The Accounting Profession and Corporate Governance

1. The Accounting Profession and Corporate Governance Presented by: Bongeka Nodada SAICA Project Director: Financial Reporting Standards

2. The Accounting Profession and Corporate Governance Why do we need good Corporate Governance? "If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country, regardless of how steadfast a particular company's practices may be, suffer the consequences. Markets must now honour what they, perhaps, too often have failed to recognise. Markets exist by the grace of investors. And it is today's more empowered investors that will determine which companies and which markets will stand the test of time and endure the weight of great competition. It serves us right to remember that no market has a divine right to investors' capital." Arthur Levitt - Former Chairman, US Securities and Exchange Commission, 2000

3. The Accounting Profession and Corporate Governance “No one disputes that leaders face big governance challenges in Africa. Yet in other parts of the world they are usually regarded as obstacles to be overcome, not as permanent excuses for failure.” Greg Mills (Why Africa is poor and what can Africans do about it)

4. The Accounting Profession and Corporate Governance Key role players in the Corporate Governance Framework • Board of Directors • Company Secretary • Auditors • Audit Committee

5. Global Competitiveness Report • South Africa ranked number for Efficacy of Boards • South Africa ranked number for accounting and reporting standards

6. The accounting profession • Independent research into the qualifications of board of directors of the 200 largest companies listed on the JSE ltd reveals that 35% of the 2215 directorships are held by Chartered Accountants in South Africa. • They also dominate the lead finance role in listed companies, with almost nine out of 10 (89.6%) finance directors or chief financial officers having qualified as chartered accountants. • Chartered Accountants in South Africa fulfil the chief executive function in South Africa with three out of 10 (29.7%) listed company leaders

7. King Code on Corporate Governance (King 1) King I • In 1992 the King Committee on Corporate Governance was formed in South Africa, and, in line with international thinking, considered corporate governance from a South African perspective. • Resulted in King Report 1994, which marked the institutionalisation of corporate governance in South Africa. • Aimed to promote corporate governance in South Africa and established recommended standards of conduct for boards and directors of listed companies, banks, and certain state-owned enterprises, with an emphasis on the need for companies to become a responsible part of the societies in which they operate. • Advocated an integrated approach to good governance, taking into account stakeholder interests and encouraging the practice of good financial, social, ethical and environmental practice.

8. King II • In 2002 the second King Report on Corporate Governance (King II) was published. King II: • Contained a Code of Corporate Practices and Conduct • Voluntary but the Johannesburg Securities Exchange requested listed companies to comply with the King Report recommendations or to explain their level of non-compliance • Applied only to certain categories of business enterprises which are companies listed on the JSE; banks, financial and insurance entities ; public sector enterprises governed by the Public Finance Management Act and the Municipal Finance Management Act. • Built on seven characteristics of good corporate governance:DisciplineTransparencyIndependenceAccountabilityResponsibilityFairnessSocial Responsibility

9. King III • The third report on corporate governance in South Africa became necessary because of the new Companies Act no. 71 of 2008 (‘the Act’) and changes in international governance trends. • Financial Crisis • Effective from 1 July 2010

10. King III • Advocates ‘comply or explain’ approach • 56 countries in the Commonwealth, including South Africa and the 27 states in the EU including the United Kingdom, have opted for a code of principles and practices on a ‘comply or explain’ basis, in addition to certain governance issues that are legislated

11. King III • The new Companies Act codifies the standard for directors’ conduct and regulates the liability of directors where the standard is not met. • In contrast, there is no statutory obligation on companies to comply with King III. • The underlying intention of King III is not to force companies to comply with recommended practice (King II required companies to ‘comply or explain’), but rather for companies to ‘apply or explain’. • Directors are accountable for the governance and wellbeing of the company, and to the body of shareholders. • Where directors opt not to implement the recommended practices as set out in King III, they should be able to explain their reasoning and motivation to the shareholders.

12. King III The Chapters of King III are: • Ethical leadership and corporate citizenship • Boards and directors • Audit committees • The governance of risk • The governance of information technology • Compliance with laws, rules , codes and standards • Internal audit • Governing stakeholder relationships • Integrated reporting and disclosure

13. Audit committee • Every public company and state-owned company must appoint an audit committee, the duties of which are described in the Companies Act and repeated in Chapter 3 (King III Report)

14. Audit committee (cont’d) • All members of the audit committee should be independent non-executive directors. • The audit committee should consist of at least three members. • The chairman of the board should not be the chairman or member of the audit committee.

15. Audit committee responsibilities • The audit committee should have regard to all factors and risks that may impact on the integrity of the integrated report. • The audit committee should review and comment on the financial statements included in the integrated report. • The audit committee should review the disclosure of sustainability issues in the integrated report to ensure that it is reliable and does not conflict with the financial information.

16. Audit committee responsibilities • The audit committee should consider the need to issue interim results • The audit committee should review the content of the summarisedinformation • The audit committee should engage the external auditors to provide assurance on the summarised financial information • Every year a review of the finance function should be performed by the audit committee • The audit committee should specifically have oversight of: - financial reporting risks; - internal financial controls; - fraud risks as it relates to financial reporting; and - IT risks as it relates to financial reporting

17. Financial Reporting Investigations Panel (FRIP) • Pro-actively monitors financial statements of listed companies • JSE reports on the results of non-compliance with IFRS by listed companies annually • Consequences of members belonging to a professional body party to misrepresentation of financial information or non-compliance with IFRS

18. Thank you