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Über dieses Buch

This book provides a comprehensive approach to Corporate Governance, Audit Process and Risk Management. Furthermore, it provides an analytical and comprehensive approach of the issues facing governance directors, internal and external auditors, risk managers, and public officials conducting assessments based upon the Report on Standards and Codes.

Inhaltsverzeichnis

Frontmatter

Comparative Corporate Governance

Frontmatter

1. Corporate Governance Framework

Abstract
Corporate governance can be defined as the material obligations of a company toward shareholders, employees, customers, suppliers, creditors, tax, and other supervisory authorities.1 From the above definition, we can infer that corporate governance is a set of relationships framed by corporate by-laws, articles of association, charters, and applicable statutory or other legal rules and principles, between the board of directors, shareholders, and other stakeholders of an organization that outlines the relationship among these groups, sets rules as to how the organization should be managed, as well as its operational framework.2 Concerns for corporate governance emerged in the 1980s, when US pension funds decided to invest the bulk of their stockholdings in index funds. A series of financial scandals starting in the 1980s have raised questions about US and other developed economies’ corporate governance ethics. After the Chrysler rescue in 1980; the Black Monday stock market crash in 1987; the Long-Term Capital Management (LTCM) stock market failure in 1998; the Enron, Tyco, Swissair, Vivendi, Kmart, Parmalat, Siemens, Ahold, and WorldCom fiascos; the US sub-prime market and its string of failures (i.e. Bear Stearns, Lehman Brothers, Merrill Lynch), corporate governance has become the predominant debate in academic, business, and even political circles.
Felix I. Lessambo

2. The OECD Corporate Governance Principles

Abstract
The OECD is an international economic organization of 33 countries. It defines itself as ‘a forum of countries committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and co-ordinate domestic and international policies of its members’1.
Felix I. Lessambo

3. The IMF Corporate Governance

Abstract
The International Monetary Fund (IMF) is an international cooperative institution, whose main mission consists of promoting and assisting in global monetary stability. The IMF was set up in 1944 at Bretton Woods (New Hampshire, USA) with the aim of preventing the competitive exchange rate adjustments that characterized the interwar period. At the beginning, 44 nations’ representatives gathered at the resort community of Bretton Woods led by two key figures, the British economist, Sir John Maynard Keynes and the American Deputy Secretary of State, Harry Dexter. The 44 representatives agreed primarily, to create the IMF as the second international institution to aid member states in need of foreign exchange to conduct international trade and secondarily, to facilitate the removal of the exchange controls for trade benefits.
Felix I. Lessambo

4. The World Bank and Corporate Governance

Abstract
Established in 1944 under the Bretton Woods Agreement, the International Bank for Reconstruction and Development (IBRD) — popularly known as the World Bank (WB) — was created to help rebuild Europe after World War II. However, as time has evolved, the World Bank’s mission has evolved too.
Felix I. Lessambo

5. Corporate Governance in the United States of America

Abstract
The United States struggles with its corporate governance framework. The US corporate governance is made of multiple facets: legal, securities, and accounting rules designed to protect the interests of shareholders in a transparent means. The overall system lacks rigorous implementation or at least is perceived as such.
Felix I. Lessambo

6. Corporate Governance in the United Kingdom

Abstract
Though corporate governance in the United States and the United Kingdom have more in common than any other pair of developed countries, the two systems have striking differences that even render the term or concept of ‘Anglo-Saxon’ corporate governance irrelevant. Shareholders in the UK enjoy unparalleled power in corporate decisions relative to their US counterparts. That is because the purpose of the US corporation and the purpose of the UK corporation are not, strictly speaking, the same.1
Felix I. Lessambo

7. Corporate Governance in Canada

Abstract
The corporate governance structure of Canada can be classified as between the UK and the US. That is, it shares features of both systems while protecting the interests of the business community in a sui generis way. Canada is akin to the US being a federal state, and the rules and regulations, except whenever the federal rules trumps, are the province of the states. Canada has disproportionately concentrated ownership and control of public companies. Canada follows a ‘principles-based’ approach as does the UK. That is, companies are required to publicly disclose the extent of their compliance with the best practice guidelines, and a company departing from the best-practice guidelines shall explain and/or describe the procedures implemented to meet the same corporate governance objective. The Canadian approach in similar to the UK, continental Europe, and Australasia.
Felix I. Lessambo

8. Corporate Governance in Australasia

Abstract
Australasia is the term sometimes used, in the absence of another word, for Australia and New Zealand together. Corporate governance rules in the two countries are quite similar, with minor differences due to their legal, economic and political frameworks. Both Australian and New Zealand corporate governance codes are based upon the ‘Comply or explain’ approach. Whilst corporate ownership is relatively concentrated in New Zealand, Australia relies more on its financial markets for listed companies to raise capital.
Felix I. Lessambo

