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DIWA, WENCHIE R.

2012300542

DIWA, WENCHIE R. 2012300542 FINAL EXAM AUDITING THEORY Submmitted to: Prof. Jephte O. Munez, CPA 1
DIWA, WENCHIE R. 2012300542 FINAL EXAM AUDITING THEORY Submmitted to: Prof. Jephte O. Munez, CPA 1

FINAL EXAM AUDITING THEORY

Submmitted to:

Prof. Jephte O. Munez, CPA

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

CORPORATE GOVERNANCE

DMCI Holdings, Inc. (the “Corporation”) is committed in doing business in accordance with the highest professional standards, business conduct and ethics and all applicable laws, rules, and regulations in the Philippines. The Company, its directors, officers, and employees are devoted to promote and adhere to the principles of good corporate governance by observing and maintaining its core business principles of accountability, integrity, fairness, and transparency.

DEVELOPS AND EXECUTES A SOUND BUSINESS STRATEGY

The DMCI Holdings, Inc. have a clearly defined vision, mission and core values. They have a well developed business strategy and have a strategy execution process that facilitates effective performance management, and is attuned to the company's business environment, management style and culture. They have its board continually engaged in discussions of strategic business issues.

THE BOARD

The Board of Directors (the “Board”) is responsible to promote the long-term success of the Corporation and to secure its sustained competitiveness consistent with its fiduciary responsibility, in which it should exercise the best interest of the Corporation, its shareholders and other stakeholders. The Board guarantees that the company is properly and effectively managed and controlled. The Board should conduct itself with honesty and integrity in the discharge of its duties, functions and responsibilities. The Board’s main thrust is to institutionalize corporate governance principles and best practices by transparency, accountability, professionalism, diligence, and fairness. The Board is also expected to preserve and enhance shareholder value. The roles of the Chairman and Chief Executive Officers is to ensure independence and accountability.

The DMCI Holdings, Inc. have a board composed of directors of proven competence and integrity. It is lead by a chairman who shall ensure that the board functions in an effective and collegial manner. They have in place written manuals, guidelines and issuances that outline procedures and processes. According to the guideline, it should have at least three (3) or thirty percent (30%) of its directors, whichever is higher, as independent directors. However, DMCI Holdings, Inc. (the “Corporation”) currently has 9-seat Board with two (2) independent directors. The number of independent directors is in accordance with the requirements of the Securities

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

Regulation Code and in compliance with the Corporation’s Manual on Corporate Governance, the Implementing Rules of the Securities Regulation Code, and SEC.

BOARD PERFORMANCE

Regular quarterly board meetings are scheduled after the end of each quarter, while special board meetings are scheduled in between regular meetings as the need arises. In 2012, the Board had eighteen (18) meetings. While in 2013, the Board had seventeen (17) meetings . As per records of the minutes of the meetings of the Board, no Director has absented himself for more than fifty percent (50%) from all meetings of the Board, during his incumbency or twelve (12) month period during said incumbency.

BOARD COMMITTEES

The Board established three (3) Committees to improve the implementation of corporate governance best practices. The Committees are tasked to adopt a system of internal checks and balances. Each Committee has responsibilities to oversee the Board performance and proper discharge of independent views over meetings.

NOMINATION AND ELECTION COMMITTEE

The Nomination and Election Committee (NEC) is composed of four members, one of whom is an Independent Director. The NEC’s main role is to pre-screen and shortlist all candidates nominated to become a member of the Board of Directors in accordance with the qualifications and disqualifications set in the Corporation’s Manual on Corporate Governance and in the Amended By-Laws. The NEC Chairman has consistently attended the Annual Stockholders’ Meeting in the past three (3) years to give shareholders an opportunity to address the Committee. The NEC has plans of formulating Executive Succession Plan Policy and a Board evaluation performance.

COMPENSATION AND REMUNERATION COMMITTEE

The Compensation and Remuneration Committee (CRC) is composed of three (3) members, one of whom is an Independent Director and two (2) of whom are Non-executive

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

Directors. The CRC’s main thrust is to establish a formal and transparent procedure on directors’ and executive officers’ remuneration and provide oversight over remuneration of senior management and other key personnel ensuring that compensation is consistent with the Corporation’s culture, strategy and control environment. The Chairman of the CRC has consistently attended the Annual Stockholders’ Meeting in the past three (3) years. The CRC has plans of developing remuneration policy for its directors and executive officers.

AUDIT COMMITTEE

The Audit Committee (AC) is composed of at least three (3) members, two (2) of whom must be Independent Director and one (1) of whom shall be its head or Chairman. Each member should have enough understanding about company's financial management systems and environment. The Audit Committee works closely with the external and internal auditors to check all financial reports against compliance with both internal and external management handbook and accounting standards. The Audit Committee meetings are scheduled at appropriate time to address matters on financial disclosures, audit reports and accounting and auditing processes. The Chairman of the Audit Committee has consistently attended the Annual Stockholders’ Meeting for the past three (3) years.

