Lectures 13 14 CSR and Auditing

8/7/2019 Lectures 13 14 CSR and Auditing

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Corporate SocialResponsibility and

Auditing

1Dr Simona Scarparo

I SWEARThat to the best of my

knowledge(which ispretty poor and maybe

revised in the future), mycompany's accounts are

(more or less)accurate.I have checked this withmy auditors who(I pay

to)agree with me


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` The need for corporate governance (CG)

` Nature of CG and causes for current discussions

` CG in different countries

` CG structures

` CG codes

` Evaluate the role of the auditor in corporate governance

` The role and function of audits

` Audit theories, concepts and market trends

Dr Simona Scarparo 2


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Since the collapse of Enron at the end of last year, it hasbeen almost impossible to open the business pages of anewspaper without finding reference to corporategovernance.

An extract from the ICAEWs president, Peter Wyman Speech on Corporate

Governance at the ICAI/ICAEW Joint Conference - September 2002.



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Fraud

Creative accounting

Earnings management

BCCI


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Management

(Agents)

Ownership

(Principals)

Ownership &

Management


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` Arises when shares are widely held, and the

management of the company is delegated to

directors who are not major shareholders ofthe company.

` With the separation of ownership from

management, minimising agency problems.


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` Is concerned with holding the balance between economic andsocial goals and between individual and communal goals. Thecorporate governance framework is there to encourage theefficient use of resources [by director ] and equally to requireaccountability for the stewardship of those resources. The aimis to align as nearly as possible the interests of individuals,corporations and society" (Sir Adrian Cadbury in Global Corporate Governance Forum, World Bank, 2000)

` The system by which businesses are run. This includes thedirector's duty to ensure that the business is properly andhonestly managed (NAO, 2002)

` The branch of management, which deals with the relationshipsamong a companys top management, board of directors andshareholders. (Google).


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Bankruptcies, fraud

& mismanagement.

Increasing influenceof public, customersand media

Globalisation of

capital markets

Developments in IT

Enron, Barings, BCCI,

Maxwell, Worldcom,

Comroad

Royal shell: sink an

outdated oil platform at

sea or dismantle it?

IFRS by 2005 inEurope

Disclosure: New XBRL

for business reporting


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Market oriented(Anglo-Saxon)

` Confrontation` Shareholders:

Great spread

` Shareholder

relations

` One-tier boards

Network oriented(Continental)

` Consensus` Shareholders

Less spread

` Stakeholder approach

` Two-tier boards


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` The development of CG is correlated to:1. The ratio of the value of listed companies to the

countrys GDP

Value of listed companies to the country's GDPs

1993 1996

France 38% 38 %

Germany 25 % 28 %

Italy 15 % 21 %Norway 28 % 36 %

Spain 26 % 33 %

UK 132 % 142 %


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2. How widely the shares of listed

companied are held

3. The level of gearing (shareholders vs

financial institutions)4. Cultural considerations (e.g. former

colonies)

5. The different levels of management inthe organisation structures of

companies


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Aus. Can. H.K. India Mal. OECD Sing. UK USA

Discl of complia. Yes Yes Yes Yes Yes Yes Yes Yes N/c

Board resp. to SH SH N/c N/c SH N/C SH SH SH

Separation of

chairman&CEO

Yes Yes N/c N/c Yes Encgd. N/c Yes N.F.R

Non-exec

directors

Maj Maj N/c Maj Min 1/3 Maj N/c Yes Maj

Audit committee Y all

NED

Y all

NED

Y maj

NEDY all

NED

Y maj

NED

Y maj

NED

Y maj

NEDY maj

NED

Y onl

NED

Gov. committee N/c Yes N/c N/c N/c N/c Yes N/c Yes


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` The previous table

hig

hlig

hts recommendations(biased?)

` Currently the London Stock ExchangesCombined Code includes the followingrequirements: The chairman of the board should be a different

person to the Chief Executive. At least one third of the directors on the company

board should be independent non-executive directors.


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Cadbury chose to make the non-executive directorscontrol three important committees, the remunerationto the directors, the appointment of directors and mostimportant, the audit committee.

Service contracts should be no longer than a year inlength.

The board should produce a clear policy on executivepay.

Disclosure of directors remuneration (Gent andVodafone 2000)


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The role of the dit co ittee

To onitor the integrity of the fin nci l

t te ent .

To review the co p nys intern l controls.

To ke reco endations concerning the appoint ent and

re oval of the external auditor.

To establish policies concerning the supply of non-audit

servicesby the external auditor.

To review the independence, objectivityandeffectiveness of the external auditor.

The UK Code of Corporate Governance sets out the role of the audit

committee as:


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Audit co ittee

Accounting policiesadopted

Change to accounting policies

Esti atesandjudge ents ade in keyareas

Anyunusual trends

Anyunusual ite s

When reviewing the financial statements the following should be

considered:


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` Certain identifiable activities in human

behaviour trigger doubts and uncertainties in

the minds of individuals affected by them e.g.:x medical 2nd opinions are always sough

x a manuscript review is provided for publishers looking for

an expert basis to either reject or accept a publication.

x Property surveys..

` Reduce or remove doubts held by interested

parties, especially shareholders.


