Presented To: Prof Abhay Singh

Financial Aspects of Corporate Governance

1

Group MembersGroup Members

Fiona D’Souza A-21

Janice Pinto A-25

Jigar Patel A-27

Lynette Crasto A-31

Vivek Trivedi A-57

2

Committee on Financial Aspects Committee on Financial Aspects of Corporate Governanceof Corporate Governance

May ‘91 by Financial Reporting Council and LSE

Reasons of Setting UpSponsors Concern at Perceived Low Level of

Confidence in Financial Reporting & Ability of Auditors

Underlying FactorsLooseness of Accounting StandardsNo clear framework to keep Directors under reviewCompetitive Pressures on Companies & Auditors

Recent HappeningsUnexpected failures of Major CompaniesCriticism of Lack of Effective Board

3

Corporate GovernanceCorporate Governance It is the System by which companies are Directed and

Controlled

Board of DirectorsResponsible for Corporate Governance and setting

up overall frameworkSetting up, Implementing the Financial Policy

Shareholders Role- Appoint BOD & Auditors

Auditors Roles- Provide Shareholders an External and Objective check on Directors Financial Statements.

4

Code of Best PracticeCode of Best PracticeDirected to BOD of all listed companies

registered in UK

Statement of ComplianceListed Companies Reporting in respect of

years ending June 30, 1993 should state in their report and accounts whether they comply with the Code and identify and give reasons for any areas of Non-Compliance

Responsibility of complies lies directly with the Board Of Directors

5

Basis of Code of Best PracticeBasis of Code of Best Practice Openness

On the part of the company becomes basis for the confidence which needs to exist between Business and all Stakeholders

Done throughDisclosing InformationAllowing stakeholders to scrutinize the companies more

thoroughly Integrity

Means Straight forward dealing and CompletenessFinancial Reports should be honest and present a balanced picture

of the State of Company’s Affairs Accountability

BOD are accountable to their ShareholdersBoth BOD and Shareholders should make this accountability

effectiveBOD does it through the Quality of Information they provide to

ShareholdersShareholders by, willingness to exercise their responsibilities as

Owners

6

THE BOARDTHE BOARDCombination of Executive and Non-executive Directors

All Public companies should have effective Board

Headed by Chairman Primarily responsible for the working of the board Chairman’s role should be different from that of chief

executive

7

Board EffectivenessBoard EffectivenessTesting the Board EffectivenessAll Directors are equally responsible in LawBoard as a whole is the Final AuthorityContribution of Non-executive Directors:- 1-To review the performance of the board and

the executive directors 2-To take the lead where potential conflicts

arise

8

Non-Executive DirectorsHave an Important place on the BoardMinimum of three Non-Executive DirectorsIndependence of judgementAppointed for a specific term

Professional Advice--To furtherance their duties

Director’s Training--especially for directors with no previous board

experience

Board Structures and Procedures

continued9

Company Secretary--plays an important role on board

Standards of Conduct--all employees should know their standard of conduct

Nomination Committees--approach to make board appointments

Internal Controls

10

Audit CommitteeAudit Committee plays crucial role in ensuring integrity of financial

reports

assurance to the shareholders

minimum three members

external auditor should attend all audit meetings

authority to investigate and full access to the information

11

Duties of Audit Duties of Audit CommitteeCommittee

Making recommendations to the board

Review financial statements before submission

Discussion with external Auditor

Review of any findings of internal investigation

Chairman should answer question at the AGM

12

Board RemunerationBoard Remuneration

Transparency

Future service contracts

Appointing remuneration committee

13

Financial ReportsFinancial ReportsShow a true and fair view

Advantage to investors, analysts and company

Publishing financial statements

Financial statements should be reviewed by auditors

Inclusion of Cash Flow Statement

Simplified version of statements

14

“Auditing is the independent examination of financial information of any entity whether profit oriented or not & irrespective of its size or legal

firm when such an examination is conducted with a view to expressing

an opinion thereon. ”

- Auditing & Assurance Standard (AAS) by ICAI

15

AuditsAuditsThe 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.

It is the most direct method of ensuring that companies actions is properly stated by boards and against strict accounting standards.

16

Issues in AuditingIssues in AuditingAlthough the shareholders formally appoint the

auditors, the shareholders have no effective say in the audit negotiation.

Companies too are subject to competitive pressures.

lack of understanding of the nature and extent of the auditors’ role.

The central issue is to ensure that an appropriate relationship exists between the auditors and the management whose financial statements they are auditing. 17

Issues in AuditingIssues in Auditing

Various frauds in the management system is difficult to detect. Another problem for the auditors is when they suspect that top management itself is implicated in the fraud, without having the necessary evidence to back up their suspicions.

18

Solutions ImplementedSolutions Implemented Development of more effective accounting

standards that provide important reference points against which auditors exercise their professional judgments.

