Global Corporate Governance Rules

A CASE FOR GLOBAL CORPORATE GOVERNANCE
RULES : AN AUDITOR’S PERSPECTIVE
Robert S Roussey
University of Southern California,USA
Presented By
Mukund Prasad Joshi
MFC 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 theTreadway
Commissions), 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 theWorld
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 theWorld 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 RoundTables

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

Global Corporate Governance Rules

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