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1. Conceptsand PostulatesApproach (Mautz andSharaf, Flint, Lee). The postulates and concepts areideas to guide the performance of the audit functionrather than a theory for its existence (JUSTIFYING,

BEHAVIOURAL, FUNCTIONAL)2. Market-based Approaches: Information economicsand cost-benefit analysis From the principal point of view:monitoring in a cost effective way, insurance. Also agents(as distinct from principals) can drive the demand for

audits.3. Alternative Perspectives: Moving audit research out

of the laboratory. Exploring rather than presumingauditor expertise


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There are different types of audit: based onaudit objectives

1. There is a subject matter (e.g. financialrepresentation of a business) whosecondition is in doubt, relating to:1. Contents of financial statement2. The various accounting processes by which (1) was

produced/reflected

2. Auditing has to do with enhancing thequality of information as a basis for controldecisions; elements for a control system

include:x Objectivex Model of Organisational (Operating) systemx Monitoring mechanismx Intervening mechanism


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Entity

Environment

Interest Groups/Participants


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` The choice of boundaries: defines the control system the audit iscontributing to; i.e. who the audit is for.

helps determine the scope and objectives ofaudit;Entity alone: Internal AuditEntity + suppliers of capital: Financial AuditEntity + several interest groups: Operational & Social Audit

`Accountability: Auditors act in the interestof shareholders, whilst having regards tothe wider public interest.

x Involves: responsibility and explanationx Arises: Action is "on behalf of" agencyx Requires: information to be relevant & credible


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Internal audit

Usually involves a review of:

Accounting syste s to see whether they provide reliable

infor ation.

Internal control syste s to see whether theysafeguard the

co panysassetsandhelp prevent errorsand fraud.

Internal operationsand processes to see whether theyare

efficient and provide value for oney.


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An auditis the work performed by auditors so theycan provide an informed professional independentopinion on whether financial statements portray atrue and fair view, and that is all.

` This opinion is based on accounting practices,principles and norms. These are captured in

accounting standards.`Financial statements that comply with accountingstandards give a true and fair view.

`

Deviations from accounting standards result infinancial statements that do not provide a true andfair view.



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the independent examination of, and expression ofopinion on, the financial statements of an enterprise byan appointed auditor in pursuance of that appointment

and in compliance with

any statutory obligation(ICAEW)

an examination of the quality of a companys accountsto reassure shareholders that the information in them is

useful and free from bias for the purposes of decidingwhether their resources are being used efficiently and

to confirm, as far as is reasonable, their freedom fromfraud and error (Sherer and Kent).


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` Annual audit required for all limited companies

except small companies

` Auditors are not part of the company but are

responsible to shareholders with the main duty ofreporting whether the financial statements show a

true and fair view and comply with statutory,

regulatory and accounting standard requirements.


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Audit fees and non-audit fees paid to the auditors of 10 of the largestcompanies listed on the London Stock Exchange in 2000 (Porter et al., 2003)

Company

udit feesmillion

Non-audit feespaid to auditors

millionuditor

BP plc 20.0 36.4 Ernst & YoungVodafone Group plc 1.0 16.0 Deloitte & ToucheHSBC Holdings plc 18.4 10.7 KPMG

Astra Zeneca plc 2.3 9.9 KPMGRoyal Bank of Scotland plc 4.9 8.3 PricewaterhouseCoopLloyds TSB plc 4.0 32.0 PricewaterhouseCoopBarclays Bank plc 4.6 27.0 PricewaterhouseCoopBritish Telecom. plc 2.7 19.1 PricewaterhouseCoopDiageo plc 2.5 7.0 KPMG

Cable & Wireless plc 2.5 14.5 KPMGTotal 6 .9 80.9

26


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R Khalifa: IB1090 WBS27

000

0 0

100

1 0

200

2 0

000

00

1992

199

199

199

1996

1997

1998

1999

2000

2001

2002

200

200

Y a

Rai

Rai f a i f : a i f

(Source: Accountancy Magazine, Sept/Oct issues, 1992-2004)

FTSE 100


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` Materiality: The magnitude of an omission ormisstatement that, in the light of surroundingcircumstances, makes it probable that thejudgment of a reasonable person relying on theinformation would have been changed orinfluenced by the omission or misstatement.

(FASB)` The expectations gap:Auditors are performing at

variance with the beliefs/desires of those for whomthe audit is being undertaken (objectives andaccountability rights).

` Independence: "The overriding requirement(is)that. a member must at all times perform hiswork objectively and impartially and be free frominfluence from any consideration..."(ICAEW)


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` The expectations gap is the gap between the auditorsrole and opinion and the publics perception of theauditors role.

` Many members of the public believe that auditors arelooking for fraud when they undertake an audit, that

auditors say the financial statements are accurate, thatthe auditors are responsible for the financial statementsand that auditors should give warnings about the futureof the entity when they suspect it is going to fail.



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` The audit report does notsay the financialstatements are correct.

`Auditors only check a sample of transactions notevery transaction, therefore, they cannotguarantee that fraud will be detected.

`An audit does not guarantee that a company willsucceed in the future.

` Management are responsible for the financialstatements that they prepare, or that areprepared on their behalf.

` Management are also fully responsible for therunning of the company.



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` CG proposals are a step in the right direction` There are now more than 0 governance codes

in 30 countries, as well as numerousinternational codes

` On directors remuneration, CG in the UK doesnot seem to be working (their remuneration isincreasing faster than employees wages).

`Auditing is inherently connected with processesof accountability and control

`Accountability offers a criterion for establishing

the control system that auditing and CG iscontributing to


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` Chapter Auditing, Corporate Governance and

Ethics(pp. 2-9 ), in Introduction to Financial

Accounting, by Andrew Thomas and Anne Marie

Ward, McGraw Hill, 2010,

th

Edition.` Chapter 11 Governing a company (pp.390-439),

in Financial Accounting for Decision-Makers, by

Peter Atrill and Eddie McLaney, FT Prentice Hall,

2011,th

Edition (5th

editionh

as a similar ch

apter).


Documents

Lectures 13 14 CSR and Auditing