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Corporate governance refers to the set of systems, principles and processes by which a company
is governed. They provide the guidelines as to how the company can be directed or controlled
such that it can fulfill its goals and objectives in a manner that adds to the value of the company
and is also beneficial for all stakeholders in the long term. Stakeholders in this case would
include everyone ranging from the board of directors, management, shareholders to customers,
employees and society. The management of the company hence assumes the role of a trustee for
all the others.
What are the principles underlying corporate governance?
Corporate governance is based on principles such as conducting the business with all integrity
and fairness, being transparent with regard to all transactions, making all the necessary
disclosures and decisions, complying with all the laws of the land, accountability and
responsibility towards the stakeholders and commitment to conducting business in an ethical
manner. Another point which is highlighted in the SEBI report on corporate governance is the
need for those in control to be able to distinguish between what are personal and corporate funds
while managing a company.
Why is it important?
Fundamentally, there is a level of confidence that is associated with a company that is known to
have good corporate governance. The presence of an active group of independent directors on the
board contributes a great deal towards ensuring confidence in the market. Corporate governance
is known to be one of the criteria that foreign institutional investors are increasingly depending
on when deciding on which companies to INVEST in. It is also known to have a positive
influence on the share price of the company. Having a clean image on the corporate governance
front could also make it easier for companies to source capital at more reasonable costs.
Unfortunately, corporate governance often becomes the centre of discussion only after the
exposure of a large scam.
The corporate governance practice in the Company is built in conformity with the best
international standards and recommendations set in the Code of Corporate Behavior of the
Federal Financial Markets Service, as well as the provisions of the Code of Corporate
Governance of OJSC Enel Russia ratified by the Company in 2006.
Corporate governance in the Company is based on the following principles:
7. Accountability
The Code of Corporate Governance envisages accountability of the Board of Directors of the
Company before all shareholders in accordance with the legislation in force, and is the governing
document for the Board of Directors in issues related to strategy planning, administration and
control over the Companys executive bodies.
8. Fairness
The Company undertakes to protect the rights of its shareholders and treat all shareholders on an
equal basis. The Board of Directors enables its shareholders to receive efficient protection if their
rights are violated.
9. Transparency
The Company shall provide timely disclosure of credible information on all the important facts
related to its activities, including information on its financial condition, social and environmental
measures, results of activities, ownership and management structures; the Company shall provide
free access to such information for all interested parties.
10. Responsibility
The Company acknowledges the rights of all interested parties envisaged by the legislation in
force, and aims at cooperation with such parties in order to provide steady development and
ensure financial stability of the Company.
inventory) or it may be something which supports the primary operations of the organization
(e.g. office building).
Classification
Assets may be classified into Current and Non-Current. The distinction is made on the basis of
time period in which the economic benefits from the asset will flow to the entity.
Current Assets are ones that an entity expects to use within one-year time from the reporting
date.
Non Current Assets are those whose benefits are expected to last more than one year from the
reporting date.
Classification
Machine
Non-current
Office
Building
Non-current
Vehicle
Non-current
Inventory
Current
Economic Benefit
Cash
Current
Cash!
Receivables
Current
Changing
It is also an important principle that no one should handle the transaction from beginning to
end, because in this situation there is a chance of fraud. Generally most of the frauds are
committed due to this reason.
4. Proper Supervision
It is also a principal of the internal control. All the senior officers have a right to supervise the
activities of their juniors. It is necessary for the benefit of the business.
5. Clear Rules
All those rules relating to cash stock receipts and issuance of goods should be very clear and
well defined. It should be also checked that the employees should follow their rules properly.
6. Performance of Duties Record
For the best internal control it is necessary that the performance of all the employees must be
recorded.
reporting, and compliance with laws, regulations and policies. A broad concept, internal control
involves everything that controls risks to an organization.
It is a means by which an organization's resources are directed, monitored, and measured. It
plays an important role in detecting and preventing fraud and protecting the organization's
resources, both physical (e.g., machinery and property) and intangible
Types of Internal Controls
preventive and detective controls. Both types of controls are essential to an effective internal
control system. From a quality standpoint, preventive controls are essential because they are
proactive and emphasize quality. However, detective controls play a critical role by providing
evidence
that
the
preventive
controls
are
functioning
as
intended.
Preventive Controls are designed to discourage errors or irregularities from occurring. They are
proactive controls that help to ensure departmental objectives are being met. Examples of
preventive controls are:
Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:
Conflict of interest
A conflict of interest (COI) is a situation in which a person or organization is involved in
multiple interests (financial, emotional, or otherwise), one of which could possibly corrupt the
motivation of the individual or organization.
