REVITALISING THE AUDIT COMMITTEE – A STRATEGIC PRIORITY IN AN UNCERTAIN ECONOMIC ENVIRONMENT Title of Paper: Improving Organisational Governance and Ethics Caribbean Association of Audit Committee Members Inc. CAACM’s 8 th Annual General Meeting & Conference, 10 th -11 th July, 2014 Hilton Hotel, Port-of-Spain, Trinidad and Tobago By Vindel L. Kerr, DBA
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REVITALISING THE AUDIT COMMITTEE – A STRATEGIC
PRIORITY IN AN UNCERTAIN ECONOMIC
ENVIRONMENT
Title of Paper:
Improving Organisational Governance and
Ethics
Caribbean Association of Audit Committee Members Inc.
CAACM’s 8th Annual General Meeting & Conference, 10th-11th July, 2014
Hilton Hotel, Port-of-Spain, Trinidad and Tobago
By Vindel L. Kerr, DBA
OUTLINE
1. Why Governance and Ethics now more than ever?
2. The Inextricable link between the Audit Committee and
Organisational Governance and Ethics
3. Legal vs Ethical Duties of the Board of Directors. Can they be reconciled?
4. Board’ Role in Developing and Preserving the Governance
and Ethical Frameworks of an Organisation: The Corporate Governance Code
The Code of Ethics and Business Conduct
5. Conclusions/Suggestions
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WHY ORGANIZATIONAL GOVERNANCE
AND ETHICS NOW MORE THAN EVER?
The proliferation of financial crises has been a
particularly severe wake-up call, because it has
adversely affected employment, consumer
spending, pensions, the finances of national and
local governments and the global economy.
These crises are manifestations of several
structural reasons why corporate governance has
become more important for economic
development and a more significant policy issue
in many countries.
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WHY….IN THE CONTEXT OF THE
CARIBBEAN PUBLIC SECTOR
Corporate Governance and Ethics are more important now than
ever for the following reasons:
There is a dearth of empirical literature in Corporate
Governance
Inadequate Corporate Governance Structures and
Practices
Weak and Underdeveloped Regulatory Frameworks
Systemic Weaknesses in the in the Financial Sector
The prevalence of Corporate and Political Corruption
Source: Vindel Kerr Thesis (2010), Manchester Business School, England
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Among these are the following additional
compelling realities:
The globalization of financial markets and the
commodification of capital
Trade liberalization
Complexity in the allocation and monitoring of
capital by International Financial Institutions
Increase in international financial integration
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Therefore, in sum it can be argued that the
introduction of corporate governance and ethics
has been generally motivated by a desire for
greater transparency, accountability,
probity, elimination of public sector
corruption, adjustment of regulatory
systemic weaknesses and increase investor
confidence in the stock market as a whole.
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THE INEXTRICABLE LINK BETWEEN THE
AUDIT COMMITTEE AND ORGANISATIONAL
GOVERNANCE AND ETHICS
The Audit Committee
This committee was invented with the purpose of monitoring
the integrity of financial statements and the internal
financial control systems. Its scope has long been extended to
that of providing an enterprise-wide approach to the review of
not just financial statements and internal control systems
(policies, procedures, processes, fit-and-properness of persons,
risk management, inter alia), but assesses independence,
objectivity and fairness in organisational decision making. In
essence, the modern role of the Audit Committee is to ensure
transparency, accountability, probity, equity and ultimately,
value-for-money.
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AUDIT COMMITTEE (CONTD.)
It is the structure of the Board that assesses the
performance of the organisation and presents regular
and period updates to the Board of Directors
It presides over the recruitment of the external auditors
and makes recommendations to the Board for removal
To perform its duties effectively, international audit
conventions have specified minimum standards for its
membership, skill, experience and qualifications
(training) of members, its relationship with the BOD,
whistle-blowing, and role in external shareholder
relations
See Sir Robert Smith Report (2003), Financial Reporting Council, UK
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WHAT IS CORPORATE GOVERNANCE?
