Auditing & Investigations I Corporate Governance

Key issues Corporate Governance – What is it?. Codes of Corporate Governance Audit Committees. Internal Controls Effectiveness Communication with those charges with corporate governance

1. Corporate Governance – What is it: Corporate governance is defined as the system by which companies are directed and controlled. Good corporate governance is important because the owners of a company and the people who manage the company are not always the same. Corporate governance is important because it ensures that stakeholders with a relevant interest in the company's business are fully taken into account.

2. Codes of Corporate Governance 2.1. National Code on Corporate Governance in Zimbabwe (ZIMCODE) Principles and learning based approach Carries similar provision like King III Developed by ZIMlef, IODZ and SAZ Focuses on Board structure, Committee, Information disclosure, Risk Management Etc.

2.Code of Corporate Governance 2.2. OECD Principles of Corporate Governance set out the rights of shareholders, the importance of disclosure and transparency and the responsibilities of the board of directors. transparent and efficient markets, protection and facilitate the exercise of shareholders‘ rights. the equitable treatment of all shareholders, including minority and foreign shareholders.

…Continued the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders. timely and accurate disclosure is made on all material matters. strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company.

2.3. Code of Corporate Governance 2.3. UK Code of Corporate Governance Key Principles Leadership – Effective Board Effectiveness – Balance of skills and committees Accountability – Transparent arrangements Remuneration – Appropriate level of remuneration to attract skills. Relations with shareholders – dialogue with shareholders on shared objectives

3. Audit Committees An audit committee can help a company maintain objectivity with regard to financial reporting and the audit of financial statements. An audit committee is a sub-committee of the board of directors, usually containing a number of nonexecutive directors. The role and function of the audit committee should be set out in written terms of reference and the extract from the Corporate Governance Code. Relationship with the board varies from organisation to organisation.

3.1. Audit Committees - Advantages Improve the quality of financial reporting, by reviewing the financial statements on behalf of the board Create a climate of discipline and control which will reduce the opportunity for fraud Enable the non-executive directors to contribute an independent judgement and play a positive role Help the finance director, by providing a forum in which they can raise issues of concern and which they can use to get things done which might otherwise be difficult

3. 1. Audit Committees – Advantages (Cont.) Strengthen the position of the external auditor by providing a channel of communication and forum for issues of concern Provide a framework within which the external auditor can assert their independence in the event of a dispute with management Strengthen the position of the internal audit function, by providing a greater degree of independence from management

3.2. Audit Committee - Challenges The executive directors may not understand the purpose of an audit committee and may perceive that it detracts from their authority. There may be difficulty selecting sufficient non-executive directors with the necessary competence in auditing matters for the committee to be really effective. The establishment of such a formalised reporting procedure may dissuade the auditors from raising matters of judgement and limit them to reporting only on matters of fact. Costs may be increased.

4. Internal Control Effectiveness The directors of a company are responsible for ensuring that a company's risk management and internal controls systems are effective. Internal controls contribute to: Safeguarding the company's assets Helping to prevent and detect fraud Safeguarding the shareholders' investment The auditors should review the statements made concerning internal control in the annual report to ensure that they appear true and are not in conflict with the audited financial statements.

5. Communication with those charges with corporate governance Auditors shall communicate specific matters to those charged with governance and ISA 260 provides guidance for auditors in this area. ISA 260 Communication with those charged with governance sets out guidance for auditors on the communication of audit matters arising from the audit of the financial statements of an entity with those charged with governance.

5. Definitions Those charged with governance‘ - 'the person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity'. 'Management' is defined by ISA 260 as 'the person(s) with executive responsibility for the conduct of the entity's operations'.

5. Matters to be communicated The auditor's responsibilities in relation to the financial statement audit Planned scope and timing of the audit Significant findings from the audit Auditor independence

6. Tutorial Questions Does corporate governance of a client company matter to the auditors? At what stage should the auditor consider corporate governance in the audit process? Is there as link between corporate governance and auditing?

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