2.6 Hypothesis Development 2.6.1 Board of Directors Independence Hypothesis Both Beasley (1996) and Uzun et al (2004) demonstrated that larger proportion of independent non-executive directors on the board for US listed companies could reduce the likelihood of corporate fraud. These findings indicate that independent directors are more likely to represent shareholders’ interests. Thus, higher proportion of independent non-executive directors on the board could increase board’s effectiveness as a monitoring mechanism over management. On the other hand, there are other evidence which casted doubts on the benefits of an independent board. Persons (2005) found that a board which largely comprised of independent directors has no significant effect on the likelihood of financial statement fraud in the US. Instead, the study highlighted that the likelihood of financial statement fraud is lower when audit committee is comprised solely of independent directors. Despite audit committee is a subset of the main board which depends on the board composition, this finding may indicate the independence of audit committee rather than the board itself is more effective in addressing fraud risk. The contrasting findings appear to show that the impact of independent board on the likelihood of corporate fraud remains indefinite. Nevertheless, the governance principles of UK Code support the view that board independence is an essential factor for effective governance, which in turn could have a significant effect on reducing the likelihood of corporate frauds. UK Corporate Governance Code recommends that at least half of the board for UK listed company (excluding the chairman) should comprise of independent non-executive directors (at least two indep... ... middle of paper ... ...d depth to effectively mitigate bribery and corruption risk. The inclusion of a legal expert within the audit committee could greatly assist the audit committee in their risk oversight responsibilities, including ways in dealing with regulators to minimise the company’s risk exposure. Furthermore, with the combination of financial and legal experts, the diversity of backgrounds and experiences could help the audit committee to foster greater constructive discussion and penetrate deeper into business issues. Therefore, this study predicts that availability of a legal expert in audit committee could enhance the effectiveness of committee’s oversight function which helps to reduce the likelihood of corporate fraud, suggesting the following hypothesis: H4: The likelihood of corporate fraud is lower when the audit committee has at least one member with legal expertise.
Auditors do not provide audit opinions for different levels of assurance. Therefore, auditors consider providing more or less assurance when modifying evidence for engagement risk to be unnecessary. However, auditors should be professionally responsible to accumulate additional evidence, assign more experienced personnel, and review the audit more thoroughly, particularly when a client poses a higher than normal degree of engagement risk. The auditor should also modify evidence for engagement risk when high legal exposure and other potential actions affecting the auditor
The Audit Committee is comprised of the following five members from the Board; F. Duane Ackerman, Ari Bousbib, J. Frank Brown, Karen L. Katen, and Mark Vadon. This group is tasked with assisting the Board with the oversight of The Home Depot’s financial statements, ensuring that they are in compliance with legal and regulatory requirements. They also review and monitor the Company’s Compliance program, making changes when appropriate to ensure that the Company remains compliant. This committee must be comprised of three or more independent directors from the Board and they cannot receive any compensation other than directors’ fees from Home Depot. A requirement for this committee is to have a basic understanding of finance and accounting principles and practices. At least one member must be an “audit committee financial expert.” Mr. Brown acts as the audit committee financial expert. The members of this committee all have knowledge in basic accounting and finance principles and also bring in a variety of knowledge in different areas.
The audit committee a part of the board of directors plays an important role in preventing fraud. They are directly responsible for overseeing the work of any public accounting firm, such as PwC, employed by the company. They also must preapprove all audit services provided by the auditors.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
The oversight responsibilities of the board, the CAE lacking of expertise or broad understanding of financial controls and responsibilities, and the understaffed internal audit functions lacking of independence and direct access to the board of directors contributed to the absence of internal controls. To begin with, the board should be retrained to achieve financial literacy to review financial reporting. Other than attending formal meetings, the board of directors should be more involved with the management. For the Audit Committee, the two members who were recruited as acquaintances to Brennahan need be replaced with experts who are more sufficiently knowledgeable about accounting rules beyond merely “financially literate”. Furthermore, the internal audit functions need to expand with different expertise commensurate with the expanded activities of the organization, testing financial reporting rather than internal controls from an operational perspective. The CAE should be more independent and proactive to execute audit plans, instead of following orders from the CFO, and initiate a direct and efficient communication between internal audit and audit
Firstly, the board needs to be more independent in terms of having board members who only serve the interests of the company and not those of other parties. The company should increase the number of independent members to about 10 or two thirds of the whole board to increase the watchdog function of the board. Independence of the board would also enhance good governance and corporate credibility of the company. This way, there would be more oversight to prevent future scandals.
