Ethics Class Group 5 Auditors and Audits

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CSGB6102 ETHICS AND CORPORATE GOVERNANCE

20TH OCTOBER 2008

ETHICS AND CORPORATE GOVERNANCE

GROUP PRESENTATION

NORHAYATI M LUI CGA 080021

JAYAKUMAR SALLIAH CGA 070127

MOHD ZIA CGA 070040

AZMAN IBRAHIM CGA 060021

JOEHARY SULAIMAN CGA 040189

AUDITORS AND AUDITS


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PRESENTATION OUTLINE

ROLE OF AUDITING AND AUDITORS IN CORPORATE GOVERNANCE

AUDIT AND AUDITOR

MALAYSIAN CODE OF CORPORATE GOVERNANCE

CORPORATE GOVERNANCE PRACTICES

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS (IFAC Code)

THE LEGAL ENVIRONMENT

CASE REFERENCES

FUTURE OF AUDIT

CONCLUSION

OPEN THE FLOOR FOR OTHER OPINION


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ROLE OF AUDITING AND AUDITORS IN

CORPORATE GOVERNANCE

Understanding Corporate Governance

Corporate governance is the set of processes, customs, policies, laws and

institutions affecting the way a corporation is directed, administered or controlled. It

includes the relationships among the many stakeholders involved and the goals forwhich the corporation is governed

The principal stakeholders are the shareholders, management and the board of

directors, along with other stakeholders like employees, suppliers, customers,

banks and other lenders, regulators, and the community at large

Key elements of good corporate governance principles include honesty, trust andintegrity, openness, performance orientation, responsibility and accountability,

mutual respect, and commitment to the organization.

ZIA


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STAKEHOLDERS OF CORPORATE GOVERNENCE


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An effective Audit Committee is a vital component of an effectivecorporate governance system

The Audit Committee and the Auditors need to maintain an ongoing

dialogue independent of management and the the Board of

Directors

Audit Committee members must have Financial Compitence,miminum a financial background

Major Audit Committee roles include:

Include mainly non-executive directors

Enterprises Risk Management (ERM)

Approve the appointment of the Auditors

Establish the audit fees

Critical accounting judgments

ROLE OF AUDIT COMMITTEE


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Audit:

Audit is an expert opinion on the fairness with which financial

statements present, in all material respects, a companys financial

position, results of operations, and cash flows in conformity of GAAP

Auditor:

Auditor is a certified person/firm that performs the auditing activity

The auditor does not have direct corporate governance responsibility

but rather provides a check on the information aspects of the

governance system

Auditors primary role is to check whether the financial information

given to investors is reliable, thus contributing in decision making,

accountability, and monitoring of the system

AUDIT AND AUDITOR


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Internal auditing is an activity involved in advising organizations regarding

how to better achieve their objectives. Internal auditing involves the utilization

of a systematic methodology for analyzing business processes or

organizational problems and recommending solutions.

Professionals called internal auditors are employed by organizations to

perform the internal auditing activity.

The scope of internal auditing may involve internal control topics such as the

efficacy of operations, the reliability of financial reporting, investigating fraud,

safeguarding assets, and compliance with laws and regulations.

INTERNAL AUDIT AND AUDITOR


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Enterprise Risk Management (ERM) is one of the major activities of

Internal Auditing System

According to the Institute of Internal Auditors:

ERM is a structured, consistent and continuous process across the wholeorganization for identifying, assessing, deciding on responses to and reporting

on opportunities and threats that affect the achievements of its objectives.

ERM is a complex process requiring an appropriate corporate culture and

creativity stemmed of a variety of experiences

It recognizes interdependencies among corporate, financial, andenvironmental factors

Strives to determine and implement an optimal strategy to achieve the

primary objectives i.e. optimize the value of the firm

INTERNAL AUDITORS AND ENTERPRISR RISK

MANAGEMENT (ERM)


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Key roles of Internal Auditing regarding ERM are:

To provide independent and objective assurance for Board oneffectiveness of ERM

Identify/assess/manage key risks

Internal controls

Assurance regarding, and evaluation of, the risk managementprocess

Risk reporting, evaluation, management

INTERNAL AUDITORS AND ENTERPRISR RISK

MANAGEMENT (ERM)


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The primary role of external auditing is to provide a judgment on whether

an entitys financial statements are free of misstatements

Where, this judgment or opinion is given by audit professionals, called

external auditors, who are independent of the entity being audited

Users of the entities' financial information, such as investors, government

agencies, and the general public, rely on the external auditors reports

The independence of external auditors is crucial to a correct and thorough

appraisal of an entity's financial controls and statements

Any relationship between the external auditors and the entity must bedisclosed in the external auditor's reports

EXTERNAL AUDIT AND AUDITOR


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Internal Auditors:

Internal auditors primary responsibilities include appraising an entity's

risk management strategy and practices, management control

frameworks and governance processes, but they do not express an

opinion on the entity's financial statements

External Auditors: The primary role of external auditors is to express an opinion on

whether an entity's financial statements are free of material

misstatements

Moreover, they must also investigate any material issues raised by

inquiries from professional or regulatory authorities

INTERNAL VS EXTERNAL AUDITORS


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What isWhat is

Corporate Governance?Corporate Governance?

Corporate Governance is the process and structureused to direct and manage the business and affairs of

the company towards enhancing business prosperityand corporate accountability with the ultimate

objective of realising long-term shareholder value,whilst talking into account the interest of other

stakeholders.

