Global Corporate Governance Rules

A CASE FOR GLOBAL CORPORATE GOVERNANCE RULES : AN AUDITOR’S PERSPECTIVE

Robert S RousseyUniversity of Southern California, USA

Presented By

Mukund Prasad JoshiMFC 2nd Semester

SOMTU

Abstract The articles emphasizes on need of global corporate

governance rules The paper considers the importance of Corporate

Governance and auditor’s involvement in it The paper also considers the new initiatives of OECD

and World Bank for development and implementation of global CG rules

The paper describes the use of Global Shares by global enterprises and how it compels to a movement for global rules

Finally, the paper recommends International securities Regulators to seriously consider the formation and implementation of global CG rules

Mukund Prasad Joshi | MFC 2nd Semester | SOMTU

Introduction

“Once a business entity lists its shares outside of its national boundary, it should be subject to a set of global corporate governance rules” - Roussey

Corporate governance has been practiced since a long time

But, CG has been practiced mostly on a nation by nation basis

Globalization and the changing scenario of corporate structure create imperatives regarding the need of global CG rules


Financial statement frauds, rampant corruption and expanding money laundering has increased the need of corporate governance

CG plays important role to protect global capital markets


What is CORPORATE GOVERNANCE?

Governance in the private sector is generally referred to as “Corporate Governance”

The ethical corporate behavior by directors or others charged with governance in the creation of wealth for all stakeholders

It is how stewardship is provided over business of an entity to

o achieve corporate objectives,

o balance such activities with expectation of society ; &

o provide appropriate accountability to stakeholders


Why CORPORATE GOVERNANCE?

Shareholders are being away from the management and control of enterprise

Large companies employee professional managers who may involve in mismanagement or financial statement fraud

There are many ways to control over professional operating management

The most important way is to hire the directors who

o Accept stewardship responsibilities

o Oversee the actions of professional managers


Why CORPORATE GOVERNANCE?

CG responsibilities are focused more on non executive directors since they are true representatives of the stakeholders

They are independent from

o the day to day operations of the entities

o the actions of the professional managers

They have interests of stakeholders


Contd…

Studies showed that firms having outside directors have less financial statement fraud

A study, sponsored by COSO (Committee of Sponsoring Organizations of the TreadwayCommissions), focused on fraudulent financial reporting. As related to governance, the study found that

1. Top management was usually involved

2. Boards and Audit committees were weak


Contd…

1. Top management was usually involved

oThe CEO was named in 72% of cases

oThe CFO was named in 43% of cases

o Either CEO or CFO were associated in fraud in 83% of cases


Contd…

2. Boards and Audit committees were weak

o25% of companies had no audit committee

oThe median number of meeting each year was just 1 (where audit committee existed)

o65% of audit committees had no accounting or financing expertise

60% of directors were insiders or ‘gray’ directors (outsiders with ties to the company or management)

39% of boards had no directors that had served as an outside or gray director on another company’s board, suggesting they had little board experience


Who are the stakeholders ?

Some of the stakeholders of a typical business entity are

Shareholders : who make an equity investment in an enterprise and who expect share investment growth and dividend distributions

Banks : who provide loans and who expect to be repaid

Executive management and employees : who provide services to an entity and who expect to be paid for the services and to receive various employee benefits


Who are the stakeholders ?

Suppliers : who provide goods and services and who expect to be paid from them

Other companies : who have cross-holding interests, who have a vested interest in the entity and who can significantly influence the corporate behavior of the company

National and Local governments : who provides services to the entity and the society and who need to receive revenue through taxation


Do we need CG always ?

We might not need CG,

o If all the companies has the most outstanding business managers as the executive management who truly had the stakeholders interest foremost

o If we did not have fraud and corruption in the world

There is need not only for representatives to assists overall strategies and development of business enterprises but also to eliminate these illegal acts


Governance activities relates to

o Entity strategy development and implementation

o Economic development , including mergers and acquisitions

o Appointment of professional operating management executives

o Compensation of these executives

o Formation of adequate accounting systems and related internal controls over financial reporting, operations and compliance with laws and regulations

o Engaging independent auditors


Role of Auditor…

To be effective corporate governance, principles have to be applied in good faith, consistently, ethically and with skills needed to apply the principles

This is when the auditor can play an important role in the governance process


The Auditor’s Involvement in Governance Process

An auditor primarily focuses on an entity’s financial reporting process

Encourage executive management to adopt appropriate accounting systems and internal controls

But, auditors have not any power to direct executive management


What is the effect of CG ?