The Audit Committee will make recommendations to the Board of Directors regarding items relating to financial and regulatory reporting and the system of internal controls following the execution of the Committee's responsibilities as described herein. The Audit Committee review and discuss with management and the external auditor the annual audited financial statements, including discussion of material transactions with related parties, accounting policies, as well as the external auditor's written communications to the Committee and to management. They also report on and recommend to the Board of Directors the annual financial statements and the external auditor's report on those financial statements, prior to Board approval and dissemination of financial statements to shareholders and the public, ensuring the integrity of disclosure controls and internal controls over financial reporting.

ENTERPRISE RISK MANAGEMENT

The Corporation has engaged the services of Sycip, Gorres, Velayo & Co. (SGV) to establish the Enterprise Risk Management process that is designed to assist the Corporation and its subsidiaries to focus on and manage its key risks. They will be also tasked to enhance the Corporation’s ability as an organization to successfully implement an established risk

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

management process, by transferring knowledge through orientation, training, and coordination with SGV. However, the company did not disclose sufficient information about its risk management procedures and processes as well as the key risks the company is currently facing including how these are being managed because the company is currently undertaking the ERM Program Approach which comprises of modules of activities.

The Company has policies on financial risks as stated in its Annual Report (SEC Form 17-A). The main risks arising from the use of financial instruments are equity price risk, market price risk, foreign currency risk, credit risk, liquidity risk and interest rate risk. The Group’s Board of Directors had reviewed and approved the policies for managing each of these risks They have its board oversee the company's risk management function and have a formal risk management policy that guides the company's risk management and compliance processes and procedures.

INTERNAL AUDIT AND CONTROL

The Company has in place an independent Internal Audit function which shall be performed by an Internal Auditor or a group of Internal Auditors, through which its Board, senior management, and stockholders shall be provided with reasonable assurance that its key organizational and procedural controls remain effective and appropriate, and are complied with. The Company’s Audit Committee performs oversight function to its internal audit. The internal controls are reviewed on quarterly basis and annual audit under the supervision of the Audit Committee for the directors’ criteria for assessing the effectiveness of the internal control system.

The Internal Auditor formulates the rules and procedures on financial reporting and internal control. It has direct and unfettered access to the board of directors and the audit committee.

The DMCI Holdings, Inc. established the internal audit function as a separate unit in the company which would be overseen at the Board level and have a comprehensive enterprise-wide compliance program that is annually reviewed. It institutionalize quality service programs for the internal audit function. Also, they have in place a mechanism that allows employees, suppliers and other stakeholders to raise valid issues. They have the Chief Executive Officer and Chief Audit Executive who will attest in writing, at least annually, that a sound internal audit, control and compliance system is in place and working effectively.

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

DOES NOT ENGAGE IN ABUSIVE RELATED-PARTY TRANSACTIONS AND INSIDER TRADING

The company have developed and disclosed a policy governing the company’s transactions with related parties. They clearly define the thresholds for disclosure and approval for RPTs and categorize such transactions according to those that are considered de minimis or transactions that need not be reported or announced, those that need to be disclosed, and those that need prior shareholder approval. The aggregate amount of RPT within any twelve (12) month period should be considered for purposes of applying the thresholds for disclosure and approval. There is a voting system whereby a majority of non-related party shareholders approve specific types of related party transactions in shareholders meetings. The company also have a clear policy in dealing with material non-public information by company insiders and there is a practice of full and timely disclosure to shareholders of all material transactions with affiliates of the controlling shareholders, directors or management.

CODE OF BUSINESS CONDUCT AND ETHICS

The Corporation has established and adopted its Code of Business Conduct and Ethics to ensure full compliance of directors, officers, and employees with the Corporation’s Manual on Corporate Governance and to guide individual behaviour and decision making, clarify responsibilities, and inform other stakeholders on the conduct expected from company personnel. This Code of Business Conduct and Ethics sets forth the Company’s business principles and values which shall guide and govern all business relationships of the Company, its directors, officers and employees in carrying out their duties and responsibilities effectively.

Also, the company does not seek exemption from the application of a law, rule or regulation especially when it refers to a corporate governance issue. Should it do so, it has to disclose the reason for such action as well present the specific steps being taken to finally comply with the applicable law, rule or regulation. They have clear and stringent policies and procedures on curbing and penalizing company or employee involvement in offering, paying and receiving bribes, and they also respect intellectual property rights.