Corporate governance refers to the set of laws, regulations and voluntary principles, practices and processes (a mixed of the ‘hard’ and ‘soft’ laws) by which a company is governed. They provide the basis as to how the company is directed and controlled such that it can fulfill its goals and objectives in a manner that adds value to shareholders and stakeholders over the long-term.
The Board of Directors have ultimate and overarching responsibilities for an organisation’s corporate governance system, and is the sole body and authority to whom the Chief Executive Officer reports and is accountable.
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CORPORATE GOVERNANCE
SYSTEM
Ethical Standards
Accountability
Vigilance
Internal Control Transparency
Strategic Direction: Vision,
Mission & Strategy
A Basic Corporate Governance System
The Board as the Fulcrum of Organisational
Ethics and Governance: 0
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The Board of
Directors
Vision, Mission &
Strategy
Performance & Reward Systems
Balancing Stakeholders’
Interests
Governance and Ethics
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WHAT IS ETHICS?
Ethics is the branch of philosophy that is
concerned with the rules, guidelines and
principles that underpin the decisions that people
make in any given aspect of their lives.
Ethics therefore embodies concerns with the
determination of what is right or what is wrong.
Noel Cowell, Archibald Campbell, Gavin Chen and Stanford Moore (eds),
Ethical Perspectives for Caribbean Business (Arawak 2007)
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LEGAL VS. ETHICAL DUTIES OF
DIRECTORS.
CAN THEY BE RECONCILED?
Section 99 (1) (a) of the TT Companies Act states that directors and officers have a duty to act “honestly and in good faith with a view to the best interest of the company.”
Section 99 imposes legal duties on the directors, but from these duties, one can clearly see ethical duties breaking the surface such as care, honesty and loyalty, which are two key ethical duties which would ultimately lead to the success of any company.
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Section 99 1(b) of the TT Companies Act states:
1) Every director and officer of a company shall in exercising his powers and discharging his duties—
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
o In Re: City Equitable Fire Insurance Co [1925] Ch 407, Lord Justice Romer stated that the duty of care and skill involved three basic elements: competence and skill in conducting the company’s affairs, diligence and devotion to those affairs and the proper delegation of their duties.
o John Stuart Mill, posited under the Utilitarian Theory that an act or action is proper if it produces more positive consequences for the majority.
o Section 99(1)(b) which states that Directors must take into account the interest of Shareholders and Employees therefore impliedly encompasses an ethical duty as stipulated by Mill to ensure that Directors’ actions are beneficial to the majority of the stakeholders.
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Some Considerations for Boards in shaping an
The Ethical Framework of An Organisation:
Firstly, an ethical framework is built by people
interacting within an organization but most see
leadership (The Board) as a crucial factor. Some
institutionalized procedures, events or practices can
also contribute to shaping organizational cultures.
1. Leaders’ moral behaviour- Leaders communicate
beliefs and values but above all they are role models.
Thus, ‘leading by example’ is perhaps the most
important factor reinforcing the merits of an
organization ethical framework.
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SOME CONSIDERATIONS…(CONTD.)
2. Corporate mission, vision and values- Well-
defined Mission, Vision and Value Statements can
convey clear messages to organization actors when
accompanied by a serious commitment to
implement such statements
3. Ethical criteria for recruiting, selection
and promotion- if culture depends on people, it is
relevant to consider ethical criteria and virtues in
recruiting, selecting and promoting people in the
organisation
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4. Applying ethical values to decision-making- An ethical framework is shaped by consistent incorporation of
corporate ethical values into strategic decision-making, and
into the corresponding goals, policies and programmes
5. Ethics in both the formal and the informal
organization- Integrating ethical criteria into intra-
organization procedures and structures- and particularly
personnel policies and practices- is another way to bring
ethical values into everyday routine
6. Ethical criteria in customer relations- If customer relations are permeated with ethical values this can
promote trust amongst customers which would in turn
First of all, your institution's Code of Ethics must
reflect your organization's policies, controls and
processes. While it may be tempting to short-cut
the process by "borrowing" policies from other
institutions under the guise of following "best
practices", unless those policies, controls, and
processes adequately reflect your institution's
unique organization and business practices, the
Code will not be effective in providing guidance
or offering protection.
