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Financial Accounting
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Factors underlying the lack of confidence in
financial reporting:
• Loose accounting standards, that allows considerable latitude
• Lack of clear framework to ensure directors are able to continuously review business controls
• Competitive pressure within companies and auditors, making it difficult for auditors to maintain independence from demanding boards
• Lack of apparent accountability regarding directors remuneration and compensation for loss of office.
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Group Presentation of case study:
Group 1: WorldCome
Group 2: Parmalat
Group 3: Barrings
Group 4: Shell
• What was wrong with the company?
• Who fail to perform their duties?
• What mechanisms of corporate governance failed?
• What lesson could be learn from this situation?
• What solution would you suggest to avoid similar situation in the future?
Group work 1
3
Company departmental structure organised according to business function
Board of directors
Finance Personnel Operations Marketing
4
A divisional organisational structure
Central services – information technology, personnel,
research and development
Board of directors
North
division
South
division
East
division West
division
Finance
Marketing
Operations
Finance
Marketing
Operations
Finance
Marketing
Operations
Finance
Marketing
Operations
Other Other Other Other
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Board of Directors:
represent shareholders
Shareholders
Board of Directors
Management
Complex Operations
Legally
responsible
for the firm,
but mgt has
time,
expertise,
infrastructure
Theory:
mgt serves
the board.
Reality?
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Directors:
• Executive
– Chief Executive Officer (CEO) /Managing Director
– Chief Operating Officer (COO)
– Chief Financial Officer (CFO) / Treasurer
– Secretary.
• Non executive
Board Composition
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Directors Functions
• Review financials and financial projections
• Set long-term (strategic) goals
• Set capital structure
• Approve major debt financings
• Oversee resource allocations (investment)
• Dividend policy
• R & D
• Monitor competition
• Evaluate global prospects
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Director Liability
Adverse events causing losses to
shareholders where directors failed to
inform themselves and failed to assure that
there was an adequate information and
reporting system in place ( lack of good
faith).
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Cadbury Report (1992)
if the roles of chairman and chief executive were not filled
by two different individuals, then a senior member of
board should be present who was independent
a third of the board be comprised of non-executive
directors who are able to influence the board’s decisions
that majority of the non-executive directors should be
independent of management and free of any relationship
that could affect their independence
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Cadbury Report (1992)
It was recommended that at least two of the minimum
requirement of three non-executive directors should
be independent
concerns about the supply of adequately qualified
non-executive directors.
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Cadbury Report (1992)
Suggested ways of ensuring the independence of non-executive directors:
fees payable to non-executive directors,
stipulating that a balance needed to be struck between recognizing the value of contribution made by non-executive directors
avoiding compromising their independence
non-executive directors should not to take part in share option schemes
The central issue is to ensure that an appropriate relationship exists between the auditors and the management whose financial statements they are auditing
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Greenbury Report (1995)
focused specifically on issues relating directors
remuneration („Fat Cat”)
unseemly pay increase for company directors
establishing balance between directors
remuneration and their performance
the total compensation of directors and that of the chair and the highest paid UK director would each be separately disclosed, with a breakdown into base salary and performance-based elements
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Greenbury Report (1995)
the pay of executive directors should be determined by a
remuneration committee, to be comprised wholly or
mainly of non-executive directors and chaired by one of
the latter.
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the remuneration committees
be composed entirely of non-
executives and be directly
accountable to shareholders,
with committee chair
attending the AGM
Higgs Report(1998)
The roles of Chairman and Chief Executive should not be exercised by the same individual
at least half of a company’s board of directors should be independent non-executive directors.
one (or several) non-executive director(s) should take direct responsibility for shareholder concerns, effectively championing shareholders at board level
Institutional Investors should enter into a dialogue with companies based on the mutual understanding of objectives
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Turnbull Report (1999)
• Focuses on Internal Control
• formalize the sets of procedures and
represent an explicit framework for
companies to refer to as a benchmark
when developing their own internal
control strategies
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Higgs Report (2003)
• Effectivness of non-executive directors
• greater proportion of non executive directors on
boards
• remuneration of non executive directors
• stronger links between non executive directors and
companies principal shareholders
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Smith Report (2003)
• Relationship between auditor and audited company
• creation of audit committee
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Group work 2
• Discuss which issues highlighted by
different reports has been implemented
in your home country. Give examples.
Which areas are has not been put into
practise and why?
• Present your findings
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