Auditing
Corporate Governance-session 1
What is corporate governance?
Corporate governance refers to the set of systems, principles and processes by which a
company is governed. They provide the guidelines as to how the company can be
directed or controlled such that it can fulfill its goals and objectives in a manner that
adds to the value of the company and is also beneficial for all stakeholders in the long
term.
Stakeholders in this case would include everyone ranging from the board of directors,
management, shareholders to customers, employees and society. The management of
the company hence assumes the role of a trustee for all the others.
The corporate governance framework consists of
(1) explicit and implicit contracts between the company and the stakeholders for
distribution of responsibilities, rights, and rewards,
(2) procedures for reconciling the sometimes conflicting interests of stakeholders in
accordance with their duties, privileges, and roles, and
(3) procedures for proper supervision, control, and information-flows to serve as a
system of checks – and balances.
Why is it important?
Corporate governance is the way a corporation polices itself. In short, it is a method
of governing the company like a sovereign state, instating its own customs, policies
and laws to its employees from the highest to the lowest levels.
Corporate governance is intended to increase the accountability of company and to
avoid massive disasters before they occur.
Well-executed corporate governance should be similar to a police department’s
internal affairs unit, weeding out and eliminating problems with extreme prejudice.
A company can also hold meetings with internal members, such as shareholders and
stakeholders – as well as suppliers, customers and community leaders, to address the
request and needs of the affected parties.
10 concepts of corporate governance
1. Honesty not only to telling the truth but also no giving half-truths or misleading
shareholders and other stakeholders. Probity also involves not accepting lavish
hospitality or gifts with a significant monetary value and certainly not accepting
gifts that can influence their decisions.
2. Accountability means that directors are accountable to shareholder and to some
extent to stakeholders.
3. Independence is an important concept in relation to directors. The concept
strongly emphasizes the appointment of independent non-executive directors.
NEDs are not primarily employed by the company nor are they involve in the
day-to-day operations of the entity. Thus, they should be free from conflicts of
interest and are therefore in a better position to promote the interests of
shareholder and other stakeholders. They are able to monitor effectively the
activities of the entity and the executive directors.
4. Responsibility means management accepting the credit or blame for governance
decisions and will take whatever corrective action is necessary in order to keep the
entity focused. Responsible management should do, when necessary, whatever it
takes to set the company on the right path.
5. Judgement means that decision making from broad could enhance the prosperity
of the organization. This means board members must acquire a broad enough
knowledge of the business and its environment to be able to provide meaningful
direction to it. This has implications for the way directors are recruited and
trained.
6. Reputation especially a good one is a valuable asset because it impacts on the
price of publicly traded shares of the entity. Therefore, directors strive to build the
reputation of the organization.
7. Integrity means straightforward dealing and completeness. What is required of
financial reporting is that it should be honest and that it should present a balanced
picture of the state of the company’s affairs. The integrity of reports depends on
the integrity of those who prepare and present them (Cadbury report) Holders of
public office should not place themselves under any financial or other obligation
to outside individuals or organisations that might influence them in the
performance of their official duties.
8. Fairness – the directors’ deliberations and also the systems and values that
underlie the company must be balanced by taking into account everyone who has
a legitimate interest in the company, and respecting their rights and views.
9. Transparency mean the open and clear disclosure of relevant information to
shareholders and other stakeholders, also not concealing information when it may
affect decisions. It also includes all voluntary disclosure, that is disclosure above
the minimum required by law or regulation i.e. management forecasts, analysts’
presentations, press releases, information placed on websites and other reports
10. Clarity - such as framework, policy, monitoring performance, strategy directions.
Benefit of corporate governance
1.
2.
3.
4.
5.
6.
7.
8.
9.
Prevent conflict of interest
Deal with agency problem
The advantages of corporate governance
Improve the profitability (reporting and performance)
Effective risk management
Reduce fines and penalty and loss of goods
Improve the relationship with bank
Address the governance risk
Improve reputation
10. Understand the market (competition advantages and customer needs)
The importance of corporate governance
Corporate governance gives importance to shareholders’ welfare and also includes the
relationships between the strategic goal of the company and its stakeholders. This
relationship helps to sustain the business for longer period.
1. Management
An advantage with corporate governance is that the benefits are measureable. Good
corporate governance ensures that the board of control and management take the
necessary steps that are in the best interest of the business of the company.
2. Transparency
Corporate governance practices encourage a system of internal control, which in turn
leads to better profit margins. Thus, for a company, corporate governance initiatives
make it possible to attract equity investors. The corporate value of the company is
increased by adopting good corporate governance practices.
3. Benefits to shareholders
Good corporate governance initiatives can assist the board of control and the
management to act on objectives that are in the best interest of both the company and
the shareholders. The shareholders also have greater security on the investments they
have made because of the transparency and access to investment details.
4. Benefits to the National Economy
If a country has a reputation for its strong governance practices, this leads to greater
confidence in the investors, which in turn leads to a good flow in capital. The
reporting and accounting standards adopted by the country are also an important
factor to bring in investments.
Corporate governance reports
Corporate governance reports include the following main five components that are
1.Role of board, 2.Quality of financial reporting and auditing, 3.Directors'
remuneration, 4.Risk management and 5.Corporate Social Responsibility – CSR
1.Role of board
Principle
The Board believes that good governance emanates from an effective board which,
directly and indirectly through its committees, leads and provides direction for
management by laying down strategies and overseeing their implementation by
management, reviews the operational and financial performance, and provides
oversight to ensure that a sound system of internal control and risk management is in
place.
The Board has the overall responsibility for evaluating and determining the nature and
extent of the risks it is willing to take in achieving the Group’s strategic objectives,
and maintaining sound and effective risk management and internal control systems for
the Group to safeguard Shareholders’ investment and the Group’s assets.
2.Quality of financial reporting and auditing
2.1 Financial reporting
The annual financial statements should give a true and fair view of the Group’s state
of affairs, results and cash flows for the year. In preparing the financial statements, the
Board:
(i) adopted HKFRSs, which conform to the International Financial Reporting
Standards in all
material respects;
(ii) selected suitable accounting policies and applied them consistently;
(iii) made prudent and reasonable judgements and estimates; and
(iv) ensured that the financial statements were prepared on a going concern basis and
show a true and fair view of the state of affairs of the company and of the Group as at
the year-end date and of the Group’s profit and cash flows for the year.
The Board is committed to presenting a balanced, clear and comprehensible
assessment of the Group’s operational performance, financial results and prospects to
Shareholders and other stakeholders in a timely manner.
2.2 Auditing
Principle
Audit quality is not defined in auditing standards. Standards guide auditors on what to
do in an audit and compliance with standards will indicate that an audit has been
carried out to acceptable levels of quality. In the standards in use now, two
specifically address quality – HKSQC 1, which addresses quality control procedures
across the whole audit firm and HKSA 220, which focuses on quality control in the
context of individual audit engagements.
Many factors contribute to or influence the quality of audit, and chief among
them are the skills and experience of the people doing the audit. Another is the rigor
of the audit methodology. The balance may vary from audit to audit
Elements of audit quality
1. Culture within an audit firm
Culture includes leadership and an environment that promotes and recognizes
quality.
2. Skills and personal qualities of audit partners and staff
This goes beyond technical skills to include adherence to ethical principles,
application of professional skepticism and appropriate supervision and support
for audit staff.
3. Effectiveness of the audit process
Application of a well structured and thorough audit methodology supported by
effective and relevant teamwork and not constrained by financial pressures.
4. Reliability and usefulness of audit reporting
Reporting that clearly conveys the auditor’s opinion and effective
communication with audit committees.
5. Factors outside the control of auditors
These include client approach to corporate governance and financial reporting
and the audit regulatory environment.
3.Directors' remuneration
Principle
An issuer should disclose its directors’ remuneration policy and other remuneration
related matters. Remuneration levels should be sufficient to attract and retain directors
to run the company successfully without paying more than necessary.
The Remuneration Committee (RC)
The Remuneration Committee (RC) is delegated by the Board with the responsibility
to establish, review, and make recommendations to the Board on the Group’s
remuneration policy and practices. The RC ensures that all employees and Executive
and Non-executive Directors are appropriately remunerated in accordance with the
Group’s strategy as well as its long-term and short-term performance.
Non-executive Directors’ Remuneration
To remunerate Non-executive Directors at an appropriate level for their commitment
of time and effort to the company and to ensure the attraction and retention of high
calibre and experienced individuals to oversee the company's business and
development
• To conduct annual reviews with reference to companies with comparable business or
scale and recommend remuneration adjustments, if appropriate
• To seek the Board’s endorsement for and Shareholders’ approval of any
recommended changes
4.Risk management
Principle
The Board and the management pay particular attention to enhancing the Group’s risk
management, both the structure and the process. Establishing a Risk Committee to be
responsible for the Group’s enterprise-wide risk management including overseeing
the relevant risk management systems and ensuring that they are compatible with the
Group’s strategy and risk appetite.
“3 lines of defense” model
1st line of defense – Risk management
 Management conducts an Internal Control Self-evaluation annually

