2. Corporate Governance Pertemuan 06 Matakuliah: F0122 – Seminar Akuntansi Tahun: 2009

3. Corporate Governance Accounting Seminar Week 6 Prepared by: Gatot Soepriyanto, SE., Ak., M.Buss (Acc)

4. The Corporate Governance Environment Corporate governance practices signal the potential for earnings management—permissive structures indicate that manipulation is more likely The board of directors sets overall policy & provided oversight for operating activities Historically, boards were composed mainly of owners, managers & other insiders It is now clear that a majority of independent board member is essential for effective oversight

5. Analyzing Corporate Governance Analysis of corporate governance is a qualitative analysis, based on structures & policies of the board The primary source of information is the Proxy statement, usually issued after the annual report (& associated with the upcoming annual stockholders’ meeting)

6. Areas of Corporate Governance Analysis The CEO & board of directors—composition, independence & policies Executive compensation—what forms, how much, relation to performance Auditing—the role of the audit committee, the external auditor, non-audit fees Related-party transaction—potential conflicts of interest Insider trading—patterns that suggest abuse Investment banking relationships Evidence of past abuse such as earnings restatements

7. Concerns with the Board of Directors Is the CEO also the chairman of the board? Evidence of CEO oversight abuse Are a majority of board members independent? What are the board committees & is there evidence that they’re active & effective Evaluate board compensation—is it based on performance & active participation

8. Concerns with Executive Compensation Evaluate the compensation committee for independence & competence Analyze the executive compensation (especially the CEO) by component: base pay, bonuses, stock options (& other forms of ownership- related compensation) & perks Is compensation based on performance? Evaluate based on earnings & stock price performance Particular concerns are for over-compensation of CEO for poor performance & impact of previous accounting-related abuses

9. Concerns with Auditing Evaluate the audit committee for independence, competence with financial information, how many times the committee meets & other evidence of diligence Review audit procurement practices, including the external auditor (usually a Big 4 firm), non-audit fees, the audit opinion & timeliness of reports

10. Other Concerns Are there related-party transactions? If so, do they signal potential manipulation or a permissive environment? Evaluate insider trading (buying & selling of corporate stock by senior executives)—are there patterns that suggest abuse? Do investment banking relations exist that suggest potential abuse? Is there evidence of past accounting abuse (e.g., earnings restatements) or on-going problems (such as SEC investigations)

11. Assignments Discuss and present the following paper: Earnings Management and Corporate Governance in Asia’s Emerging Markets –ByChung-Hua Shen and Hsiang-Lin Chih (Corporate Governance: An International Review, 2007 - papers.ssrn.com)