CHAPTER 3

CHAPTER 3

GOVERNANCELEARNING OBJECTIVES:1. The organization business model composing key governance elements 2. The roles of the internal audit function in the governance process3. In governance what are key responsibilities of a. Board of Directors

b. Senior Management

c. Risk owners

4. Describe the changes in regulations and how governance has evolved into its present status.

PRELUDE TO TOPIC: Organization must see to it that effective governance structures and risk management approaches are working and implemented. Governance structure is essential because it provides direction the day-to-day activities of persons managing the company The activities of persons managing the company must be monitored to ensure success.

Organizational structure will vary from one organization to others, but it is very essential that the organization operates within the bound of laws and regulations

These laws and regulations are typically promulgated to protect the public interests and its key stakeholders. WHAT IS STAKEHOLDERS AND WHO ARE THE STAKEHOLDERS OF AN ORGANIZATION?

A person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies. Key stakeholders in a business organization include creditors, customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources.WHAT IS GOVERNANCE?

The process conducted by the BOD to authorize, direct, and oversee management toward the achievement of the companys objectives.

Corporate Governance is basically the process how management operates from top-down perspective It involves a set of relationship between companys management, its Board, its shareholders and other stakeholders.

Day-to-day operation is executed by the management, which includes the senior executives and line managers

The Board is the ultimate responsible of the corporate governance. They are the governing body, such as BOD, Board of Trustees ( for non profit organizations ) Board Head, or any designated body of the organization Shareholders are not directly involved in the operation but they have a strong interest in the organizations success. They are the investors who have right to elect to serve as directors on the board. Since they can influence the Board, shareholders are most important and powerful stakeholders.

OTHER STAKEHOLDERS: Some are directly involve in the operations and some are indirectly involve like Employees, Customers, Vendors, Regulatory Bodies, Financial Institutions, and Competitors.WHAT ARE THE EXPECTION S OF STAKEHOLDERS TO THE BOARD?

Since the Board is the ultimate responsible for the corporate governance, he is expected to protect the interests of the stakeholders, especially the investors. The Board must determine the acceptable outcomes and turn the unacceptable outcomes to tolerance level in order not to block the achievement of business objectives. Thus the board must articulate its direction, advice on the creation of business objectives, establish boundaries of business conduct, and empower management to carry out its direction.

HOW THE BOARD EXECUTE ITS GOVERNANCE RESPONSIBILITIES?

1. By establishing a governance committee The committee could be new or expansion

Creation of Governance Committee makes the tasks more specific to its members and its line of authority, the power to direct and decide, is precise. In case of any failures from expectations, the members of the governance committee are directly responsible to explain and accountable to the stakeholders.

2. Articulating requirements for reporting to the Board

There should be at least quarterly meeting in order to report what transpire for the outcome and which outcomes need to decide more.

As part of their oversight role, they should require the management team to likewise report to them actions that need to be taken in implementation of the boards directives to them.

3. Re-evaluate governance expectations periodically , preferably annually

The expectations of stakeholders may evolve and change, thus the board must identify those changes and re-evaluate its governance direction.

SENIOR MANAGEMENT AND ITS KEY RESPONSIBILITIES who executes the day-to-day activities that help ensure that effective governance is achieved

Ensures that the full scope of direction and authority delegated is understood appropriately.

He must understand the Boards governance expectations, the amount of authority delegated to them.

Identify their activities, like risk management, towards attainment of organizations objectives. Ensures to maintain Internal Control and these internal controls must be effectively implemented to minimize damage or risks associated for its lapses.

RISK OWNERS AND HIS KEY RESPONSIBLITIES RISK OWNERS are individuals who manage the day-today risks related activities of the organization These risk owners are responsible for identifying, measuring, managing, monitoring, and reporting on risks to the members of senior management to whom they report.

RISK OWNERS is working under the umbrella of senior managers to carry out the risk management activities

Risk owners evaluate the adequacy of risk management activities. Is it adequate or need to revise or improve it?

They assess if the risk management activities are working as designed, and assess the maturity of the procedural approach

They conduct day-to-day monitoring activities to identify, in timely manner, whether anomalies or defiance from control have occurred. They ensure that the information needed by the senior management and Board is accurate and readily available.

WHAT ROLE DOES THE INTERNAL AUDIT FUNCTION PLAY IN THE GOVERNANCE?

Doing an independent assurance services

Assurance service is an objective examination of evidence for the purpose of providing an independent assessment on governance, risk management, and control processes for the organization.

Internal Auditors must assess and make appropriate recommendations for improving the governance process

The Internal Audit ensures effective organizational performance management and accountability

The Internal Audit promotes appropriate ethics and values within the organization

The Internal Audit communicates risk and control information to appropriate areas of the organization

The internal auditor should assess the condition of internal control that the risks are managed and leader of the organization are working within the bound of laws and procedures.

GLOSSARY:

1. GOVERNANCE

The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives.

2. BOARD

An organizations governing body, such as board of directors, supervisory board, head of an agency or legislative body, board of governors, etc.

3. STRATEGY

Refers to how management plans to achieve the organizations objectives

4. STAKEHOLDERS

A person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies.5. RISK MANAGEMENT

How to deal with uncertainties that could affect the attainment of objectives

6. RISK APPETITE

The amount of risk, on a broad level, an organizations willing to accept in pursuit of its business objectives.7. RISK TOLERANCE The acceptable levels of risk size and variation relative to the achievement of objectives, which must align with the organizations risk appetite.

8. RISK Possibility that an event will occur and adversely affect the achievement of objectives

9. RISK OWNER

Individuals who have day-today responsibility for ensuring that risk management activities effectively manage risk within the organizations risk appetite.10. ASSURANCE SERVICES

An objective examination of evidence for the purpose of providing an independent assessment on governance, risk management, and control processes for the organization.

11. CONSULTING SERVICES

Advisory and related services, the nature and scope of which are agreed to with the customer, and which are intended to improve an organizations governance, risk management, and control processes without the internal auditor assuming management responsibility.

12. INDEPENDENT OUTSIDE AUDITOR

Registered Public Accounting Firm, hired by the organization to perform a FS audit providing assurance and issues opinion whether the Financial Statements are fairly presented in accordance with GAAP.

13. SECURITIES ACT OF 1933

This is enacted after the US market crash of 1929 in order to bring back stability and investor confidence in the securities market. Its two goals are to ensure grater transparency in financial statements so investor can make informed decisions about securities being offered for public sale; and to establish laws against deceit, misrepresentation, and other fraudulent activities in the sale of securities in the public market.14. SECURITIES EXCHANGE ACT OF 1934

This was created to provide governance of securities transactions on the secondary market ( after issue ) and regulate the different exchanges and the broker-dealer to protect the investing public.

15. FOREIGN CORRUPT PRACTICES ACT

This criminalizes transnational bribery and requires companies to implement internal control programs. This broadens the focus on internal control to provide reasonable assurance that transactions are appropriately authorized and accurately recorded.16. U.S. SARBANES-OXLEY ACT OF 2002

This creates more accountability over the integrity of financial reporting by chief executive and chief financial officers, and restoring investor confidence in the capital market.