As a consequence of the separate legal entity and limited liability doctrines within the UK’s unitary based system, company law had to develop responses to the ‘agency costs’ that arose. The central response is directors’ duties; these are owed by the directors to the company and operate as a counterbalance to the vast scope of powers given to the board. The benefit of the unitary board system is reflected in the efficiency gains it brings, however the disadvantage is clear, the directors may act to further their own interests to the detriment of the company. It is evident within executive remuneration that directors are placed in a stark conflict of interest position in that they may disproportionately reward themselves. The counterbalance to this concern is S175 Companies Act 2006 (CA 2006) this acts to prevent certain conflicts arising and punishes directors who find themselves in this position. Furthermore, there are specific provisions within the CA 2006 that empower third parties such as shareholders to influence directors’ remuneration.
The debate whether diversity is beneficial to corporate governance or not has persisted over the years. In this context, the concept of diversity relates to boardroom composition and the wide-ranging blend of characteristics, expertise, and attributes supplied by individual board members (Grosvold, Brammer and Rayton, 2007, p. 344). What is more, diversity in corporate boards of directors can assume a variety of forms, counting individual demographics such as, nationality, race, ethnicity, and gender (Singh, Terjesen, and Vinnicombe, 2008, p.48). Boardroom diversity in listed companies is dictated by an array of diverse factors, including profitability, company size, as well as the size of the board (the number of non-executive and executive directors) (Grosvold, Brammer and Rayton, 2007, p.346). In listed companies, the board of directors usually serves at least four significant roles i.e. controlling as well as monitoring managers, providing counsel and information to managers, ensuring conformity with relevant laws as well as regulations, plus connecting the corporation to the external business environment (Carter et al. 2010, p.398).
...g to firms misconduct. The bankruptcy of Enron exposed the matter of lack of independence with the Board and the failure of the independent system in the USA which needed to be reformed; however to maintain such independence can be tricky.
Paul in his 2007 paper also indicates the similar argument with McWilliams and Sen (1998). In her paper, she investigates the role of corporate boards following large declines in share value surrounding acquisition announcements. She concludes that firms with independent boards are less likely to complete the value-decreasing bids, suggesting that boards influence corporate responses to information in stock prices. Board independence is also associated with unusually high frequencies of asset restructuring for bids that are completed, suggesting that independent boards promote restructuring in mergers the market believes are difficult to integrate (Paul, 2007). Another paper that supports the independent board argument is from Kolasinski and Li (2013).
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor
There have been many studies into the effects of auditor independence over time, and especially since the recent scandals within the accounting world, such as Enron. However, there are contrasting views regarding the issue, and my report is hoping to critically evaluate material written on the subject and explain the views promoted within the articles.
The board membership, irrespective of executive or non executive membership, is very crucial in the governance and management of the company. However, as the duties and responsibilities of directors vary according to their type of directorship; the rewards should also match the responsibilities carried out and be in line with the performance shown over period of time.
K, . N., ER, w., DAVID, K., PAUL, M., WALTER, O., & EVANS, A. (2012). Corporate governance theories and their application to boards of directors: A critical literature review . Prime Journal of Business Administration and Management (BAM), 2(12)(2251-1261), 782-787.
According to Carol Padgett (2012, 1), “companies are important part of our daily lives…in today’s economy, we are bound together through a myriad of relationships with companies”. The board of directors remain the highest echelon of management in any company. It is the “group of executive and non-executive directors which forms corporate strategy and is responsible for monitoring performance on the behalf of shareholders” (Padgett, 2012:1). Boards are clearly critical to the operation of companies and they are endowed with substantial power in the statute (Companies Act, 2014). The board is responsible for directing and steering the company. The board accomplishes this by business planning and risk management through proper corporate governance.