPACTONBUSINESS Critical Unacceptable level of risk exposure, which requires extensive management Major Moderate Risk management measures need to be put in place and monitored Minor Almost Never Unlikely Likely Almost Certain Acceptable level of risk subject to regular monitoring LIKELIHOOD OF OCCURING 1 2 4 3
  • 37. Risk response options Is your glass half full or half MT? The 4M • Mitigate • Manage • Monitor • Move it Internal Audit speak The 4T • Terminate • Treat • Tolerate • Transfer Risk Management speak
  • 38. Where there is an action.... • Recognise real issues within in organisation • Focus appropriate management attention • Delivery of assurance through review and closure • Need to recognise relationship to achievement of corporate and operational targets. • Relevance to Governance Statements in Annual Reports High Medium Low Low Medium High S I G N I F I C A N C E PROBABILITY Requires close monitoring Manage and monitor Significant focus and action Accept but monitor Management effort worthwhile Manage and monitor Accept risks Accept but periodically review Accept but monitor
  • 39. Summary • No right answer • Often needs an agreed approach within leadership style • Needs follow up • Review • Action • Part of continuous assurance cycle.
  • 40. 3. Risk Monitoring, Reporting & Assurance
  • 41. Formal Risk Rating Corporate Risk Rating must reflect a transparent understanding of the risk appetite of the Board IMPACTONBUSINESS Critical 4 4 8 12 16 Unacceptable level of risk exposure, which requires extensive management Major 3 3 6 9 12 Moderate 2 2 4 6 8 4 – 8: Risk management measures need to be put in place and monitored Minor 1 1 2 3 4 Almost Never 1 Unlikely 2 Likely 3 Almost Certain 4 1 – 3: Acceptable level of risk subject to regular monitoring LIKELIHOOD OF OCCURING
  • 42. So we agree what is a risk? • We have a risk register • A list of actions • A timeframe • A responsible manager Does it stop there?
  • 43. Real time review • Monitoring and review ensures that the organisation monitors risk performance and learns from experience. • Communication and consultation ensures that the organisation is aware of what measures are being taken so that everyone concerned can consider whether the actions being taken might effect them or their part of the organisation • All part of a continuous process
  • 44. Real time review allows • Follow up of known issues and actions • Consideration of emerging and new risk through effective identification • Aligned with routine management procedures • Operations level • Management level • Board level
  • 45. Hierarchy of risk reporting Board Executive Management Operational Management • Continuous examination of operational risks • Consideration of material risks within risk definitions • Consideration at meetings • Review of performance against business expectations at EMT • View to risk horizon through effective scanning and intelligence • Relationship with middle management • Commitment to upwards reporting • Review of business critical risks and actions to manage • Relationship with Executive Management • Focus on annual business performance data link to Governance Statement • Setting risk appetite
  • 46. The big questions therefore: • From where does the Board get assurance? • Is assurance just financial? • To what extent should the Board reveal significant risk exposures to the outside world particularly in Governance Statements? • Provision of confidence to investors and customers? • Where are the primary sources of assurance?
  • 47. Using technology • Allows continuous update in line with identification • Instant notification • Joint review of position including impact and likelihood features for upwards reporting • Recording of risk related decisions and actions: - tolerate, treat, transfer or terminate • Reminders regarding actions and overdue closure • ‘Encourages’ buy-in throughout the organisation
  • 48. The assurance agenda - the providers • Management Executive, Health and Safety, Purchasing, IT, Quality, • Surveys Staff, customers, partners • Regulator Monitoring returns, inspections • Third parties IIE, IIP, Social Enterprise Mark, • Professional advisors Insurers, External Audit, Lawyers, Bankers • Internal Audit
  • 49. Introducing independence – A role for non executive directors • Guardians of Stakeholder interest • More than just financial • Provision of assurance - Annual Report and Accounts - Sustainability reports - Health and Safety • But in a Non quoted company? - Use of independent advisors • Engagement of third parties including trade unions and the media • Use an assurance framework and internal audit
  • 50. The role of transparency • Governance Statements/Statements of Internal Control • Role of the Audit Committee • Stakeholder assurance requirements • The focus on risk, good governance and effective reporting • Assurance Frameworks • Risk Management • Role of Internal Audit?