Formation by every listed company of an audit committee which gives, the auditors direct access to the non-executive members of the board.

‘Quarantining’ audit from other services

19

Solutions ImplementedSolutions ImplementedCompulsory rotation of audit firms should be

introduced, to prevent relationships between management and auditors becoming too comfortable.

One proposal made to the Committee was that auditors should have a duty to report fraud to the appropriate authorities.

Clearly defined role of an auditor.

20

ShareholdersShareholders

How to strengthen the accountability of boards of directors to shareholders?

21

Building a Stronger Building a Stronger Relationship between BOARD Relationship between BOARD

& Shareholder’s& Shareholder’sSolution Issue

1. Formation of Shareholders’ committee (for appointment of directors and auditors)

1. Tests of legitimacy,(i.e. no evidence of true representation of all the company’s shareholders)

2. Individually or collectively put forward resolutions at general meetings.

2. Legislations required to alter the present thresholds for tabling shareholder resolutions, also reducing the costs for circulating shareholder communications22

Rights of ShareholdersRights of ShareholdersShareholders are not involved in the direction

and management of the company

However, they can call upon the directors who appear to be fail in their duties

Strengthen accountability of the Board to shareholders by ensuring compliance with the Code

Annual General Meeting gives all shareholders, (irrespective of size of shareholding ) direct and public access to their boards

23

Rights of ShareholdersRights of Shareholders

Providing forms in annual reports on which shareholders could send in written questions in advance of the meeting

Circulation of a brief summary of points raised at the Annual General Meeting to all shareholders after the event.

The Committee encourages boards to experiment with ways of improving their links

24

Institutional ShareholdersInstitutional Shareholders

Institutional shareholders own majority shares of quoted companies

These are shares largely held on behalf of individuals, as members of pension funds, holders of insurance policies and the like

Institutional shareholders use their power to influence the standards of corporate governance

25

Responsibilities of Responsibilities of InstitutionalInstitutional

Shareholders in the UK Shareholders in the UK Institutional investors should encourage regular,

systematic contact at senior executive level to exchange views and information on strategy, performance, board membership and quality of management

Institutional investors should make positive use of their voting rights, i.e. registering their votes wherever possible on a regular basis

Institutional investors should take a positive interest in the composition of boards of directors, with particular reference to

concentrations of decision making power not formally constrained by appropriate checks and balances,

and to the appointment of non-executive directors of the necessary experience and independence.26

Shareholder’s Shareholder’s CommunicationsCommunications

ISSUESISSUES

Parity between shareholders (i.e. institutional shareholder and individual shareholder)

Danger of imparting inside information

Long term relationships

27

Sound Shareholders Sound Shareholders CommunicationsCommunications

28

Shareholder InfluenceShareholder InfluenceInstitutional Shareholders must use

their influence as owners to ensure that the companies in which they have invested, comply with the Code

The obligation on companies to state how far they comply with the Code provides institutional and individual shareholders with a ready-made agenda for their representations to boards

29

ConclusionConclusionThe Code should reinforce good corporate

governance ie. raising the standards without stifling entrepreneurial initiative.

making the participants in the governance process accountable.

And this can b done only if All three groups have a common interest in combining to improve the working of the corporate system.

30

RecommendationRecommendationAll parties should encourage compliance with the

Code by making a statement in the form of report and accounts and getting it reviewed by the auditors before being published.

The Committee’s sponsors will monitor the progress of the code. It will also determine corporate governance in brief of the new sponsor.

interim reports should be reviewed by the auditors

Fees paid to audit firms for non-audit work should be disclosed.

31

There should be a criteria for assessing effective systems of internal control.

The Government should introduce legislation to the auditors of all companies

The Committee supports the lead taken by Auditing Practices Board for the development of auditing practice.

Some issues that successor body may wish to review or consider indept:-

directors’ training role of the shareholders cash flow information into interim reports

32

The Code of best practiceThe Code of best practice

The Board of Directors The board should meet regularly There should be a clear division of

responsibilities, power and authority The board should include non-executive

directors with equal power and responsibility There should be an agreed procedure for

directors performance of duties also they should have access to the advice and services of the company secretary

33

Non-Executive Directors

Non-executive directors should bring an independent judgement.

The majority should be independent and fees should reflect the time they commit to the company.

Non-executive directors should be appointed for specified Terms and have a formal process of selection

34

Executive directors

Their contracts should not exceed three years without shareholders’ approval.

There should be clear disclosure of directors’ total emoluments

Their pay should be subject to the recommendations of wholly or mainly of non-executive directors.

35

Reporting and Controls

The board should assess company’s position and ensure a good relationship is maintained with the auditors.

The board should establish an audit committee of at least three non-executive directors

The directors should explain their responsibility and report on the effectiveness of the company’s system of internal control along with assumptions or qualifications as necessary.

36

Thank You

37