IRM EMR M1U6.3 – Regulatory influences Flashcards
Three key influences over corporate governance:
three key influences over corporate governance:
The UK’s Financial Reporting Council (FRC)
The US’s Sarbanes-Oxley Act
The Organisation for Economic Cooperation and Development
Regulatory influences
Influences typically come from independent bodies or laws.
These entities set guidelines or rules for organizations, especially those listed.
They focus on governance standards.
They have the power to oversee compliance.
They can also enforce regulations through prosecution or fines for non-compliance.
History of The UK’s Financial Reporting Council (FRC)
The FRC started in the 1980s as private body to improve financial reporting.
It expanded after major scandals, adding audit and accountancy regulations in 2004 and actuarial oversight in 2006.
In 2011, it became independent.
The FRC regulates auditors, accountants, and actuaries, setting standards for governance, reporting, and auditing.
It ensures compliance, taking enforcement actions when necessary, and reports to the UK government.
The FRC’s strong regulation builds trust and confidence in the market.
It oversees the UK Corporate Governance Code and the related Guidance on Board Effectiveness and the Wates Corporate Governance Principles
Additionally, it provides guidance and support through various resources for stakeholders.
The FRC’s influence extends beyond the UK, impacting corporate governance globally.
History of The Sarbanes-Oxley Act (SOX)
The Sarbanes-Oxley Act (SOX) of 2002 was a response to corporate scandals like Enron, WorldCom, and Global Crossing.
It came into effect in 2006, mandating accurate financial disclosure for companies listed on US stock exchanges.
SOX adopts a “comply and sign” approach to corporate governance, enforcing compliance with fines and imprisonment for executives in case of non-compliance.
SOX mandates the implementation of recognized risk management frameworks, often recommending COSO ERM.
SOX influences both risk management and corporate governance, particularly for US-listed companies.
In the UK, new corporate governance requirements, unofficially dubbed UK SOX, are being developed following major collapses.
These requirements, applicable from December 2023 onwards, align UK governance closer to US regulations, imposing substantial new reporting duties on directors, necessitating investment and time for compliance.
SOX 2002 recommended risk management framework
Sarbanes-Oxley Act (SOX) of 2002 mandates the use of an approved risk management framework to evaluate risks for accurate financial reporting.
The COSO internal control cube (2013) is recommended as the framework for ensuring the accuracy of financial disclosures.
SOX Criticisms
Compliance with SOX requirements is a costly and time-consuming process.
Criticisms have been raised regarding the effectiveness of SOX in improving the accuracy of reports from US-listed companies.
SOX primarily focuses on the accuracy of reporting rather than enhancing risk management standards.
CEOs across the US view SOX as reactionary and burdensome, despite acknowledging its role in strengthening public and investor trust.
A survey by Georgia State University found that while SOX improved trust, it did not enhance ethical standards within companies.
Some CEOs perceive SOX as an over-reaction to past ethical failures, leading to unnecessary burdens.
Instances of inaccurate, misleading, and potentially fraudulent activities by senior management persist despite the enactment of SOX.
Risk reporting of US listed companies
US-listed companies are required to disclose extensive risk factors in their reports, which are forward-looking.
These risk management reports are included in periodic filings like Form 10-K or Form 20-F.
The reports typically dedicate several pages, ranging from three to ten, to list industry, economic, and environmental risks.
It’s common for the list to be introduced with a statement such as “important factors that may cause future financial difficulties include, but are not limited to,” followed by detailed explanations.
2015 OECD updated its principles for corporate governance.
The OECD is an international organization addressing economic, social, and governance challenges in a globalized economy.
In 2015, the OECD updated its principles for corporate governance.
These principles emphasize the establishment of an effective corporate governance framework while respecting stakeholder rights.
Key sections of SOX related to risk management
Key sections of SOX related to risk management are Sections 302 and 404.
Section 302 holds CEOs and CFOs responsible for accurate financial reports and internal control structures.
Section 404 requires annual financial reports to assess and report on the effectiveness of internal control structures, with external auditors attesting to their accuracy.
