LECTURE 7 – CORPORATE GOVERNANCE
‘a process by which the owners and creditors of an organization exert control and require accountability for the
resources entrusted to the organization. The owners (stockholders) elect a board of directors to provide
oversight of the organization’s activities.’
“The framework of rules, relationships, systems and processes within and by which authority is exercised and
controlled in corporations” (ASX CGC)
Primary Parties Involved in Corporate Governance
Shareholders Other self-regulatory organisations (ASX)
Boards of directors Regulatory agencies (ASIC)
Audit committees of the board External auditors
Management Internal auditors
Self-regulatory accounting organisations
The Role of Audit Committee
Audit committees have oversight responsibilities. They should:
o Be appraised of all significant accounting decisions made by management
o Be appraised of all significant changes in accounting systems and system controls
o Be involved in the engagement of the external auditor, review the audit plan and discuss the audit
results with the auditor.
o Have the authority to hire and fire the head of the internal audit function and set the budget for the
internal audit function
o Review the audit plan and discuss all significant results
o Receive all regulatory audit reports (e.g. For apra) and discuss findings.
Failures in Corporate Governance
ASIC/CLERP 9 concerns about the auditing profession included:
o Auditors were no longer willing to confront clients over questionable accounting practices.
o Consulting fees were impairing auditor independence.
o Accountants were using technical interpretations of Accounting Standards to push the limits
Some issues that arose as a result of the audit process
Analytical procedures were used inappropriately to replace direct tests of account balances.
Audit firms were not thoroughly evaluating internal control and applying substantive procedures to address
weaknesses in control.
Audit documentation, especially related to audit planning, did not meet professional standards.
Auditors ignored warning signs of fraud and other problems.
Auditors were not providing sufficient warning about companies that might not continue as ‘going concerns’.
Corporate Governance Regulations
Corporate Law Economic Reform Program Act 2004
Also known as CLERP 9 Act
Addresses audit standard setting and audit independence
Financial Reporting Council (FRC) responsibilities to include:
o Oversight of auditing standards setting arrangements
o Reconstituting the auditing and assurance standards board as a frc body
o Providing auditing standards with the force of law
o Advising professional accounting bodies on issues of auditor independence
o Addressing a range of other independence issues
o Monitoring and reporting on company response to complying with audit-related disclosure
o Promoting and advising on teaching professional and business ethics
o Monitoring and advising on the adequacy of accounting bodies’ disciplinary procedures. AUASB Revision of Auditing Standards
Develop high quality Australian auditing standards
Use international auditing standards as a basis to develop Australian auditing standards
Monitor and review auditing standards issued by other professional bodies
CLERP 9 amendments:
o Include a statement of principle requiring auditor independence
o Require auditors to make an annual declaration of independence
o Strengthen restrictions on employment relations between auditors and clients
o Impose new restrictions on financial relationships
o Require mandatory disclosure of fees paid for categories of nas in annual report
o Require a statement in annual report whether board of directors is satisfied that provision of nas is
compatible with auditor independence
o Make lead engagement and review partner rotation compulsory after five years
o Require accountants seeking registration as company auditors to meet competency standards, abide by
accepted code of ethics and complete specialist training.
8 ASX Corporate Governance Principles
Foundation for management oversight
Structure board to add value
Promote ethical/responsible decisions
Safeguard integrity of financial reporting
4.1: The board should establish an audit committee (AC).
4.2: The AC should be structured so that it:
o Consists only of non-executive directors.
o Consists of majority of independent directors.
o Is chaired by independent chair – who is not chair of board.
o Has at least 3 members.
4.3 – The AC should have a formal charter
4.4 – Coys should provide the information indicated in Guide to reporting on Principle 4.
Timely & balanced disclosures
Respect shareholder rights
Recognise & manage risk
Remunerate fairly & responsibly
Principle 4 – Safeguarding Integrity in Financial Reporting
Members of AC are non-executive directors
Committee provides advice to Board on compliance framework in accordance with Australian standards
AC responsible for reviewing & recommending for Board approval the financial statements
AC reviews representation letters provided to external auditors
AC processes provide framework for management and external and internal auditor to review and assess the
All AC members have business & financial expertise to act effectively
AC reviews & approves annually overall audit strategy
AC nominates external auditor to Board & appointment reviewed every 3 years. External auditor performance
Lead audit service partner must rotate every 5 years
Ex-audit partners will not be appointed as directors
AC reviews & approves annually the overall scope & plans for external audit & reviews audit reports
AC involved in assessment & appointment/termination of internal auditor
AC reviews overall scope, annual plans & budget for internal audit Auditor’s Communication with Committee
Auditing standards (ASA 260) require specific communications between the audit committee and the external
o Auditor’s Responsibility under o Consultations with Other Accountants
Generally Accepted Auditing Standards o Major Issues Discussed with
o Significant Accounting Policies Management
o Management Judgments and o Difficulties Encountered in Performing
Accounting Estimates the Audit
o Significant Audit Adjustments o Internal Audit Activities
o Other Information in Annual Reports o Risk Assessment Activities
o Disagreements with Management o Internal Control Evaluation.
The auditor must maintain an independent mental attitude (in fact and appearance).
Due professional care is to be exercised in the performance of the examination and preparation of the report.
The examination is to be performed by a person or persons having adequate technical training and proficiency
The work shall be adequately planned and assistants, if any, properly supervised.
A sufficient understanding of the entity and its environment, including its internal control, is to be obtained to
assess the risk of material misstatement of the financial statements whether due to error or fraud, and to
design the nature, timing, and extent of further audit procedures
Sufficient appropriate audit evidence is to be obtained through audit procedures performed to pro