Financial Aspects of Corporate Governance

1. Financial Aspects of Corporate Governance Presented To: Prof Abhay Singh

2. Group Members • Fiona D’Souza A-21 • Janice Pinto A-25 • Jigar Patel A-27 • Lynette Crasto A-31 • Vivek Trivedi A-57

3. Committee on Financial Aspects of Corporate Governance May ‘91 by Financial Reporting Council and LSE Reasons of Setting Up • Sponsors Concern at Perceived Low Level of Confidence in Financial Reporting & Ability of Auditors • Underlying Factors • Looseness of Accounting Standards • No clear framework to keep Directors under review • Competitive Pressures on Companies & Auditors • Recent Happenings • Unexpected failures of Major Companies • Criticism of Lack of Effective Board

4. Corporate Governance • It is the System by which companies are Directed and Controlled • Board of Directors • Responsible for Corporate Governance and setting up overall framework • Setting up, Implementing the Financial Policy • Shareholders Role- Appoint BOD & Auditors • Auditors Roles- Provide Shareholders an External and Objective check on Directors Financial Statements.

5. Code of Best Practice • Directed to BOD of all listed companies registered in UK • Statement of Compliance • Listed 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

6. Basis 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 through • Disclosing Information • Allowing stakeholders to scrutinize the companies more thoroughly • Integrity • Means Straight forward dealing and Completeness • Financial Reports should be honest and present a balanced picture of the State of Company’s Affairs • Accountability • BOD are accountable to their Shareholders • Both BOD and Shareholders should make this accountability effective • BOD does it through the Quality of Information they provide to Shareholders • Shareholders by, willingness to exercise their responsibilities as Owners

7. THE BOARD • Combination 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

8. Board Effectiveness • Testing the Board Effectiveness • All Directors are equally responsible in Law • Board as a whole is the Final Authority • Contribution 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

9. Non-Executive Directors • Have an Important place on the Board • Minimum of three Non-Executive Directors • Independence of judgement • Appointed 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 continued

10. 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

11. Audit 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

12. Duties of Audit Committee • 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

13. Board Remuneration • Transparency • Future service contracts • Appointing remuneration committee

14. Financial Reports • Show 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

15. “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

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

17. Issues in Auditing • Although 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.

18. Issues 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.

19. Solutions 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

20. Solutions Implemented • Compulsory 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.

21. Shareholders How to strengthen the accountability of boards of directors to shareholders?

22. Building a Stronger Relationship between BOARD & Shareholder’s

23. Rights of Shareholders • Shareholders 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

24. Rights 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

25. Institutional 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

26. Responsibilities of InstitutionalShareholders 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.

27. Shareholder’s CommunicationsISSUES • Parity between shareholders (i.e. institutional shareholder and individual shareholder) • Danger of imparting inside information • Long term relationships

28. Sound Shareholders Communications

29. Shareholder Influence • Institutional 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

30. Conclusion • The 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.

31. Recommendation • All 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.

32. 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

33. The 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

34. 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

35. 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.

36. 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.

37. Thank You