9. Corporate Governance in Japan

Abstract
The Japanese corporate governance system underwent drastic changes since the last two or three decades. Prior to the country’s financial meltdown in the 1980s, Japan’s corporate governance model was praised by many as a model worthy of imitation around the world. The admirers argued that the model provides close sharing of information between the firms and their shareholders, inter-firm cooperation, and employment stability. Such a perception has changed for at least two main reasons: (i) a string of corporate scandals — from the sales of tainted milk by Snow Brand, the hiding of product liability claims by Mitsubishi Motors, the cover up of massive stock trading losses at Daiwa Bank, and (ii) the participation of foreign investors in the Japanese stock market. Japan corporate governance is still navigating between the keiretsu type1and the market-based model. That is because Japan’s economy still bears the traces of the ‘zaibatsu’, a group of family-run businesses that emerged as early as the s century. Japanese firms were traditionally financed by big banks, which perform as supervisory boards to the managing team. Recently, Japanese firms are adopting some controversial corporate governance practices long associated with the US, such as the stock options portion of the executive remuneration, small sized boards, and independent directors. Despite the publicity orchestrated with these new elements, the reality on the ground is different. The Japanese corporate governance structure remains close to the continental European style rather than the US. That is because Japanese corporations are still either owned by big families or financed by big banks.
Felix I. Lessambo

10. Corporate Governance in Continental Europe

Abstract
Corporate governance frameworks, laws and regulations in continental Europe (i.e. France, Germany, Italy, and Spain) are different from what we have studied in the US and the UK. Most continental European countries have either a two-tier system of board (i.e. Austria, Germany, the Netherlands) or a unitary or single-tier structure with so-called executive committees to monitor the single board (i.e. Spain, Italy, Portugal).
Felix I. Lessambo

11. Corporate Governance in the BRICS

Abstract
The need for strong corporate governance is ever present in developing countries. Among the developing countries a group known by the acronym, BRICS,1 has become significantly important in the conduct of world business and trade. A quick statistic provides and highlights their weight:
Felix I. Lessambo

12. Corporate Governance in Saudi Arabia

Abstract
The Kingdom of Saudi Arabia (KSA) commitment to corporate governance and adherence to international standards and codes is widely appreciated, given that the KSA, in many respects, stands as the link between the West and the East.
Felix I. Lessambo

Audit Roles

Frontmatter

13. Internal Audit Process

Abstract
The origins of auditing can be traced back to Greek, Egyptian and earlier civilizations. Audits were associated with detection of fraud. The audit business began to grow with the emergence of large-scale businesses. Despite making a huge investment in propaganda, the auditing industry has been unable to detect massive frauds or even have been part of the problem. The industry opposes all reforms and leads a strong lobbying in Washington, DC, London, and Brussels. The audit function is salient not only to investors or the public trust, but to society as a whole. One of the fundamental tenets of current corporate governance around the world is the importance of external financial audit.3The function of the audit is to ensure that an organization’s results and related disclosures are fairly presented.4 While conducting an internal audit activity, the auditor is required to assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: (i) promoting appropriate ethics and values within the organization, (ii) ensuring effective organizational performance management and accountability, (iii) communicating risk and control information to appropriate areas of the organization, and (iv) coordinating the activities of and communicating information to the board, external and internal auditors, and management.5
Felix I. Lessambo

14. The US Sarbanes-Oxley Act and the Audit Profession

Abstract
The Sarbanes-Oxley Act of 2002 (the’ sOX’) was enacted to fix a string of auditing scandals in the US. US corporations engage often in massive financial statements’ frauds with the help or assistance of big auditing firms. The number of audit failures implicating top audit firms grew significantly over the last three decades. To quote just some well-known scandals: (i) in 2000, Ernst & Young settled for a record US$335 million; (ii) in 2001, an SEC investigation revealed over 8000 violations at PricewaterhouseCoopers, with top partners owning stocks in their audit client firms; and (iii) in 2002, Arthur Andersen Consulting destroyed documents pursuant to Enron and subsequently ceased to exist.1 Four theories have been proposed to explain the occurrence of audit frauds in the US: (i) the de-professionalization of auditing or inability to detect fraud;2 (ii) the sale of consulting services to the same client firms they are called to audit;3 and (iii) the reduced liability by auditing firms to face up to their mishaps,4 unfettered deregulation which started in the 1980s.5
Felix I. Lessambo