  • 51. The supporting role of internal audit 2050 Coordination The chief audit executive should share information and coordinate activities with other internal and external providers of assurance and consulting services to ensure proper coverage and minimise duplication of efforts. 2060 Reporting to Senior Management and the Board The chief audit executive must report periodically to senior management and the board on the internal audit activity’s purpose, authority, responsibility and performance relative to its plan. Reporting must also include significant risk exposures and control issues, including fraud risks, governance issues and other matters needed or requested by senior management and the board. Source: IIA Performance standard (IPPF)
  • 52. Role of internal audit in practice The frequency and content of reporting should be determined in discussion with board and senior management and depend on the importance of the information to be communicated and the urgency of the related actions to be taken by senior management or the board. The link to the Governance Statement of the organisation is unequivocal.
  • 53. Negative assurance Internal Audit should agree nature and basis on which opinions will be provided • Anything that isn’t positive – full, substantial are usual. • Adequate or limited means something is wrong. Otherwise look for use of wording – “nothing came to the attention of the internal auditor that would….”
  • 54. Frequency of periodic reporting • Formal reporting linked to Board agenda – Quarterly, Half yearly or Annually? • Role for Audit Committee • Audit Committee Chair access – two way? • Consideration by Executive Management • Meeting of specialist risk group • Risk Champions • Informal reporting
  • 55. Summary • Is finance the only language the organisation understands • Increasing attention to risk as part of the governance agenda • Relevance to both Shareholders and stakeholders • Linked to continuous assurance cycle and the need for an Assurance Framework. • Must be live within organisational environment!
  • 56. 4. Transparency, Internal Control & Risk Management
  • 57. The Role of Transparency in Corporate Governance • How does corporate transparency contribute to corporate governance • What mechanisms contribute to transparency
  • 58. Learning Outcomes By the end of this lecture, students should be able to: • emphasise the essential role played by corporate disclosure in corporate governance • define internal control, risk and risk management • appreciate the importance of the audit function • introduce the emerging areas of governance reporting and forward-looking narrative reporting
  • 59. Internal Control and Corporate Governance • "The whole system of controls, financial and otherwise, established in order to provide reasonable assurance of: effective and efficient operations; internal financial control; and compliance with laws and regulations"
  • 60. The Turnbull Framework
  • 61. Revised Guidance on Internal Control (FRC, 2005) • Confirmed flexible, principles-based approach • Endorsed original Turnbull Report
  • 62. Summary of the Main Revisions to the Turnbull Guidance in 2005 (1) • A new preface was added to encourage boards to review on a continuing basis their application of the guidance and consider the internal control statement as an opportunity to communicate to their shareholders how they manage risk and internal control.
  • 63. Summary of the Main Revisions to the Turnbull Guidance in 2005 (2) • The introduction was reorganized to reinforce the message that the guidance aims to reflect sound business practice as well as to aid companies in complying with the internal control requirements of the Combined Code. • Changes to the Combined Code and Listing Rules since 1999 were incorporated. • The new guidance emphasized the need for directors to apply the same standard of care when reviewing the effectiveness of internal control as when exercising their general duties.
  • 64. Summary of the Main Revisions to the Turnbull Guidance in 2005 (3) • The section of the guidance relating to the Code provision on internal audit was removed and incorporated into the Smith guidance on audit committees. • The revised guidance requires boards to confirm in their annual report that they have taken the action necessary to remedy any significant failings or weaknesses identified from their review of the effectiveness of the internal control system. • They are also required to include in the annual report information considered necessary to aid shareholders in understanding the main features of the company's risk management processes and system of internal control.
