Corporate Governance and Auditing – Their Importance to Enterprises

Corporate governance is a hot topic now, owing to many popular corporate failures. The downfall of giant corporations such Parmalat in Italy and Enron in USA have brought the importance of good corporate governance to the fore. This is also exemplified from the demand for corporate legal services related to corporate governance audits. While earlier, corporate governance was thought of as a system that makes sure that an enterprise’s manager does not exploit the business or the shareholder’s wealth for private gains, it now has a much broader meaning. Now, it is believed to be a system that makes sure that resources are utilized most effectively in order to benefit shareholders while meeting the expectations of society at the same time. Enterprise risk management, CSR and strategy audits for instance are important aspects of corporate governance. Audit reports on these aspects are of immense importance to investors and analysts and they base their perception of the enterprises accordingly. It is therefore essential to have strategic corporate governance audits in place if an enterprise wishes to survive the intricacies of the corporate world.Realizing this importance, many companies seek external help from corporate legal services to ensure they are on the right track.

Basics of Corporate Governance

Corporate governance is defined in many ways. According to the International Standard on Auditing (ISA) 260, it is defined as “communications of audit matters with those charged with governance”. It is the way in which an authority is practiced in a corporate establishment for maximizing the usefulness of corporate properties in order to hold the interest of shareholders and to justify the stated core values of the organization. Ask any corporate legal services provider and he’ll tell you that corporate governance is more about promoting fair and transparent administration of the corporation in order to meet its objectives and for achieving control with the aim of fulfilling strategic goals that not only satisfy financiers and investors, but also customers, owners, suppliers and the society. Impartiality is the key factor in any internal audit function. Corporate governance is the responsibility of a company’s board of directors, audit committee and other supervisory committees depending on the jurisdiction of the enterprise.

Corporate Governance is not 100% Fail Proof

It is impossible for any governance system, no matter how well monitored, designed and implemented it is, to fully prevent the exploitation of a company from the personal interests of some dishonest and greedy authorities. However, fraud can be prevented to a certain extent if strategic steps are taken to improve corporate governance. Corporate legal services usually come to the rescue in these matters.

Corporate Governance Theories

A large number of theories have been proposed for best practice in corporate governance. Of these, the stakeholder theory and the shareholder theory are the most popular. The shareholder theory was proposed by Milton Friedman. According to this theory, the sole responsibility of an enterprise is to increase its profits. This theory describes that the management is an agent of the shareholders and that its aim is to run the company for the benefit of these shareholders. Thus, the management is morally as well as legally responsible for serving the interests of the shareholders. While maintaining “conformity to the basic rules of the society, both those embodied in law and those embodied in ethical custom, the company needs to make as much money as possible. This theory however has its disadvantages. It pressurizes the management to focus on greater risk taking and short term strategy so they can increase returns to the shareholders. The downfall of Worldcomm and Enron are examples of how focusing on the interests of shareholders alone can bring about the downfall of thriving companies. Managers of these two companies manipulated company accounts to show increased returns to shareholders due to the pressure of keeping shareholders satisfied.

According to the stakeholder theory proposed by Edward Freeman, a business owes responsibility to stakeholders as well, not just the shareholders. A stakeholder could be any person or a group who will be affected by the actions of the business. These include customers, employees, suppliers, the community and the competitors as well. This theory is an important element of the concept of CSR (Corporate Social Responsibility). In light of this theory, companies have to take not only the legal and economic aspects of their business but also the philanthropic and ethical aspects into consideration. On the flipside however, some companies exploit their CSR as PR strategies.

Auditors and Key Players in Corporate Governance

An auditor’s role is to check and make sure the financial information given by companies to investors is correct and reliable. He does not have direct responsibility of corporate governance but rather monitors the information aspects of the corporate governance system. Auditors could be external and internal. A cost audit is performed to obtain credible data on cost and revenue on which decisions can be based.

Corporate legal services can offer valuable inputs to companies on how they can manage their audit functions and also perform them. Cost audits are a source of important analytical information that can be used by the board of directors to oversee the affairs of the company. Auditors are required to provide their expert opinion on financial statements and all other materials related to the financial position, cash flow and operations of a company. They need to examine financial statements and other company records using auditing tools.The key players in corporate governance of a company include the auditing groups, the management, secretaries, the management team and other such parties. The responsibility of the board of directors is however in a much broader sense than the auditor. It has to focus on protecting the rights of key stakeholders including the shareholders, customers, employees, suppliers and the society. It sets up the strategic aims of the company, leads and supervises its management. Corporate legal services help companies with relevant documents pertaining to these factors.

Audit Responsibilities

In light of popular corporate governance failures, there have been many proposals regarding the powers and responsibilities of audit committees. The primary role of these committees is to ensure smooth functioning of the directors who are within their mandate and to check the data in financial records thoroughly. They need to be able to explain the personnel structure used for investigating the authenticity of the company operations. Various strategy tools are used for internal and external auditing. These include Environment Scanning – PEST, TOWS, experience curve, competitive analysis etc. for external audit and SWOT, value chain analysis, strategic risk analysis, performance analysis, financial models and portfolio models for internal audits.

Failure of accounting and corporate governance results in immense costs for companies. The companies and their auditors have to face widespread skepticism from stakeholders and the community; they have to face litigations, etc. Such failures often lead to the downfall of once thriving companies. Companies therefore need to make sure their corporate governance audit systems are correctly in place. They can also go the extra mile and seek corporate legal services or advisory services if need be.

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