Emerging Issues in

Corporate Governance
 Investor Confidence and
Global Financial Markets
Investor confidence in the global financial markets is the key
driver of economic growth, global competition, and financial
stability.

Generally speaking, investors are considered to be confident

when stock prices are on an upward trend and the news about
future stock performance is optimistic.

And the Main TASK is to restore investors confidence.

Many of these recommendations such as convergence to IFRS

and corporate codes of ethics have already been implemented
or are in the process of being implemented.
Global Financial Markets
The speed with which financial transactions can be conducted and
money can be moved around the world encourages regulators to
establish a global financial infrastructure.

Different types of corporate governance structure are exposed to

different financial misconduct and scandals. For example, the dispersed
ownership system of governance in the United States is prone to
earnings management schemes (e.g., Enron, WorldCom), whereas
concentrated ownership systems are more vulnerable to the
appropriation of private benefits of control (e.g., Parmalat).

COVERGENCE needed !!!!!

Corporate Governance Reporting
The framework of corporate governance reporting and
assurance that can be used is the AA 1000 Framework and its
Global Reporting Initiative (GRI) guidelines, which promote
accountability reports.

Corporate governance reporting changes one-dimensional

financial reporting to multidimensional bottom lines.

MBL reporting goes one step beyond the corporate

sustainability reporting prepared according to the
guidelines of the GRI. The GRI focuses on the three
sustainability dimensions of SEE performance, whereas
corporate governance reporting emphasizes
multidimensional sustainability of governance, economic,
ethical, social, and environmental performance.
 Accountability: The New
Business Imperative
Accountability is the cornerstone of corporate
governance in continuously monitoring best practices
and being accountable to shareholders.

Although the primary focus and goal of accountability

reporting in the foreseeable future will continue to be
an economic issue to create sustainable long-term
shareholder value, the issues of SEE performance of
companies will gain momentum.
 Social, Environmental,
and Ethics Performance

Corporate Social Responsibility

Total assets managed by a socially responsible investing (SRI)
portfolio have increased more than fiftyfold in the past two
decades in the United States, and an increasing number of
mutual funds fall under the SRI definition.

Environmental Performance
Environmental matters, particularly climate change, are
receiving a considerable amount of attention from the SRI
community. Institutional investors, including the nation’s
largest public pension plans such as CalPERS and CalSTRS
have traditionally supported initiatives to ensure that
companies in their portfolios provide adequate disclosures of
their environmental liabilities.
 Social, Environmental,
and Ethics Performance
Ethics Performance

The established codes of conduct and ethics programs

address the following:

1. Avoidance and resolution of conflicts of interest between

the company and employees
2. Compliance with all applicable laws, rules, regulations,
standards, and policies
3. Emphasis on customer relations to enhance the company’s
reputation
4. Proper use of confidential information
5. Encouragement of whistleblowers to reveal dishonesty and
wrongdoings
Shareholder Challenging Issues
There are several challenging shareholders issues :

1. Nomination process. Not all shareholders have a full access

to the proxy statements and existing SEC rules allow
companies to reject any proposal pertaining to director
election.
2. Voting System. The prevailing plurality voting system also
makes it difficult for shareholders to monitor their
companies.
3. Proxy Statements. Shareholders of public companies with
dispersed ownership have few, if any, incentives or
opportunities to monitor their company’s business affairs
and managerial activities.

To address those issues SEC has adopted a few initiatives.

 Challenges Facing Directors
Roles of boards are expanding to both advisory and oversight
functions.

Several prevailing challenges facing directors remain

unresolved:

(1) director accountability and personal liability,

(2) the separation of chair and CEO roles,
(3) director stock ownership,
(4) board diversity,
(5) director interlocks,
(6) director performance scorecard,
(7) rotation of audit committee members.
 Sox Compliance Challenges
It has been argued that the emerging corporate governance
reforms, including SOX, SEC related implementation rules, and
listing standards, have caused smaller companies to (1) incur
compliance costs that are disproportionate to the induced
incremental benefits, and (2) divert the attention of company
management away from strategic decisions and operational
activities.