  • 65. Review of Turnbull recommended: • Self-evaluative disclosure of how board has dealt with any weaknesses or failings identified from their review of the internal control system
  • 66. Corporate Risk Disclosure Framework • Ideal framework for risk disclosure (Solomon, Norton and Joseph, 2000,2002) • Operating and Financial Review (OFR) – Environment – Level of Risk Disclosure – Location – Risk Disclosure preference – Forum of Risk Disclosure – Investors’ Attitudes
  • 67. Abraham and Cox (2006) • Companies with a higher proportion of ownership by in-house managed pension funds were characterized by lower levels of risk disclosure
  • 68. Sarbanes-Oxley: The Impact • All US companies forced to submit an annual assessment of the effectiveness of their internal control systems to the Security Exchange Council (SEC) • Companies' independent auditors forced to audit and report on the internal control reports produced by management, in the same way as they audit the financial statements • All listed companies must have a disclosure committee with the remit of overseeing the process by which disclosures are created and reviewed • emphasized the need for auditor independence
  • 69. Significant Impact on Audit Fees • Big four accounting firms have doubled their audit fees with US clients
  • 70. Disclosure and Corporate Governance “The lifeblood of markets is information and barriers to the flow of relevant information represent imperfections in the market . . . The more the activities of companies are transparent, the more accurately will their securities be valued. “ (Cadbury Report, 1992, p. 33)
  • 71. Developments in Governance Reporting • Largely neglected until now • Independent Audit Limited (2006) provides: – empirical evidence on users’ attitudes towards the current state of governance reporting • a practical framework for corporate governance disclosure
  • 72. Leadership, Direction & Control “. . . Most long-term investors do think seriously about governance. They are increasingly recognizing that good governance is about good leadership, direction and control, and should be taken into account in the assessment of management performance . . . “ (Independent Audit limited, 2006, p.2)
  • 73. The Report found that investors unanimously require: (1) 1. less boilerplate disclosures, with the focus on quality not quantity 2. inclusion of illustrative examples to provide insight 3. governance reporting that reflects each individual company's approach to corporate governance, reflecting its strategy and culture 4. a focus on current, relevant issues to avoid year-on-year repetition of themes
  • 74. The Report found that investors unanimously require: (2) 5. a focus on the role boards play and a link with performance rather than a description of what it does 6. discussion of how board membership contributes to corporate strategy 7. information about the effectiveness of the non- executive directors' role in challenging executive management and complementing the skills of the executives 8. The report also highlighted the potential for better governance reporting to contribute to the growing dialogue between companies and their investors
  • 75. The reporting framework is based on recommended questions for boards • What is the board's role and what did it do? • What gives the board confidence it has the right people? • How did the board work together? • How did management support the workings of the board? • How did the board ensure it was fully effective? • How did dialogue with investors help the board to meet its objectives?
  • 76. The Report found that investors unanimously require: (3) 9. need for greater self- evaluation and reflexivity in the board's reporting of their own effectiveness
  • 77. BP's (2005) annual report comments "The board continued its ongoing evaluation processes to assess its performance and identified areas in which its effectiveness, policies or processes might be enhanced. A formal evaluation of board process and effectiveness was undertaken, drawing on internal resources, individual questionnaires and interviews were completed; no individual performance problems were identified. The results showed an improvement from the previous evaluation, particularly in board committee process and activities, while also identifying areas for further improvement. Regular evaluation of board effectiveness underpins our confidence in BP's governance policies and processes and affords opportunity for their development" (BP, 2005, p.161).
  • 78. BP's (2005) annual report • Report does not mention STAKEHOLDERS! • Promotes long-term shareholder interest • May encourage 'cherry picking' not critical self-evaluation
  • 79. The Operating and Financial Review Fiasco • narrative disclosure • forward-looking • makes information accessible to broad range of report users • Solomon, J. F. and C. R. P. Edgley (2008) "The Abandoned Mandatory OFR: A Lost Opportunity for SER?", Social Responsibility Journal, Vol.4, No.3, pp.324-348.
