ACT 4193 (CURRENT ISSUES OF ACCOUNTING) GROUP 3

1. ACT 4193 (CURRENT ISSUES OF ACCOUNTING)GROUP 3 TITLE: CORPORATE GOVERNANCE DR. ZULKARNAIN BIN MUHAMAD SORI PRESENTED BY • NORFAHAYATU FATIMAH BT ABDULLAH 109582 • TEE SHING WEI 109606 • LIM CHOO LEONG 109690 • KANG KONG CHIAN 109765 • CATHY MOLLY BINTI ALBERT 111350

2. The High Level Finance Committee defines: corporate governance as “the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking into account the interest of other stakeholder.” INTRODUCTION

3. INTRODUCTION(CONT’) Corporate governance involves the quality assurance of the operation of the board itself. Sherinda and Kendall: “Management is concerned with the company’s operations, governance with ensuring that the executives do their jobs properly.”

4. CORPORATEGOVERNANCE FAILURES Development of corporate governance, majority of companies complied but which has been unable to prevent corruption, fraud and self – dealing at major corporations. ENRON Partnership – Special Purpose Entities (SPE) controlled by Enron executives. Engaged in deal with Enron. Book artificial profits for the SPE and Enron. The partnership executives received large payments. WORLDCOM Made large loan to top executives.

5. ISSUE 1DOES CORPORATE GOVERNANCE AFFECT CORPORATE PERFORMANCE?

6. GOOD CG PRINCIPLES &IMPLEMENTATION UNDERPIN MARKET CONFIDENCE BUSINESS GROWTH & STABILITY

7. SUCCESSFUL GIANT COMPANY • SUFFICIENT SALES REVENUES ENRON VIOLATION OF CG PRINCIPLES • ACCOUNTABILITY • INTEGRITY • EFFICIENCY • TRANSPARENCY ENRON

8. GOOD CG • PREVENT EXPROPRIATION OF CORPORATE RESOURCES BY CONTROLLING SHAREHOLDERS & MANAGERS. • ENSURE BETTER DECISION MAKING STOCKPRICE BETTERALLOCATION OFRESOURCES & PERFORMANCE

9. INVESTORS LENDERS COST OF CAPITALS PERFORMANCE EMPLOYEES SUPPLIERS COMPANY

10. SUPPORTING EVIDENCE Global Investor Opinion Survey(2002) • CONDUCTED BY MCKINSEY & COMPANY TOWARDS • 200 INSTITUTIONAL INVESTORS. RESULT 80% OF THE RESPONDENTS WOULD PAY A PREMIUM FOR WELL-GOVERNED COMPANIES. • AS ONE THAT HAD MOSTLY OUT-SIDE DIRECTORS • WHO HAD NO MANAGEMENT TIES • UNDERTOOK FORMAL EVALUATION OF ITS DIRECTORS, • RESPONSIVE TO INVESTORS' REQUESTS • FOR INFORMATION ON GOVERNANCE ISSUES.

11. AGENCY THEORY • GOOD CORPORATE GOVERNANCES • Increase stock prices • Better long- term performance • Managers are better supervised • Agency costs are decreased • Monitor whether outcomes are in accordance with plans • Motivate the organisation to be more fully informed in order to maintain or alter organisational activity.

12. EVIDENCE FROM MALAYSIA PUBLIC BANK BERHAD (PBB) KLSE Corporate Excellence Award for three consecutive years since 2000 to 2002, • IT HAS COMPLY WITH THE MALAYSIA • CODE ON CORPORATE GOVERNANCE. • DEMONSTRATE A GOOD CORPORATE CITIZENSHIP.

13. ISSUE 2 :HOW DOES CORPORATE GOVERNANCE LEAD TOWARD GLOBALIZATION ?

14. In the 21st century of the IT era, globalization has become an element that is assimilated in the business world. • In order to be competitive in the global market and realizing the importance of foreign investment in the economy, the Malaysian government has adopted a high level of code of corporate governance.

15. Important common point in many codes issued by many countries are: • Corporate governance-ensure the way corporation exercise economic power is tied to accountability-whether to shareholders or to a wider community of stakeholders. • Boards have a supervisory and managerial function. • Separation between the supervisory and managerial roles. In the Malaysian Code, example : • “Best Practice” - role of chairman is separated from that the CEO, independent directors and the use of board committees particularly in the areas where the interests of management and that of the company may come into conflict. Hence there ought to be an audit committee, a nomination committee and a remuneration committee.

16. CG Watch 2004, annual Asian corporategovernancesurvey conducted by stockbroker CLSA and Acga : Malaysia moved up to fourth position in the Asia for corporate governance improvement • McKinsey (2002) : average investors were willing to pay a premium of 22% for well governed companies in Asia compared to 14% in Europe and 13% in North America.

17. Anwar and Kar(2003) : Malaysian corporate governance framework is holistic and market based

18. The role of accounting information : • Can influence economic performance. Bush & Smith(2001)-effects flow through three channels : 1) First- help managers and investors identify & differentiate good & bad investment opportunities. Without it, the flow human and financial capital are hindered towards good investments. Reliable reports-more accurate allocation of capital, selected, for instance basis of profit margin reported. 2) Secondly- Agency theory-maintain reliable financial reports prevent managers from acting against the interest of shareholders and market can monitor the managers’ performances. Act as governance role of accounting information & minimize risk premium demanded by investors. 3) Thirdly- timely and high quality financial accounting information can reduce investors’ liquidity risks.

19. Role of external auditor : • The Code : directors, investors and external auditors- good CG • Requirement of Code & Companies Act 1965-annual financial statements audited by external auditors ( based on approved auditing standard by MIA & FRS ) upon approval in their AGM. These standards are up to date following the international standards and best global practice-global benchmark.

20. Healy and Palepu (2001) : no research has examined directly whether or not auditors significantly enhance the credibility of reported financial statements. • One reason may be the auditors act in interest of managers that engage them rather than interest of investors. • Alternatively, auditors provide formal assurance only on the annual accounts- difficulties to provide timely signals to the capital market. • Generally, role of auditors in emerging markets have been relatively unexplored. • Therefore, with presence of Code, a more accountable board how manages firms, the enhancement of the auditors’ independence would be expected. Thus a more reliable financial accounting information would be reported.

21. ISSUE 3 : SHAREHOLDER VERSUS STAKEHOLDER • clear advocacy of greater shareholder rights • stakeholder view of corporate governance is also acknowledged • The conception of shareholders being the exclusive resources contributor is incomplete since the firm’s decisions involve consequences for all stakeholders, and the concept of created value must be adapted, according to the efficiency principle, to take the latter into account in its entirety (Milgrom and Roberts, 1992).

22. ISSUE 3 (continue) • The Organization for Economic Co-operation and Development (OECD) recommended the corporate governance framework should recognize the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises.

23. ISSUE 3 (continue) • Stakeholder theory is a modern evolution keeping in needs with current day business dynamic • shareholder theory dealt with only a diverse set of owner group • stakeholder theory has emerge as a gigantic model with shareholder being considered as one among many stakeholders affected by the performance of the firm.

24. Conclusion • Good corporate governance must be include all other parties like stakeholder. • Good code of corporate governance must be lead to corporate performance

25. Cont’ • In Malaysia, corporate governance was summaries as: 1)The way corporation exercise economic power is tied to accountability- 2) Boards have a supervisory and managerial function. 3) There should be separation between the supervisory and managerial roles..