To address those concern COSO in 2005 issued “Guidance for

Smaller Public Companies Reporting on Internal Control over
Financial Reporting.”

The new guidance is intended to assist small companies to

implement, assess, and report on ICFR in compliance with
Section 404 of SOX and PCAOB AS No. 2.
 Sox Compliance Challenges
The MAIN CHALLENGE is the cost of
compliance.

Some of rules, for example, rules

concerning internal controls of Section
404, cost at least one hundred times
more than what was originally
estimated by the SEC (e.g., estimated
cost of $91,000 per company to the
first-year actual cost of, on average,
$9.8 million).
Financial Reporting Challenges
1. Financial restatements
The persistence of financial restatements adversely affects
investor confidence. The substantial decline in the number of
restatements by large public companies suggests that Section
404 is working well in reducing the number of financial
restatements and thus improving financial reporting quality.
2. Enhanced Business Reporting
Enhanced business reporting (EBR) focusing on both financial
and nonfinancial information about current and future KPIs is
suggested as an alternative to improve the quality,
transparency, and integrity of financial reporting
3. Stock Options Accounting
The two pricing models commonly used in determining the
real value of a stock option are Black-Scholes and indexing of
similar publicly traded companies.
the current pricing models are being criticized for not properly
determining the value of stock options
 Financial Reporting Challenges
Antifraud Program and Practices
(SOX Sections 302, 404, and 906, PCAOB AS No. 2, PCAOB’s new AS No. 5,
discovered fraud should be reported to ICFR )

An effective antifraud program should address corporate culture, control

structure, and fraud procedures:

1. Corporate culture—Corporate culture should create an environment that

sets an appropriate tone at the top
2. Control structure—An effective control structure should eliminate
opportunities for individuals to engage in fraudulent activities.
3. Antifraud procedures—Adequate fraud procedures should be developed
and performed to ensure prevention and detection of potential fraud.
 Global Financial Reporting
Standards
We should expect significant changes in financial reporting as
both the FASB and IASB are moving toward convergence in
their standards, and the SEC is promoting the idea of giving
U.S. companies the choice between U.S. GAAP and IFRS
compliance in their filings with the SEC.

The SEC is expected to remove the reconciliation requirement

for international firms traded on U.S. exchanges to file using
IFRS by 2009. The move by the SEC can be regarded by many
as the first step by the SEC to eventually allow listed
companies to use IFRS in place of U.S. GAAP.
 Emerging Auditing Issues
The emerging auditing issues in the post-SOX period are:

(1) auditor independence,

(2) auditor changes,
(3) engagement letters,
(4) audit failure,
(5) integrated audit approach,
(6) concentration of and competition in public accounting
firms,
(7) electronic financial reporting and continuous auditing,
(8) confirmations,
(9) audit report,
(10) auditor liability.
 Conclusion
• Investor confidence in the global financial markets is the key
driver of economic growth, global competition, and financial
stability worldwide.
• U.S. regulators and their counterparts in Europe and on other
continents should work together to assess the feasibility of
convergence to improve the efficiency, effectiveness, and
integrity of the global capital markets and prevent a global
crisis that would eventually affect the economy and financial
markets of countries worldwide.
• Corporate governance reporting should assist companies to
restore investor confidence and public trust in governance,
economic, ethical, social, and environmental performance.
• The higher the shareholdings of independent directors, the
more incentives for them to monitor management activities to
protect their own interests as well as the interests of other
shareholders
 Conclusion
• Companies should integrate SOX compliance process into
their corporate governance structure, risk and compliance
process, internal controls, financial reports, and audit
activities.
• The risk-based approach for assessing and auditing ICFR has
been suggested for public companies, particularly for smaller
companies using the COSO internal control framework.
• Antifraud prevention and detection controls and
assessments addressed by SOX, SEC rules, and PCAOB
auditing standards are only to relevant financial statement
fraud.
• Several initiatives are taken toward an ultimate convergence
of both accounting and auditing standards.
end of presentation