Accounting Chapter 2 June 2000 Issued Governance Guidelines For

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xChapter 2

Case Study

What will Bolington need to do in order to start complying with some

of the key aspects of corporate governance?

Consider

Examination questions

1) From: A Manager, Tickitt & Run

Subject: Corporate Governance in the Megablast company

Date: 13 June 2X11

Chief Executive Officer (CEO) and Chairman

Mr Tidyman is both CEO and chairman of Megablast. Corporate governance

indicates that the person responsible for running the company (the CEO) and

Composition of board

The current board ratio of executive to non-executive directors is 5:2. This

means that the executive directors can dominate the board proceedings.

Director appointment

At present, Mr Tidyman appoints directors to the board, giving him absolute

authority over who is appointed. This makes the appointment procedure and

Review of board performance

Board pay

At present, board members’ pay is set by Mr Tidyman. This process breaches

principles of good governance because the remuneration structure is not

Internal control

The system of internal control in Megablast does not appear to be reviewed

correctly. While external auditors will review the control system, this review

is based on their audit requirement and cannot be relied on to test the

Internal audit

Megablast does not have an internal audit department. Given the lack of

formal review of internal control in the company, this is surprising. Good

corporate governance implies that the control system is monitored and that

an internal audit department is established to carry out this task.

I recommend that an internal audit department is established, reporting

initially to the audit committee who will monitor internal control and then

summarise reports for the board.

Financial statements

There appears to be acceptable disclosure in the financial statements

regarding the past results of the company. However, the board should also

provide an indication of how the company will perform in the future, by a

Audit committee

There is no mention in the report of an audit committee. Good corporate

governance implies that there is some formal method of monitoring external

A Manager

Tickitt & Run

2) CORPORATE GOVERNANCE STANDARDS

Tutorial notes: Much guidance has been given to students about answering

discussion questions and this answer has been structured in accordance with

Introduction

The OECD (Organisation for Economic Cooperation and Development) and

World Bank are actively involved in initiatives to promote corporate

governance (e.g. holding an annual forum on the subject). In 1999, the

OECD issued a set of corporate governance principles which, although non-

binding, reflect the concepts of:

These Principles are now being promoted as a framework for dialogue and

consultation with emerging and transition economies with the aim of

improving corporate governance practices.

Need for IASs

The need for a uniform set of international accounting standards to provide

for the transparency and consistency of financial reporting is evident in that

Need for ISAs

The auditing profession plays a key role in both national and international

regulation and the development of transparent international standards on

Need for corporate governance standards

Corporate governance may be defined as ‘the ethical corporate behaviour by

directors or others charged with governance in the creation of wealth for all

stakeholders’. It is about how these persons:

The need for governance has increased as primary stakeholders have

become more removed from management and the control of the entities they

own. The use of outside directors in governance roles has been shown to

provide protection to entity stakeholders.

The growth of global capital markets and the significant frauds which are

being perpetrated in these markets has put this need on a global scale.

Corporate governance can counter financial statement fraud, corruption and

money laundering.

in 1997 may have been avoided (because the speculators would not have

such a free hand as they did).

Arguments for global corporate governance standards

Corporate governance on a national basis is appropriate when investing and

financing by companies is on a national basis. However, a set of global rules

should be applicable, as a minimum, to entities listing shares or obtaining

financing in the public capital markets outside of their national boundaries.

Requiring companies who participate in global capital markets to follow global

rules will provide greater protection to global investors. Corporate

governance will still be required at a national level.

Regulators are national, not international, so international consistency is

needed to avoid regulation arbitrage. Global standards are necessary

because national and international standards will not converge of their own

volition. Local subsidiaries of international groups tend to be content (e.g. on

cost grounds) to comply with lower local standards (e.g. accounting and

auditing) and not adopt the higher standards of their parent’s location.

Companies in some countries (e.g. in India) have been advised not to

globalise until there is a framework for good corporate governance. It is

therefore asserted that global standards are key to developing countries’

prospects for sustainably mobilising capital for economic growth. Developing

countries can further benefit by imitating the models and systems of another

– rather than incurring the costs of developing their own models.

ŶRespect the human rights of those affected by their activities;

ŶEncourage local capacity building;

ŶEncourage human capital formation (e.g. by creating employment

opportunities and through training programs);

Arguments against global corporate governance standards

Development of corporate governance and its implementation needs to be at

a national level because regulators are national and it is not appropriate,

given the need to respect diverse cultures and legal structures, to prescribe a

global standard. For example:

Many people fear that global corporate governance standards may attempt to

impose an Anglo-American business model on developing countries.

Corporate governance and the composition of boards should suit the local

business environment to encourage economic success.

International standards are not global standards. If accounting and auditing

standards have only reached an international level, then the need for

corporate governance standards at the present time is only international –

not global.

Conclusion

Alternatively

Accounting standards have been implemented on a nation by nation basis