-Malaysian definition as per Finance Committee on Corporate Governance(Report on Corporate Governance, February 1999)

JAYA


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Good governance is not simply aboutcorporate excellence. It is the key toeconomic and social transformation. Thecorporation of today are no longer sheer

economic entities. These are engines ofeconomic and social transformation.

--Dr Madhav MehraDr Madhav MehraPresident of World Council For Corporate GovernancePresident of World Council For Corporate Governance


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Malaysian Code onMalaysian Code onCorporate GovernanceCorporate Governance


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15

Directors DirectorsRemuneration Shareholders Accountability& Audit

The Board

Board Balance

Supply ofInformation

Appointments to theBoard

Re-election

Level & Make Up ofRemuneration

Procedure

Disclosure

Dialogue betweencompanies &

investors

Annual GeneralMeeting

Financial Reporting

Internal Control

Relationships withAuditors

Principles of Corporate Governance


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ShareholderVoting

Dialogue betweenCompanies &

Investors

Evaluation ofCorporate

Governance

ExternalAuditors

Principles & Best Practices For CG


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The Board ofDirectors

Shareholders

Accountability & AuditPrincipal responsibilities of theBoard

Constituting an effective board

Size of non-executive participation

Board structures & procedures

Relationship of the board tomanagement

The audit committee

The relationshipbetween the board &

shareholders

Best Practices in Corporate Governance


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Role of the Board

- To focus on guidance and strategic oversight while managementrun the company business

- Increasing shareholder value for the long term- To ensure company is running effectively in accordance with theboards basic fiduciary oversight requirement

The specifics of the boards role will vary with size, stage and strategy of

the company and talents and personalities of the CEO and the board

CORPORATE GOVERNANCE PRACTICES


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Code of Ethics for Professional Accountants

(IFAC Code)

IFAC Code includes changes in three important aspects: The code establishes five fundamental principles of professional

ethics which all professional accountants must comply. Fivefundamental principles are a) Integrity, b) Objectivity, c) Professionalcompetence and due care, d) Confidentiality e) ProfessionalBehavior.

The conceptual framework approach is now extended to all thefundamental ethical principles. Professional accountants, whether inpublic practice, in business or employment are required to apply theconceptual framework approach to ethic.

The revised code now has the authority of an international standard.As an international benchmark, it requires that national ethicalstandards developed by IFAC member body must be based on theIFAC Code. They are not allowed to apply less stringent standardsthan those stated in the IFAC Code unless certain rules areprohibited by their local laws and regulations.

AZMAN


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1) Liability to clients-Breach of Contract

2) Liability to clients and third parties-Negligence

a) The auditor owed a duty of care to the plaintiff to confirm

to a required standard of care.b) There is failure to act in accordance with that duty of care

c) There is a causal relationship or connection betweenauditors negligence and the plaintiff damage

d) The plaintiff suffered actual loss or damage.

3) Duty to report breach of laws

THE LEGAL ENVIRONMENT


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AUDIT AND AUDITORS

Case References YATI


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CORPORATE SCANDALS

Infamous US cases: Enron, WorldCom, Tyco, etc.

Malaysia : Transmile, Oilcorp, Megan Media, etc

Earnings management

Asset

Misappropriation

Insider Trading

Asset

Embezzlement Financial

Statement

Manipulation

Accounting Fraud

Where are the auditors???

What are they doing??

Money laundering

Creative AccountingConspiracy

Accounting

Irregularities


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Oilcorp Saga, 2008http://oilcorp.com.my/

Oilcorp Berhad incorporated on 12July 2001- listed on

main board on 5 August 2003.

An investment holding company, main activities: oil &gas, hotel & property, marine related activities, etc

Issue: Oilcorp vs. BTMH (auditors):

Management of Oilcorp bid to remove BTMH and to

replace with Horwarth (May 2007 ~)

BTMH

OILCORP

HORWARTH

CASES:MALAYSIAN CORPORATIONS


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The objective and techniques of auditors have changedduring the four hundred years of recognizable existenceof auditors

The lack of understanding of the auditors role amongthe public may have harmful implications to the auditprofession as the public may not be able to recognizethe contribution of auditors to society.

FUTURE OF AUDIT JOE


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Fall of Enron-The Sarbanes-Oxley Act was

implemented.

The Public Company Accounting Oversight

Board The collapse of HIH Insurance-Ramsay Report

Practice Review Programme and Public

Oversight Board (PCAOB) (Malaysia)

FUTURE OF AUDIT


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Audit has gone from the backwater from an inspectionfocused, box-ticking environment and is now on amassive journey to meet new challenges.

Auditor needs to focus on how they can take audit

function forward and add value to the business. Auditor needs to consider what their function should look

like, alongside the regulatory agenda, and how they caninfluence that agenda.

Auditor cant afford to become the old inspection groupsof20 years ago. They need to hire from a pool that cando analysis.

THE ROLE OF AUDITORS IN THE FUTURE


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Good corporate governance is not simply about the avoidance

of financial shocks nor should the emphasis be on the negative

impact of poor corporate governance.

Good corporate governance is not simply about fairness in theallocation of a limited pie but rather about the enlargement of

that pie, the adoption of solid and correct business strategies,

and the effective management of the firm.

SUMMARY AND CONCLUSION


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An auditor can improve and analyze the books, but in

the end, the key is for management to practice good

governance. The Edge Malaysia, 4 February 2008

THANK YOU

Ethics Class Group 5 Auditors and Audits

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