Ch 1 Assurance THE REGULATORY ENVIRONMENT (A3) Flashcards
(43 cards)
THE REGULATORY ENVIRONMENT (A3)
Audit is a highly regulated industry. This is deliberate as audit is deemed to play a central role in corporate governance.
International Standards on Auditing (A3a,b)
are the rules that tell auditors how to do their job. They are developed by the International Auditing and Assurance Standards Board (IAASB). The ISA have
been copied into national standards in most countries.
Corporate governance (A3c)
refers to the way that corporations are governed. It is an
all-encompassing concept that includes company relationships with shareholders, society and the environment.
Audit committees (A3d)
Some companies have audit committees to help enhance audit independence. When a client has an audit committee, then the auditor will channel much of the audit communication through the audit committee.
things that auditors might discuss with the audit committee are in accordance with ISA 260 likely to include issues such as:
= The auditor’s responsibilities in relation to the financial statement audit
= The scope and timing of the audit
= Significant findings arising on the audit
= Any independence issues
= Possible modifications necessary to the audit report
= Any management representation points requested
= Any suspected or actual cases of fraud.
International codes of corporate governance (A3e,f)
What is corporate governance?
In many organisations, those CONTROLLING it are not the same people who
OWN it.
In the largest organisations, owners may have such small individual stakes that:
o They do not care too much what the organisation does.
o They are not prepared to challenge the directors.
o They do not have the power to challenge the directors.
The biggest owners are often INSTITUTIONAL SHAREHOLDERS – for example, pension funds.
o They are investing money on behalf of others – it is not theirs.
o They tend to be “inactive” by nature, preferring not to “rock the boat”
Globalisation
has resulted in the biggest companies / organisations
becoming even larger than in the past – which is making the above issues even more important.
Recent CORPORATE DISASTERS and the apparent increase in CORPORATE FRAUD
and UNETHICAL BUSINESS BEHAVIOUR have led to
a lack in trust in directors.
The agency problem
if you want something done properly, the way you want it done …
Do It Yourself!
Agents are people employed to do something for you. The risk is that they do it for themselves…
Agency Costs
= The agent will expect to be paid for their work
= The agent may expect additional benefits
o A nice office
o A company car
o To travel first class while doing your business
= You will have to spend some time and effort monitoring the agent to ensure they are doing what you want … and the less you trust the agent, the more checking you will want to do!
Corporate governance is
a series of laws or guidance aimed at making directors manage companies in the best interests of shareholders, and other stakeholders.
Corporate governance (In other words)
it is an attempt to deal with the agency problem.
Who sets the rules?
= Global – the OECD have developed a Code (OECD = Organisation for Economic Co-operation and Development)
= National – many countries have developed their own systems, sometimes as laws (e.g. Sarbanes-Oxley in the USA) and sometimes as a Code (eg The UK
Corporate Governance Code)
= Companies – many companies have tried to develop their own policies on Corporate Governance, some of which go further than the rules or Code their country expects them to follow
= Other - in some countries, something that appears to be “voluntary” can effectively become law (eg in UK all listed companies are required to either follow the UK Corporate Governance Code, or explain what they have not followed it – Stock Exchange Rules).
Underlying concepts behind corporate governance
These are the fundamentals behind how companies (and more importantly those involved with companies, primarily directors) should behave.
Fairness
All people affected by decisions (stakeholders) should be treated with equal
consideration.
Openness / transparency
All information should be made available to stakeholders, and in a clear manner.
This may suggest companies should not just follow disclosure rules, but also add VOLUNTARY DISCLOSURES if it adds to transparency.
Independence
All those in a position of monitoring should be independent of those / what they are monitoring:
= Non-Executive Directors should be independent of the Executives, and of company operations.
= External auditors should be independent of the company, especially its accounting department and processes.
= Internal auditors should be independent of the company, as they are likely to be involved in monitoring systems throughout the company’s operations.
Probity / honesty
This is not just telling the truth – it also means finding out the truth, not ignoring it (not “turning a blind eye”).
Responsibility
Directors should understand and accept their responsibility to shareholders and other stakeholders, and act in their best interests … and be willing to accept the consequences if they fail in this responsibility.
Accountability
This links with responsibility. Directors must be willing to be held accountable for their actions – and shareholders cannot exercise their own responsibility (as owners) unless they have this information available.
Reputation
Directors must protect their own reputation, and that of the company they run, as damage to either is likely to lead to more widespread damage to the company.
This raises an interesting debate about whether a director’s private life is in fact private – since a bad personal reputation is likely to affect their business reputation and hence that of the company.
Judgement
Directors must ensure they have all the necessary information and understanding in order to be able to make sensible business decisions that improve the prosperity of the company.