Different policies, procedures and guidelines have been adopted with defined
authority for effective segregation of duties and controls, and they are kept under
regular review.


Whistle blowing policies are in place to facilitate internal reporting
Provide employees with guidelines on reporting and disseminating inside
information, maintaining confidentiality and complying with dealing restrictions
2nd line of defense – Risk oversight
 The risk governance structure has been enhanced by: (i) the appointment of the
Group Risk Officer, a newly created position to oversee all of the Group’s risk
functions and head the new Risk Management Division; and (ii) the

establishment of Regulatory Compliance Department to lead or facilitate the
self-assessments and on-site reviews on the adequacy of procedures for
compliance with the Group’s regulatory obligations.
There was further investment in information security in line with industry best
practice.
3rd line of defense – Independent assurance
 Conducting independent reviews of the adequacy and effectiveness of the
Group’s internal control and risk management systems and reporting the review
results regularly to the Board through the Audit Committee.
Enterprise Risk Management Framework
6. Corporate Social Responsibility – CSR
Principle
Corporate social responsibility, or CSR, is a corporation's obligation to its
stakeholders, which are any groups/people that have a stake or interest in a company's
success and products. This includes customers, employees, suppliers, investors and
the communities surrounding the business. It means maximizing the good and
minimizing the bad effects your company has on these stakeholders' diverse interests.
Categories
Aspects which are material to both the
company as well as the stakeholder groups
outside the company
Economic
Economic performance
Labour Practices and Decent
Work
Employment
Workforce-management relationship Diversity
and equal opportunities
Equal remuneration for women and men
Society
Anti-corruption Public policy
Anti-competitive behaviour
Compliance with laws and regulations
Product Responsibility
Product and service labelling
Marketing communication
Customer privacy
Compliance with laws and regulations
concerning the provision and use of products
and services
Corporate Governance Practices Code
Hong Kong: Code on Corporate Governance Practices
UK: The UK Corporate Governance Code