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Audit and assurance

Audit and assurance. Introduction to corporate governance regulatory frameworks - UK Lecture 4a (Hong Kong SAR, Malaysian and Singaporean institutions may study equivalent structures in their countries). Cadbury Report, 1992. ‘The way companies are directed and controlled’

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Audit and assurance

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  1. Audit and assurance Introduction to corporate governance regulatory frameworks - UK Lecture 4a (Hong Kong SAR, Malaysian and Singaporean institutions may study equivalent structures in their countries) AA - Intro to CG - L4a

  2. Cadbury Report, 1992 • ‘The way companies are directed and controlled’ • Definition used by Solomon (2007) • Corporate Governance and Accountability 2nd edn. • ‘…principally a study of the mechanics of capitalist systems’ • Solomon, 2007 AA - Intro to CG - L4a

  3. The Combined Code on CorporateGovernance2008(FRC) • Directors are in a privileged position • They run the business • For owners and other stakeholders • Good CG means that all stakeholders’ needs are appropriately taken into account • OECD • ‘Principles’ of CG • In the UK • ‘The Code’ AA - Intro to CG - L4a

  4. The Combined Code on CorporateGovernance2008(FRC) (cont.) • Main Principle • ‘Every company should be headed by an effective board, which is collectively responsible for the success of the company’ • The ‘Turnbull Guidance’ and ‘Smith Guidance’ • Detailed guidance that accompanies ‘the Code’ (revised September, 2005) AA - Intro to CG - L4a

  5. The Combined Code on CorporateGovernance2008(FRC) (cont.) • Some key areas • Directors’ remuneration • Going concern • Internal control • Audit committees • An ‘independent’ sub-committee of the Board of Directors • Non-executive directors (NED’s) AA - Intro to CG - L4a

  6. Agency theory • ‘Stewardship accounting’ • Owners, shareholders… • Directors, stewards, managers… • Agency theory • Principal (P) • Agent (A) • ‘The agency problem’ • Separation of ownership and control • Objectives of P and A may be different AA - Intro to CG - L4a

  7. Agency theory (cont.) • Short-termism • Agents • Bonuses, salaries, benefits-in-kind… • ‘Residual losses’ • Principals (institutional investors) • ‘Churning’ • Long term investment • Relies on optimum NPV from projects • wealth maximisation for shareholders AA - Intro to CG - L4a

  8. Agency theory (cont.) • Control • AGM • Time for agents to account for themselves? • Practical problems • Large ownership base • Interested in return not control AA - Intro to CG - L4a

  9. Other theoretical viewpoints • Transaction cost theory • Stakeholder theory • The ‘Corporate Report’ (ASSC*, 1975) • Specifically considering financial reporting questioned: • Who should report what to whom • Public accountability • Users of corporate reports • Equityholders • Loan creditors • Employee • Analysts and advisors • Business contacts • Government • The public * The original UK accounting standards body, now the ASB AA - Intro to CG - L4a

  10. References • Combined Code (2008) http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf • OECD Principles of Corporate Governance (2004)http://www.oecd.org/dataoecd/32/18/31557724.pdf AA - Intro to CG - L4a

  11. References (cont.) • Hong Kong – The Code on Corporate Governance Practices (2005) • http://www.charltonslaw.com/corporategovernance/english.pdf • http://aci.kpmg.com.hk/docs/Internal_control_Guide.pdf • http://www.ecgi.org/index.htm AA - Intro to CG - L4a

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