What is corporate governance?
The IIA definition of corporate governance, included within the International Standards is Governance is the combination of processes and structures implemented by the board in order to inform, direct, manage and monitor the activities of the organisation towards the achievement of its objectives.
Although there is no universally accepted definition, the first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury Committee. Sir Adrian Cadbury defines corporate governance as “corporate governance is the system by which companies are directed and controlled”.The proper corporate governance structure specifies the distribution of rights and responsibilities among the different parties in the organization; this includes the board, managers, shareholders and other stakeholders. It will also lay down the rules and procedures for decision-making within the organization.
Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.
Corporate governance is therefore about what the board of a company does and how it sets the values of the company, hence the process of managing corporate governance is usually handled by a board of directors.
Need for Corporate governance for the following reasons:
ØChanging Ownership structures ØWidespread of shareholders ØHigherexpectations of society from the corporates ØCorporates scams or scandals ØHostile take overs
ØSignificant increase in the compensation of Top management ØGlobalisation
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Corporate Governance from India’s perspective
Objectives of Corporate governance
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The Indian Companies Act of 2013 introduced some progressive and transparent processes which benefit stakeholders, directors as well as the management of companies. Investment advisory services and proxy firms provide concise information to the shareholders about these newly introduced processes and regulations, which aim to improve the corporate governance in India. Corporate advisory services are offered by advisory firms to efficiently manage the activities of companies to ensure stability and growth of the business, maintain the reputation and reliability for customers and clients.
Corporate governance was guided by Clause 49 of the Listing Agreement before introduction of the Companies Act of 2013. As per the revised Clause 49, SEBI has also approved certain amendments in the Listing Agreement so as to improve the transparency in transactions of listed companies and giving a bigger say to minority stakeholders in influencing the decisions of management. These amendments have become effective from 1st October 2014.
Importance of Corporate governance in India
The Indian Companies Act of 2013 introduced innovative measures to appropriately balance legislative and regulatory reforms for the growth of the enterprise and to increase foreign investment, keeping in mind international practices. A company that has good corporate governance has a much higher level of confidence amongst the shareholders associated with that company. Active and independent directors contribute towards a positive outlook of the company in the financial market, positively influencing share prices. Corporate Governance is one of the important criteria for foreign institutional investors to decide on which company to invest in.
Principles of Corporate Governance:
Transparency: It is the foundation of corporate governance; which helps to develop a high level of public confidence in the corporate sector. In the context of corporate governance; it implies an accurate, adequate and timely disclosure of relevant information about the operating results etc. of the corporate enterprise to the stakeholders.
Accountability: It implies the responsibility of the Chairman, the Board of Directors and the chief executive for the use of company’s resources (over which they have authority) in the best interest of company and its stakeholders.
Independence: Good corporate governance requires independence on the part of the top management of the corporation so that it can take all corporate decisions based on business prudence.
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Corporate Governance and Internal Audit |
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Stakeholder expectations of internal audit
Recent events have highlighted the critical role of directors in promoting good corporate governance. In particular, boards are charged with ultimate responsibility for the effectiveness of their organisations’ internal control systems. These events have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and the effectiveness of corporate governance.
How an organisation designs and practices the principles of effective governance vary depending on the size, complexity, and life cycle maturity of the organisation, its stakeholder structure or legal and cultural requirements.
The head of internal audit should work with the board and the executive management team, as appropriate; to determine how governance should be defined for internal audit purposes and the extent and expectations of internal audit assurance and consultancy needed to satisfy the internal audit charter.
Role of Audit Committee
The Internal audit is an independent and objective source of advice and assurance, separate from the management of a company, when outlining the role of the audit committee in respect to internal audit, the key is to establish the principle that the committee should monitor the independence and objectivity of the internal audit function in order to enable it to provide the support needed by the board.
The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:
- to monitor and review the effectiveness of the company’s internal audit function; to review and monitor the internal audit function’s independence and objectivity and the effectiveness of the internal audit process, taking into consideration relevant professional standards;
- to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements.
- Overseeing of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
- To investigate any activity within its terms of reference
- To seek information from any employee
- To obtain outside legal or other professional advice
Role of Internal Audit
The definition of internal auditing and International Standards identifies that internal audit has a role to play in evaluating and helping to improve governance processes. The internal auditor should, atleast annually, carry out an assessment of the overall effectiveness of the governance, risk and control frameworks of the organisation.
The International Standards make specific reference to assessing and making recommendations for:
- promoting appropriate ethics and values within the organisation
- ensuring effective performance management and accountability
- communicating risk and control information
- coordinating the activities of the board, external and internal auditors and management, and communicating what they do
The internal audit charter should make reference to the scope of the work of internal audit and this should include corporate governance activities and processes.
Responsibility
The ultimate responsibility for corporate governance in most organizations lies directly with the board of directors. Internal auditors are charged with ensuring that corporate processes and associated controls are functioning as intended. They also can determine if a process of the corporation could be improved and could save the corporation money or could become more efficient. Ensuring that resources of the corporation are used effectively is a major role of internal auditors.
Fraud
One of the most important tasks of the internal auditor is the detection of fraud. Left alone, fraud can cause a corporation millions of dollars in lost revenue, and also can affect a corporation’s public image. The boards of directors of many corporations depend solely on the internal audit team to reveal instances of fraud and abuse.
Type of Internal Audits
Different types of internal audits can be performed throughout the year. They may focus on financial controls, operating controls or and information technology controls. A board of directors may decide to test in all of these areas, or it may focus on only one.
Time Frame
The internal audit function in most corporations is a year-round process conducted by employees. Typically, an audit manager drafts an annual audit plan, and the board of directors approves the plan. Most corporate audits are focused and scheduled according the level of risk. Higher-level risk areas often receive the most attention from the internal audit function in order to ensure that corporate governance objectives are being met.
The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives:
- Promoting appropriate ethics and values within the organisation.
- Ensuring effective organizational performance management and accountability.
- Communicating risk and control information to appropriate areas of the organisation
- Coordinating the activities ofand communicating the information among the board, external and internal auditors and management.
Auditing governance – recommended approach
- Develop framework for oversight and accountability by defining roles and responsibilities of the of the Board and executive officers.
- Value addition by organizing the Board, board shall consists of Directors who will contribute to its effectiveness with attention to competencies, independent, objective and sound judgment.
- Mechanism shall be developed by the Board to assess its members to ensure that directors, individually and collectively have the necessary competencies and other attributes.
- IV) Efforts shall be made to improve board’s performance continuously for which board shall have the processes to improve its performance and that of its committees.
- The board shall actively promote ethical and responsible behavior and decision making which includes laws, regulation and ethical standards.
- VI) A sound mechanism shall be developed by the Company to determine any potential conflict of interest.
VII) The board shall supervise the strategy development process, resulting strategy and plan for its implementation.
VIII)Evaluate the Organization performance by the Board in the best interest of the Company and its shareholders.
- IX) The board should approve the significant transactions ensuring that they are supportive of the organisations strategic direction.
- X) The board shall oversee and evaluate the activities of the Internal and External auditors.
The key factor for internal audit is to determine how it has factored in the governance in its audit plans, the priority it assigns to the various governance elements, and the appropriate framework, methodology and measures to auditing governance elements. In a well regulated Organization the more focused approach is expected on governance.
This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