  • 80. Business Review requirements: • fair review of the business • description of principal risks and uncertainties facing the company • balanced and comprehensive analysis of the development and performance of the business during the financial year and the position of the business at the end of the year • requirement (to the extent necessary) to include financial key performance indicators and (where appropriate) non-financial key performance indicators. • Far less effective for stakeholder accountability
  • 81. Timeline of OFR Events: Solomon and Edgley (2007) 5 May2004:Thegovernmentannouncesitsplansfora mandatoryOFR  1 April2005:NewprovisionswereinsertedintotheCompaniesAct1985 requiringquotedcompaniesto producea statutoryOFRforreportingperiodscommencingonorafter1 April2005  10May2005: TheASBpublishedReportingStandard1 (RS1)  28Nov2005:(i)GordonBrownannouncedthatthemandatoryOFRwouldbescrapped. HetoldCBImembersthat whileSER reflectedbestpractice,heunderstoodconcernsabouttheextraadministrativecostsofthe"gold-plated regulatoryrequirement"andthatwaswhyhewasabolishingtheOFR. (ii)Allcompaniesmuststill complywiththeextendedBusinessReview(BR)requirementsoriginallyintroducedat thesametimeastheOFR.TheBRformspartoftheDirectors’ Report, andcomplieswiththeminimumrequirements oftheEUAccountsModernisationDirective.
  • 82. 14Dec2005:Ethicalinvestors,charities,academicinstitutionsandfaithgroupswrotetoGordonBrowncriticisinghis decisiontoabolishtheOFR  15Dec2005:TheDTIMinisterAlunMichaelinvitedviewsonnarrativereportingby15February2006  11Jan2006:FriendsofTheEarth(FoE)filedanapplicationforajudicialreviewofthedecision  12Jan2006:AgroupofmajorassetmanagementgroupswrotetotheDTIconcernedthatcompanies’reporting effortscouldbedestabilizedbyalackofgovernmentguidancefollowingtheendofthemandatoryOFR. LegislationpassedtowithdrawtheOFRrequirement.
  • 83. 26 Jan 2006: The ASB converted RS1 into non statutory best practice guidance (Reporting Statement 1)  1 Feb 2006: Alun Michael announced renewed consultation on how the Company Law Reform (CLR) Bill might be amended. The consultation on the BR, which had been due to close on 14 February was extended until 24 March.  2 Feb 2006: FoE claimed victory and issued a press release stating that the Government has been forced into a dramatic climb down over abolition of the mandatory OFR following an imminent legal challenge by FoE. The Treasury had also agreed to pay FoE's legal costs in order to avoid the group taking the judicial review to Court  24 Mar 2006: The CBI issued an official response to the DTI supporting the Government’s decision to abolish the OFR but retain BRs.  3 May 2006: Amendments were made to the CLR Bill to give effect to changes to the content of companies' BRs. Alun Michael announced “Quoted companies will need to ensure that…their business review includes: (a) the main trends and factors likely to affect the future development, performance and position of the company's business; and(b) information about: (i) environmental matters (including the impact of the company's business on the environment), (ii) the company's employees, and (iii) social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies. Directors will need to state in their Review if they do not think it necessary to include information about (i), (ii) or (iii) above. FoE issued a press release attacking the Government's announcement that it would not be re-instating the OFR. FoE welcomed new reporting requirements which stated companies must provide information on environmental matters but warned that the amendments to the CLR Reform Bill would fail to remedy companies' worst abuses of the environment both here and overseas.
  • 84.  26July2006:FoEissuedapressrelease.“FriendsoftheEarthwilltoday…challengetheGovernmenttostrengthen itsCompaniesBillwhenitreturnstotheHouseofCommonsintheautumn,aftertherevelationthatitscurrent proposalsforannualenvironmentreportswouldaffectjustoneofthetoptenpollutingcompaniesfromlastyear.”
