Chapter 3

Governance

Faculty of Economics and Business - Accounting Undergraduate Program

 LearningObjective
Learning ObjectiveI:I:
GovernancePrinciples
Governance Principles

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 Governance: Definition

Governance is the process conducted by board of directors

to authorize, direct, and oversee management toward the
achievement of the organizations objectives ( The IIA)

Corporate governance involves a set of relationships

between a companys management, its board, its
shareholders, and other stakeholders (OECD)

Faculty of Economics and Business - Accounting Undergraduate Program

Key Governance Elements
Internal control
Governance provides direction to
execute the day-to day activities of
Risk managing risks in an organizations
management business model

Risk Management is intended to: (1)

Governa identify and mitigate the risks that may
nce adversely affect the organizations
success and (2) exploit the
opportunities that enable success

Internal control: mechanism to

prevent inherent risk happened in daily
operation

Faculty of Economics and Business - Accounting Undergraduate Program

 Key components of governance oversight

Stakeholders BOD provides direction to

management, empowers them with
authority to take the necessary
actions and oversees the overall
result of operations
Governance Umbrella
Board of Directors (BOD) BOD must understand and
focus on the needs of key
stakeholders

Day to day, governance is

executed by management
Risk Assurance Internal and external
Management activities provide
Senior Management Internal External management and the
Activitie Activitie board with assurance
s s regarding the effectiveness
Risk Owner of governance activities
Faculty of Economics and Business - Accounting Undergraduate Program
 LearningObjective
Learning ObjectiveII:
II:
Roleof
Role ofthe
theInternal
InternalAudit
AuditFunction
Function
inthe
in theGovernance
GovernanceProcess
Process

Faculty of Economics and Business - Accounting Undergraduate Program

Key persons in Corporate Governance

Faculty of Economics and Business - Accounting Undergraduate Program

 BOD: Understanding

BOD
BODisisGoverning
Governingbody
bodyofofanincorporated
anincorporatedfirm.
firm.
Itsmember
Its memberareareelected
electednormally
normallybybythe
the
stockholdersofthe
stockholdersof thefirm
firm(generally
(generallyatatan
anannual
annual
generalmeeting
general meeting) )togovernthe
togovernthefirm
firmand
andlook
look
after the stockholders interest
after the stockholders interest

Faculty of Economics and Business - Accounting Undergraduate Program

Roles of BOD in Corporate Governance

Faculty of Economics and Business - Accounting Undergraduate Program

Common outcomes for BOD

Faculty of Economics and Business - Accounting Undergraduate Program

 Senior managements
Responsibilities
Ensuring that the full scope of direction and authority
Ensuring that the full scope of direction and authority
delegated is understood appropriately
delegated is understood appropriately
Identifying the processes and activities within organization
Identifying the processes and activities within organization
Evaluating what other business considerations or factors
Evaluating what other business considerations or factors
might create a justification for delegating a lower tolerance
might create a justification for delegating a lower tolerance
level to risk owners that that delegated by the board
level to risk owners that that delegated by the board
Ensuring that sufficient information is gathered from the risk
Ensuring that sufficient information is gathered from the risk
owners to support its reporting requirement to the board
owners to support its reporting requirement to the board

Faculty of Economics and Business - Accounting Undergraduate Program

 Responsibilities of Risk Owners

Risk owners are Individual who have day-to-day responsibility for ensuring
Risk owners are Individual who have day-to-day responsibility for ensuring
that risk management activities effectively manage risks within the
that risk management
organizations activities effectively manage risks within the
risk appetite
organizations risk appetite

Responsibilities of risk owners:

Responsibilities of risk owners:
Evaluating whether the risk management activities are designed adequately to manage
Evaluating whether the risk management activities are designed adequately to manage
the related risk within the tolerance levels
the related risk within the tolerance levels
Assessing the ongoing capabilities of the organization to execute the risks
Assessing the ongoing capabilities of the organization to execute the risks
Determining whether the risk management activities are currently operating as
Determining
designed whether the risk management activities are currently operating as
designed
Conducting day to day monitoring activities
Conducting day to day monitoring activities
Ensuring that the information needed by senior management and the board is accurate
Ensuring that available
the information needed by senior management and the board is accurate
and readily
and readily available