The presence of a conflict of interest is independent of the occurrence of impropriety. Therefore,
a conflict of interest can be discovered and voluntarily defused before any corruption occurs. A
widely used definition is: "A conflict of interest is a set of circumstances that creates a risk that
professional judgement or actions regarding a primary interest will be unduly influenced by a
secondary interest." Primary interest refers to the principal goals of the profession or activity,
such as the protection of clients, the health of patients, the integrity of research, and the duties of
public office. Secondary interest includes not only financial gain but also such motives as the
desire for professional advancement and the wish to do favours for family and friends, but
conflict of interest rules usually focus on financial relationships because they are relatively more
objective, fungible, and quantifiable. The secondary interests are not treated as wrong in
themselves, but become objectionable when they are believed to have greater weight than the
primary interests. The conflict in a conflict of interest exists whether or not a particular
individual is actually influenced by the secondary interest. It exists if the circumstances are
reasonably believed (on the basis of past experience and objective evidence) to create a risk that
decisions may be unduly influenced by secondary interests.
CONFLICT OF INTEREST AND RELATED PARTY TRANSACTIONS
Under the Companys Code of Business Conduct, directors, officers and employees are to avoid
situations that present a potential conflict between their personal interests and the interests of the
Company. The Code requires that, at all times, directors, officers and employees make a prompt
disclosure in writing to the Companys Vice President and Corporate Secretary of any fact or
circumstance that may involve an actual or potential conflict of interest as well as any
information necessary to determine the existence or likely development of conflicts of interest.
This specifically includes any material transaction or relationship that could reasonably be
expected to give rise to a conflict of interest. This requirement includes situations that create
even the appearance of a conflict of interest.
reactions and going into fire-fighting mode to rectify problems that could have been
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Course will give you the practical skills to develop a comprehensive risk management process.
Signs & Symptoms of a Lack of Internal Control
Internal controls are the procedures and methods used to protect the validity of business
transactions, the accuracy of accounting and business records and protection of assets. Internal
controls are also designed to detect errors and prevent fraud. They do not guarantee absolute
protection from fraud, just reasonable assurance that an organization can reach its goals and
objectives.
An Unspoken Signal
The first symptom of a lack of controls in a business occurs when management fails to set an
appropriate atmosphere that supports fraud prevention and rewards honesty among employees.
Surveys by the Association of Certified Fraud Examiners conclusively show the vast majority of
discovered frauds result from tips by employees. The study also suggests that a strong anti-fraud
policy that rewards honesty and encourages employee participation is possibly the most
important of all internal controls.
Signs of Trouble
Accuracy and validity of accounting data are suspect when a business lacks internal control. This
would be the case even if it were possible to obtain a completely fraud-free environment,
because internal controls prevent fraud and they prevent errors. Accidental processing of
incorrect information is inevitable during accounting and business transactions, so when internal
controls are lacking, these errors accumulate. Without a system of internal authorizations and
approvals, the validity of a company's business and accounting records will be in doubt. This
symptom will not be recognized unless an audit is conducted.
Undetected Fraud
Lack of controls creates an ideal environment for fraud. The first area to suffer from fraud
schemes is likely to be accounts payable. Abuses in expense reimbursements and
employee CREDIT CARDS are possible even when controls are present. Abuses in payroll
could include submission of fraudulent time sheets and false overtime. This would be followed
by unauthorized purchases and phantom vendor accounts that generate false bills for services not
rendered.
All these schemes are common to employees who commit fraud. They are relatively easy to
conceal and would go unnoticed in an environment without internal controls. As losses to fraud
rise, the only symptom or sign exhibited would be the rising level of company expenses eroding
the bottom line on income statements.
More Symptoms
Relationships with vendors are often based on purchasing and inventory management. In an
environment lacking controls, records of purchasing and sales may be questionable. Incomplete
purchase and sales records create tensions when confirming information with vendors, who
notice poor record keeping. Poor management of inventory results in product interruptions and
customer service issues. Poor record keeping makes customer returns and refunds more difficult
to substantiate. Unreconciled accounts put the company at risk for cash flow and payment
difficulties. Inaccurate accounting data will endanger applications for FINANCING and deter
potential investors.
Sarbanes-Oxley Overview
The Scope of the Act
Internal controls.
Process.
Policies.
Activities.
Transparency.
Accuracy.
Governance.
Accountability.
Responsibility.
The act created the Public Company Accounting Oversight Board. The board regulates
and inspects public accounting firms that deal with publicly traded companies. The act also
requires CEOs and chief financial officers to establish internal accounting controls as a means to
prevent fraud and malfeasance. These internal control summaries must be included in financial
reports to increase corporate transparency. False statements on these internal control documents
may subject company executives to criminal penalties.
Sarbanes-Oxley lessens the influence companies wield over auditors and accounting
firms. In previous situations of corporate reporting fraud, investigators found inappropriately
close business relationships between some companies and the firms that audited them. This gave
the auditors a financial incentive to portray the company in a positive light. Sarbanes-Oxley
basically allows auditing of auditors as an oversight technique.
Increased Penalties for Corporate Crime
The act places greater controls on insider activities. The SEC defines an insider as an
executive officer, a director or a shareholder with at least 10 percent of outstanding shares. The
act requires faster reporting of insider trades to the SEC than previously required. Any insider
trades must be reported within 48 business hours of the trade. The act also bars any insider trades
during retirement fund blackout periods. Blackout periods occur when the fund experiences
major changes. Participants are prohibited from changing their investment options during this
blackout period.