ROLE OF STAKEHOLDERS

The Company conducts business in accordance with the law, the charter of the Company, and a high standard of commercial morality. The company have a separate corporate responsibility (CR) report/section or sustainability report/section. It features the CSR projects and programs of its subsidiaries as a major section in the Company’s annual report.

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

The policies on health, safety and welfare of employees are on per subsidiary basis. The parent company and its subsidiaries provide health and life insurance benefits to its employees. The subsidiaries have been ISO certified on their respective areas of concerns specifically on health and safety. The DCMI Holdings, Inc. established and disclosed a clear policy statement that articulates the company’s recognition and protection of the rights and interests of key stakeholders specifically its employees, suppliers & customers, creditors, as well the community, environment and other key stakeholder groups.

There is no formal policy of training of employees. If necessary, funds shall be allocated by the Treasurer or its equivalent officer for the purpose of conducting an orientation program or workshop. In the Annual Corporate Governance Report in 2012, there had been nine (9) trainings/seminars attended by key officers and employees while in 2013, there had been thirteen (13) trainings/seminars. The Company has also in-house training through DM Consunji Technical Training Center which provides quality training exclusive to the DMC Group of Companies such as Leadership, Supervisory Development, Problem Solving and Decision Making and Foremanship Training among others.

Also, the Company has a Multi-Employer Retirement Trust Fund which provides retirement, death, disability and severance benefits to all eligible employees of the Company and its subsidiaries. The company’s procedures for handling complaints by employees concerning illegal (including corruption) and unethical behaviour are based on subsidiary level. Such cases on illegal and misbehaviour are being handled by their respective Human Resources and Legal counsel teams. They have in place a merit-based performance incentive mechanism such as an employee stock option plan (ESOP) or any such scheme that awards and incentivizes employees, at the same time aligns their interests with those of the shareholders.

TRANSPARENCY AND DISCLOSURES

The Corporation has consistently been informing the investing public of its material information through structured and unstructured timely disclosures to the Philippine Stock Exchange and the Securities and Exchange Commission. They have disclosed the existence, justification, and details on shareholders agreements, voting trust agreements, confidentiality agreements, and such other agreements that may impact on the control, ownership, and strategic direction of the company. The Corporation, through its investor relations group, is constantly in communication with shareholders and investors in an appropriate time. The Group engages in conference calls, or meets with institutional and prospective investors, and analysts.

Transactions entered into by the Group with related parties are at arm’s length basis and have terms similar to the transactions entered into by the company with third parties. The

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Final Project in Auditing Theory

DIWA, WENCHIE R.

2012300542

Company formulated policies and procedures that would ensure the integrity and transparency of related party transactions between and among the corporation and its parent company, joint ventures, subsidiaries, associates, affiliates, major stockholders, officers and directors, including their spouses, children and dependent siblings and parents, and of interlocking director relationships by members of the Board.

RIGHTS OF STOCKHOLDERS

In accordance with the SRC Rules, at least fifteen (15) business days the information statements should be distributed to the stockholders. During the year 2012, the Company sent before the Annual Meeting the Notice of Meeting and Information Statements eighteen (18) business days before the stockholders' meeting date of July 25, 2012; and July 31, 2013 in the year 2013.

The company also allows shareholders to call a special shareholders meeting, submit a proposal for consideration at the ASM (Annual Stockholders Meeting) or the special meeting, and ensure the attendance of the external auditor and other relevant individuals to answer shareholder questions in such meetings. They ensure that all relevant questions during the ASM are answered. In the last ASM, the Vice-Chairman of the Board opened the floor for any questions that the stockholders may have in relation to the President’s Report. Several stockholders congratulated Mr. Consunji on the impressive performance of the Company for 2011 and 2012. Thereafter, there being no other questions from the floor, upon motion made and duly seconded, the President’s report was approved by the majority of the outstanding capital stock.

The Board of Directors appointed the External Legal Counsel and Transfer Agent to be Committee of Inspectors to validate votes during Annual Stockholders Meeting. The company’s common shares adopts the principle of "one share, one vote" policy. They ensure that all shareholders of the same class are treated equally with respect to voting rights, subscription rights and transfer rights and have an effective, secure and efficient voting system. They have effective shareholder voting mechanisms such as supermajority or “majority of minority” requirements to protect minority shareholders against actions of controlling shareholders.

According to the guideline, the company should have at least thirty percent (30%) public float to increase liquidity in the market. But the Company's public float as of December 31, 2013 is 27.80%. This, however, is compliant with the PSE's Rule on Minimum Public Ownership of no less than 10%. Also, the company does not have a dividend policy. But the Company is committed to its shareholders by declaring cash dividends based on its retained earnings, cash flow, CAPEX projections and good market conditions.

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Final Project in Auditing Theory