Faculty of Economics and Business - Accounting Undergraduate Program

 Role of Internal Audit in Governance
Activity

Promoting
Promotingappropriate
appropriateethics
ethicsand
andvalues
valueswithin
withinthe
the
organization
organization
Ensuring
Ensuringeffective
effectiveorganizational
organizationalperformance
performance
managementand
management andaccountability
accountability
Communicating
Communicatingriskriskand
andcontrol
controlinformation
information
Coordinating
Coordinatingthe
theactivities
activitiesofofand
andcommunicating
communicating
informationamong
information amongthe theboard
board

Faculty of Economics and Business - Accounting Undergraduate Program

 Responsibilities of Internal Audit in
Governance Activity

Evaluating adequacy various risk management activities

Testing various risk management activities
Determining whether the assertion made by the risk owner and
senior management to the board regarding the effectiveness of
the risk management activities provide the board with the
information it desires about the current state of risk
management effectiveness
Evaluating whether risk tolerance information is communicated
timely and effectively
Assessing whether there are any other risks area that are
currently not included
Faculty of Economics and Business - Accounting Undergraduate Program
 Commonly Identified Governance Principles
Ensure a properly organized and functioning board that has the correct
Ensure a properly organized and functioning board that has the correct
number of members, an appropriate board committee structure, established
number of members, an appropriate board committee structure, established
meeting protocols, sound, independent judgment about affairs of the
meeting protocols, sound, independent judgment about affairs of the
organization and periodically reaffirmed membership
organization and periodically reaffirmed membership
Ensure board member possess appropriate qualifications and experience,
Ensure board member possess appropriate qualifications and experience,
with a clear understanding of their role in the governance activities, a sound
with a clear understanding of their role in the governance activities, a sound
knowledge of the organizations operations and an independent/objective
knowledge of the organizations operations and an independent/objective
mindset
mindset
Ensure that the board has sufficient authority, funding and resources to
Ensure that the board has sufficient authority, funding and resources to
conduct independent inquiries
conduct independent inquiries
Maintain an understanding by executive management and the board of the
Maintain an understanding by executive management and the board of the
organizations operating structure, including structures that impede
organizations operating structure, including structures that impede
transparency
transparency
Articulate an organizational strategy against which the success of the overall
Articulate an organizational strategy against which the
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Economics and Businessof the overall
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enterprises and the contributions of the individuals are measured
 Commonly Identified Governance Principles
contd

Establishing a governing policy for the operation of key activities of the

Establishing a governing policy for the operation of key activities of the
organization
organization
Set and enforce clear lines of responsibility and accountability throughout
Set and enforce clear lines of responsibility and accountability throughout
the organization
the organization
Ensure effective interaction among the board, management, and internal
Ensure effective interaction among the board, management, and internal
auditors and any others assurance providers
auditors and any others assurance providers
Secure appropriate oversight by management, including establishment
Secure appropriate oversight by management, including establishment
and maintenance of a strong set of internal control
and maintenance of a strong set of internal control
Make sure that compensation policies and practices are consistent with the
Make sure that compensation policies and practices are consistent with the
organizations ethical values, objectives, strategy and control environment,
organizations ethical values, objectives, strategy and control environment,
and encourage appropriate behavior
and encourage appropriate behavior
Communicate and reinforce throughout the organization and ethical
Communicate and reinforce throughout the organization and ethical
Faculty of Economics and Business - Accounting Undergraduate Program
 Commonly Identified Governance Principles
contd
Effectively use internal auditors, ensuring the adequacy of their
Effectively use internal auditors, ensuring the adequacy of their
independence, resources, scope of activities and effectiveness of
independence, resources, scope of activities and effectiveness of
operations.
operations.
Clearly define and implement risk management policies, process, and
Clearly define and implement risk management policies, process, and
accountabilities at the board level and throughout the organization
accountabilities at the board level and throughout the organization
Effective use auditors, ensuring their independence, adequate resources,
Effective use auditors, ensuring their independence, adequate resources,
and scope of activities
and scope of activities
Provide appropriate disclosure of key information, in a transparent
Provide appropriate disclosure of key information, in a transparent
manner, to stockholders.
manner, to stockholders.
Provide disclosure of the organizations governance processes,
Provide disclosure of the organizations governance processes,
comparing those processes with recognized national codes or best
comparing those processes with recognized national codes or best
practices
practices
Ensure appropriate oversight of related-party transactions and conflict of
Ensure appropriate oversight of related-party transactions and conflict of
interest situations
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