“If governance responsibilities are taken seriously and performed with intelligence, competence and due regard for the stakeholders, society stands a better chance of being protected from financial statement fraud, money laundering, and other ills embedded in some entities”


Global CG rules – WHY ?

A task force of ICMG (International Capital Markets Group) studied international corporate governance in 1994-95

It concluded that ‘it was not appropriate to prescribe an international standard for CG

But, during the year 1995-2000 the global market capitalization has increased by $18 trillion and the need for global governance rules was felt


Why global CG Rules ?

There is no doubt that CG has to be implemented at the national level

But, global investors and other stakeholders would be better protected if all countries required, at least initially, a prescribed set of corporate governance principles for an entity desiring to list its shares in a country outside of its national securities jurisdiction


Any Progress on global CG ?

There are several new initiatives that may further the development of governance rules on a global basis

A new initiative of IAPC (International Auditing Practice Committee) of the IFA (International Federation of Accountants)

A new initiative of the OECD and the World Bank


The initiative of IAPC

IAPC considered the role of auditors with respect to governance

communication between the audit team and the people who accepted the governance responsibilities

The IAPC developed an exposure draft of an International Standard on Auditing (ISA) and finalized it on 1999


What does ISA tell ???

Auditor should communicate audit matters arising from the audit of financial statements

The auditor has to communicate these matters in all audit situations and not just in audits of publicly traded entities


What if governance people are not identified ? The auditor has to use judgment in this

determination, taking into account such matters as

The governance structure of an entity(for e.g. in entities with supervisory boards or with audit committees, the relevant person may be those bodies)

The circumstances of the audit committees(for e.g. owner-managed entities)

Relevant legislation; and(for e.g. that defines certain aspects of governance communications)

The legal responsibilities of those persons


The matters to be communicated

The general approach and the overall scope of the audit

The selection of, or changes in, significant accounting policies and practices

The potential effect on the financial statements of any significant risks and exposures that are required to be disclosed in the financial statements;

Audit adjustments, if any


The matters to be communicated

Material uncertainties that may cast significant doubt on the entity’s ability to continue as a going concern;

Disagreements with management

Expected modifications to the auditor’s report;

Other matters warranting attention by those charged with governance; and

Any other matters agreed upon in the terms of the audit engagement


The initiative of OECD and the World Bank

An important agreement was reached between OECD and the World Bank on 21 June 1999

Agreement for new initiatives to co-operate and improve CG

The initiatives include holding an annual Global Corporate Governance Forum and a series of Policy Dialogue and Development Round Tables


GCGF and PDDRT

Objective of Global Corporate Governance Forum will be ‘to provide a framework for international cooperation and create synergies for the design and implementation of joint or individual projects by participating countries and institutions’

The Policy Dialogue and Development Round Tables will be run on a regional and, where appropriate, national basis to “provide the framework for continuing policy dialogue and a multilateral process of exchange of experience”


Key points of the agreement… The agreement also includes the

establishment of a senior Private Sector Advisory Group (PSAG)

PSAG will be part of obtaining support and input from the private sector

The agreement intends new set of CG principles that has recently been issued by the OECD

The principles focus primarily on public traded entities, but may be of use to other entities and government owned enterprises


What does OECD document cover?

FIVE AREAS, FOLLOWED BY SUPPORTING RECOMMENDATIONS

1. The rights of shareholders;

2. The equitable treatment of shareholders;

3. The role of stakeholders;

4. Disclosure and transparency; and

5. The responsibilities of the board


Global Shares Organizations following a global business model are

starting to use global shares, i. e. using the same form of shares for listing in a home country and in non-home country capital markets

Global Shares enable virtually seamless cross-border trading allowing non-U.S. companies to increase liquidity and pricing efficiency in the U.S. market while permitting U.S. investors access to the home market shares on the same terms as local investors

- NYSE (July 2, 2000)


What are global shares…???

According to NYSE, Global shares

Are actual shares of a company that trade and transfer freely across borders;

May be used to raise capital or as currency for U.S. acquisitions. The same shares may be listed and traded on stock exchanges around the world;

Are quoted, traded and settled in U.S. dollars


Conclusion

Global corporate governance rules should be

developed and implemented, at a minimum, for business entities whose shares are listed in international capital markets


I liked it…

“Good corporate governance matters” !!!

It matters to business because it contributes to sustainable long-term success.

It matters to shareholders – and others interested in the company – because it ensures them a transparent and productive relationship with the enterprise concerned”

- Byeres


Any Queries … ???

Thank You !!!

Global Corporate Governance Rules

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