  • 85. The Role of Audit in Corporate Governance “The annual audit is one of the cornerstones of corporate governance . . . The audit provides an external and objective check on the way in which the financial statements have been prepared and presented.” (Cadbury Report, 1992, p. 36, para. 5.1)
  • 86. Auditor Independence • Balance between close relationship and preserving independence • Provision of non-audit services • “. . . we do not believe it would be right to seek to impose specific restrictions on the auditor’s supply of non-audit services through the vehicle of Code guidance. We are sceptical of a prescriptive approach, since we believe that there are no clear-cut, universal answers . . . there may be genuine benefits to efficiency and effectiveness from auditors doing non-audit work. “ (Smith Report, 2003, p. 27, para. 35)
  • 87. Audit Committee • Rotation of auditors • Smith Report • Audit committees • Cadbury Report recommended that all companies should establish audit committees
  • 88. Audit Committee • Recent research has shown that there is convergence in corporate governance within Europe in the area of audit committees. • Collier and Zaman (2005) found wide adoption by European countries of the audit committee concept
  • 89. Effectiveness of the Audit Function “We do have—not officially, not publicly—concerns about their independence overall . . . you would be amazed at how, when you speak to auditors, from big firms as well as little firms, at drinks parties, at non- official events, and when they are in isolation (you would never get this if you had an audit conference), they often say that they are amazed that more does not come to light or that they often get their arm twisted by management—not from their own practice but of the companies they are auditing—to not worry about it, it is under control. I do find that quite alarming. What do you do about it? You cannot go out and say, ’Investment management believes that the auditing profession is completely corrupt!’.
  • 90. CASE DISCUSSION : GOLDMAN SACHS AND ITS REPUTATION
  • 91. Cases - Goldman Sachs and Its Reputation • Goldman Sachs is a bank, but it does not take deposits, issue credit cards, make mortgage loans, or interact with consumers • Goldman was the most prestigious and most profitable of the investment banks • Goldman Sachs had been a major participant in the events leading up to the financial crisis • During the financial crisis Goldman performed much better than other banks
  • 92. The Nonmarket Environment of the Financial Services Industry Issues Interests Institutions Information
  • 93. Casestudy 2 : General Motors 1. Read and prepare the Casestudy on General Motors (Monks & Minow (2011)) for discussion. Identify the corporate governance issues faced.
  • 94. Casestudy Exercise In groups of four members you are required to: 1. Allocate responsibility to – a non executive director, a CEO, A Health and Safety Manager and a Risk Manager 2. Analyse the scenario’s in the case study and discuss which are the most critical risks that the organisation faces. 3. Plot the resulting risk analysis on an appropriate risk map. 4. Decide what is your groups response.
  • 95. Further Reading • Solomon, Jill (2010) Corporate Governance and Accountability 3rd Edition, Wiley, UK. Ch.6 • Goergen, Marc (2012) International Corporate Governance, Pearson. Ch.15 • Larker & Tayan (2011) Ch.6 • CIMA - Performance Strategy: Study Text (2012) BPP Learning Media Ltd. Part B : 1-2
  • 96. Additional Readings (1) • Solomon, J. F., Solomon, A., Norton, S. D. and Joseph, N. L. (2000) ‘A conceptual framework for corporate risk disclosure emerging from the agenda for corporate governance reform’, British Accounting Review, 32(4), December, 447–478. • Collier, P. and M. Zaman (2005) "Convergence in European Corporate Governance: The Audit Committee Concept", Corporate Governance: An International Review, Vol.13, No.6, November, pp.753-768. • Independent Audit Limited (2006) Better Governance Reporting, Independent Audit Limited, London, UK. • Solomon, J. F. and C. R. P. Edgley (2008) "The Abandoned Mandatory OFR: A Lost Opportunity for SER?", Social Responsibility Journal, Vol.4, No.3, pp.324- 348.
  • 97. NEXT Ideas for Discussion • Mayer, Colin (2002) “Corporate Cultures and Governance: Ownership, Control and Governance of European and US Corporations”, TRANSATLANTIC PERSPECTIVES ON US-EU ECONOMIC RELATIONS:CONVERGENCE, COOPERATION AND CONFLICT ,Conference paper, JFK School of Government, Harvard University, April 11-12
  • 98. QUESTIONS?