15. The Integrated Audit Process

Abstract
Section 404 of the SOX Act requires that the management ensure that a permanent and adequate system of internal control of processing and reporting financial statements exists within the entity. The PCAOB goes on to require that the external auditor performs two distinct audits for publicly-traded companies: (i) the audit of internal control over financial reporting, and (ii) the audit of financial statements. In these audits, the auditor may either issue separate reports on financial statements and internal control over financial reporting (ICFR), or issue a combined report.
Felix I. Lessambo

16. Audit of Group Financial Statements

Abstract
Audit of group financial statements includes the financial information of more than one component. A component is defined as an entity or business activity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements. The concept of component includes a subsidiary, a division, an account balance or an investment accounted for under the equity method of accounting.
Felix I. Lessambo

17. The European Union Statutory Audit Directive

Abstract
The European Union (Statutory Audits) (Directive 2006/43/EC) were signed into law on May 20, 2010.
Felix I. Lessambo

18. The Accounting and Auditing ROSC

Abstract
In Part I, Chapter 4, I discussed the role of the World Bank (WB) pursuant to the assessment of member countries’ corporate governance under an umbrella known as the ROSC. A component of the WB Reports on the Observance of Standards and Codes deals with accounting and auditing as the three are intertwined. The WB has developed a program to assist its members in implementing corporate governance principles, international accounting and auditing standards to strengthen their financial statements reporting and analysis. The standards and codes developed by the IMF, the WB and other international bodies1 are grouped into three broad categories: (a) micro policy and data transparency, (b) institutional and market infrastructure, and (c) financial sector regulation and supervision.2
Felix I. Lessambo

19. Corporate Governance, Accounting and Auditing Scandals

Abstract
The corporate governance sagas in the US, the UK, Italy, and Japan have fuelled the essential belief our generation shares about corporations. Though a corporation is a social construct, we came to look and consider it as a person and expect it to comply with the societal tie or bondage without with no society or group can survive. The chapter will cover the best-known corporate scandals in the US, the EU, Asia-Pacific and South Africa. Most frauds could have been prevented if preventive actions were taken to curve the well-know triangle of fraud.
Felix I. Lessambo

20. Auditor Legal Liability

Abstract
Like other professionals such as physicians and architects, auditors are liable both civilly and criminally. Civilly, an auditor can be found liable either under the common law or a statutory law liability. Common law liability arises from negligence, breach of contract, and fraud. Statutory law liability is the obligation that comes from a certain statute or a law which is applied to society. The scope of both common law liability and statutory liability has been expanded to include certain third parties, mainly the foreseen or foreseeable users of audited financial statements. Also, a lawsuit in a state court provides greater protection than the one brought before the federal court.
Felix I. Lessambo

21. The Future of Auditing

Abstract
Accounting reform didn’t come with SOX Act as that legislation did not significantly reduce the gains to be made from engaging in creative accounting, accounting massage nor did it change significantly the chances of catching those involved in such practices. Accounting scandals will continue to prosper, mainly in the US because of the perverse and inept judicial system in place. The recent string of scandals in the US would undoubtedly lead to a significant strengthening of the audit committee, in some case its independence from the board of directors.
Felix I. Lessambo

Board Oversight

Frontmatter

22. Risk management

Abstract
Risk oversight is one the responsibilities of any board of directors. Though not involved in day-to-day risk management, the board must put in place a risk management policy, procedures and guidelines, that management team must follow. Put differently, risk management policies and procedures and codes of conduct and ethics should be incorporated into the company’s strategy and business operations. However, in practice, most boards delegate the oversight of risks to their audit or risk committees. According to the International Organization for Standardization (ISO), effective risk management and the resulting controlled environment are central to sound corporate governance.3 Various regulatory bodies in the US and worldwide are pushing for great and effective risk management, particularly in publicly-traded corporations. The PCAOB, for instance, is guiding audit firms to pay more attention to the level of risk associated with management processes. The PCAOB is pushing public auditors to enhance their audit plans and increase monitoring for high-risk behavior.4
Felix I. Lessambo

23. Management Fraud

Abstract
Management has a unique ability to perpetrate fraud because it frequently is in a position to directly or indirectly manipulate accounting records and present fraudulent financial information.1 Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively.
Felix I. Lessambo

24. The Audit Committee and Management Fraud

Abstract
The role of the audit committee has been enhanced in most developed countries. In the US, sections 205, 301, 304, and 407 of the SOX Act of 2002 provide additional rules concerning the prerogatives of audit committees within publicly-traded companies. The audit committee is a fraud detector and ethics policy enforcer for all registered companies.1 Audit committees are required by NYSE (New York Stock exchange), the AMEX (American Stock Exchange), and the NASDAQ. They all require that: (i) audit committee be composed of at least three independent directors2 that is, those outside directors who have no other relationship that might impair their independence, and (ii) be financially literate, and that at least one member (usually the chairman) be a financial expert.
Felix I. Lessambo

Backmatter

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