A Significance of The System of Audit and Corporate Governance

Introduction

The audit committees in the recent past have become a mechanism that is common for corporate governance internationally. Corporate governance is the process in which the director of a particular company ensures that the company is running properly. It strictly entails monitoring the senior managers and giving report back to the shareholders. The ultimate power is often with the shareholders who are relatively weak in comparison with the directors. It is because, in most institutions, shareholders are the sources of finance, and when they are made unhappy, they can sell their shares. Notably, government bodies, researchers, and regulators in various countries have been raising questions about the audit committees’ effectiveness and their significant contribution to corporate governance. Attempts to enhance the audit committees’ role have been made in order to address the corporate governance issues. For example, Cadbury (1992) in the UK. There have been numerous changes over time which all address audit committees, where their operation has been influenced by the structural and cultural differences internationally. These have resulted in the increasing degree of harmonization and codification. The growing global acceptance of the audit system as a relevant governance structure is creating a conducive environment for the operation of firms. This paper will analyze and critically evaluate the effectiveness of the system of audit and corporate governance.

A Significance of The System of Audit and Corporate Governance

The effectiveness of the organization’s performance is mainly assessed through system audits. For example, in the case of an information system, an information system audit is incorporated to measure the degree of effectiveness. The primary aim of the systems audit is to establish whether the systems audit are involved in safeguarding the corporate assets, whether the organization is operating efficiently, and whether the organization supports corporate objectives in an effective way. Another aim is to establish whether the organization maintains the integrity of the communicated and stored data. The financial audit of the organizations is the one that is involved in the verification of the financial statements and accounting records. In most cases, to enhance proper system auditing in this age of technology, information systems are designed (Abbott, 2000). These information systems help in tracing every financial transaction that is carried out, thus ensuring the effectiveness of financial reporting. This allows reliance on the data that is given by such systems in the balance sheets, statements of affairs, ledgers, and other bookkeeping practices. Apart from the financial audit, operational audits can also be performed in an organization. Operational audits are mainly used in the evaluation of the effectiveness and efficiency of the operations in the information systems. Also, technological audits can be used to verify that the selection of information technologies is appropriately done, well configured, and properly implemented.

Remuneration and Shareholder Engagement

The levels of remuneration to retain, motivate, and attract directors of the required quality should be sufficient in order to enhance the company to run successfully. However, the company should take precautions to avoid excessive payments beyond what is necessary. The executive directors’ remuneration should be structured to link rewards to individual and corporate performance (Carcello, 2000). There should exist a transparent and formal procedure for developing policy on executive remuneration as well as for fixing the remuneration packages of individual directors. No director should be involved in making decisions about their own remuneration.

A dialogue should be established with the company’s shareholders based on their mutual understanding of the objectives. The board should hold the responsibility to ensure that a satisfactory dialogue with shareholders takes place (Collier, 1993). The board should make use of the Annual General Meetings (AGM) to facilitate communication with investors in order to encourage and recognize their participation. Furthermore, proactive engagement with shareholders can lead to better decision-making and alignment of company goals with shareholder interests.

Case Study: Cadbury Company

To ensure my understanding of the system audit and corporate governance, I will look at the Cadbury Company, which is based in the UK. In 1991, Cadbury noted a continuous decline in the quality of information provided to shareholders. It was found, together with the ineffectiveness of the external audit, that the directors’ remuneration was also out of control. Only a small group of concerned directors took autocratic control (Collier, 1999). These problems were well documented and led Cadbury to identify measures to address them. This led to the creation of the Cadbury Report in 1992, named "Aspects of Financial Corporate Governance." The committee involved in the report creation was chaired by Adrian Cadbury. It set out recommendations for company board arrangements and accounting systems. All this was done to mitigate corporate governance failures and risks. The adoption of the report has been done by other bodies such as the World Bank, the United States, and the European Union.

The report by Cadbury ensured that there was board effectiveness. It stated that every public company ought to be headed by an effective board that can both control and lead the business. In order to test the effectiveness of the board, the work done by all the members of the board should be gauged and quantified under the chairman who is the head of the board (Cottell, 1988). All the directors should be equally responsible according to the law for the actions and decisions by the board, regardless of the specific duties undertaken by directors individually. However, the board should collectively, as a unitary body, make sure that it meets its obligations (Dalton, 1998). The executive and non-executive directors should contribute to the working of the board. For example, the Cadbury non-executive directors had two crucial contributions to make in the process of governance as a consequence of their executive responsibility independence. The first was to review the board’s performance and that of its executives. The second was to take the lead in situations where potential conflicts of interest arise (Manson, 2001).

Conclusion

In conclusion, the effectiveness of the system of audit and corporate governance is evident in the way organizations are run. Without effective corporate governance and system audits, organizations cannot be successful in the way they offer services to the public. Both the system audit and corporate governance ensure proper financial reporting and bookkeeping practices. The corporate governance key principles that ought to be rigorously observed are leadership, accountability, remuneration, and relationships with stakeholders. If these principles are well observed, organizations can achieve success in the long run. As an example of our company of interest in the UK, we have identified that Cadbury in 1991 was faced with several problems. All these problems occurred due to ineffective system audits and corporate governance. The company observed the principles as they were listed in the report that they developed in 1992. The report, called "Aspects of Financial Corporate Governance," was later embraced by other companies in the UK since it appropriately addressed all the issues to be observed.

References

Abbott, L. J. (2000). The role of the audit committee in corporate governance. Journal of Accounting and Economics, 50, 50.

Carcello, J. V. (2000). Executive compensation and corporate governance. Journal of Accounting and Public Policy, 459.

Collier, P. (1993). Audit committees in large UK companies. International Journal of Auditing, 429.

Collier, P. (1999). Corporate governance and audit committees. Managerial Auditing Journal, 322.

Cottell, P. (1988). The role of non-executive directors. Corporate Governance: An International Review, 97.

Dalton, D. (1998). Corporate governance: The role of boards of directors. Business Ethics Quarterly, 279.

Manson, S. (2001). The effectiveness of non-executive directors. Accounting and Business Research, 115.