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STAKEHOLDERS
BENEFITS
IMPLEMENTATION
CONTENTS
CODE OF ETHICS
Key Considerations in Developing the Code of Ethics
SUGGESTED KEY ELEMENTS OF A CODE OF
ETHICS AND BUSINESS CONDUCT
A basic code should include policies on:
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CODE
OF
ETHICS
Conflicts of interest
Gifts and hospitality
Recordkeeping
Information
security
Co-operation with
investigations and
audits
Information
privacy
Whistleblowing
Insider trading
CRITICAL CONSIDERATIONS IN
OPERATIONALIZATION/IMPLEMENTATION
(A STEP-BY-STEP APPROACH)
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What’s the point
in having a code of
ethics if no one
abides by it???
In practice, there are several factors that can
contribute to the effectiveness of a code of conduct or,
on the contrary, can make it completely ineffective.
Among these factors are the following:
The purpose of a code should be clear, achievable
and realistic
A strong senior management should exist
The code should arise from a real need and strong
motivation
The code should form part of a broader ethical
outlook
The code should be well written and well
implemented
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For an appropriate implementation of such a code,
several practices are usually applied:
Making explicit a top management’s expression of
commitment
Implementing a broad and effective process of
communication and dissemination
Creating the position of ethical affairs or ‘head of
compliance’
Providing a direct line
Training
Monitoring and auditing
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BENEFITS OF A CODE OF ETHICS Having and implementing a code of ethics correctly can
bring about several benefits, among them, the following:
Helping to express and articulate corporate values
Providing guidelines for decision-making and dilemmas
Preventing abuses within the firm
Sending an ethical message to
to stakeholders
Fostering corporate identity and
building reputation
Helping to avoid or minimize litigation against the
firm against the firm
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Beneficiaries of Code of Ethics
Internal Stakeholders:
Employees
Management
Board of Directors
External Stakeholders:
Shareholders
Clients, Customers, Members, Creditors
Media
The International Community
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CONCLUSIONS AND SUGGESTIONS
To improve organisational governance and ethics
require more than fanciful ideas and expert
opinions as espoused in the preceding.
What is needed are ethical leaders with the will to
agree on and implement what is right-action ethical
principles and practices - Chairmen, Directors and
those leading Auditing, Accounting, Banking and
Governance firms and institutions such as yours
and mine.
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CONCLUSIONS AND
SUGGESTIONS (CONTD.)- 2
Citizens and residents of Trinidad and Tobago,
and indeed all other Caribbean territories expect
our politicians to meet equal if not higher ethical
standards. Not just to do ‘the right thing’ but
what is right for the majority of the people.
I want to use this forum to call for a Code of
Conduct for Auditors to be established in each
of CAB’s member countries. Too many of our
professionals are operating as Auditors in the
front offices by day, and as consultants out of the
back officers by night.
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CONCLUSION AND RECOMMENDATIONS
(CONTD.) - 3
Too many of our governance professionals are establishing non-profit firms which serve as fronts to mask their incestuous and corrupt activities here in Trinidad and Tobago
In the areas of public procurement, too many of our professionals are bribing procurement officers to get excessively high technical scores while very low scores are assigned to competing bidders
Finally, I am calling for the immediate separation of the Audit and Risk Management functions in organisations where the duality exists, to ensure and preserve the integrity of the Audit Committee, consistent with international Best Practices.
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Questions, please!
Thanks for listening.
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Very special thanks to my Research Assistant, Ms.
Ashely Roopchansingh for her invaluable contribution