What is corporate governance?

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.

Why was it in the news recently?

Corporate governance has most recently been debated after the corporate fraud by Satyam
founder and chairman Ramalinga Raju. In fact, trouble started brewing at Satyam around
December 16 when Satyam announced its decision to buy stakes in Maytas Properties and
Infrastructure for $1.3 billion. The deal was soon called off owing to major discontentment on
the part of shareholders and plummeting share-price. However, in what has been seen as one of
the largest corporate frauds in India, Raju confessed that the profits in the Satyam books had
been inflated and that the cash reserve with the company was minimal. Ironically, Satyam had
received the Golden Peacock Global Award for Excellence in Corporate Governance in
September 2008 but was stripped of it soon after Raju's confession
Fundamental issue in Corporate Governance

TRANSPARENCY IN RESPECT TO COMPANY AFFAIRS AND COMPLETE

DISCLOSURE OF ALL ADVERSE FACTORS AFFECTING A COMPANY

ACCOUNTABILITY OF DIRECTORS IN COMPLIANCE OF LAWS AND

REGULATIONS

FAIRNESS IN REPORTING OF ALL DEALINGS

RESPONSIBILITY ON PART OF DIRECTORS FOR BUSINESS DEALINGS

INCLUDING CULPABILITY OF PUNISHABLE OFFENCES eg CULPABILITY OF
K.C.MAHINDRA IN UNION CARBIDE CASE(HOMICIDE DUE TO
NEGLIGENCE?) AND ROLE OF AMRI DIRECTORS IN KOLKATTA

Corporate Governance Objectives

"Effective corporate governance is transparent, protects the rights of shareholders, includes both
strategic and operational risk management, is as interested in long-term earning potential as it is
in actual short-term earnings and holds directors accountable for their stewardship of the
business." These guidelines include most objectives of a corporate governance policy in any
organization.

1. Transparency and Full Disclosure

Good corporate governance aims at ensuring a higher degree of transparency in an organization
by encouraging full disclosure of transactions in the company accounts. Full disclosure includes
compliance with regulations and disclosing any information important to the shareholders. For
example, if a manager has close ties with suppliers or has a vested interest in a contract, it must
be disclosed. Also, directors should be independent so that the oversight of the company
management is unbiased. Transparency involves disclosure of all forms of conflict of interest.
2. Accountability
"Principles of Contemporary Corporate Governance," point out that a corporate governance
structure encourages accountability of the management to the company directors and the
accountability of the directors to the shareholders. Through hiring independent directors, a
company aims to create good corporate governance. The compensation of the chief executive
officer has to be approved by the company directors to ensure that the compensation structure is
fair and in the best interests of the shareholders. Any discrepancy in the company accounts or
malfunctioning of the company is closely watched by the board of directors. The board has a
right to question strategic decisions.
3. Equitable Treatment of Shareholders
A corporate governance structure ensures equitable treatment of all the shareholders of the
company. In some organizations, a particular group of shareholders remains active due to their
concentrated position and may be better able to guard their interests; such groups include highnet-worth individuals and institutions that have a substantial proportion of their portfolios
invested in the company. However, all shareholders deserve equitable treatment, and this equity
is ensured by a good corporate governance structure in any organization.
4. Self Evaluation
Corporate governance allows firms to evaluate their behavior before they are scrutinized by
regulatory bodies. Firms with a strong corporate governance system are better able to limit their
exposure to regulatory risks and fines. An active and independent board can successfully point
out the loopholes in the company operations and help solve issues internally.
5. Increasing Shareholders' Wealth
The main objective of corporate governance is to protect the long-term interests of the
shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and
Access to Capital in Global Markets," mentions that firms with strong corporate governance
structures are seen to have higher valuation premiums attached to their shares. This shows that
good corporate governance is perceived by the market as an incentive for shareholders to invest
in the company.
6. Principles for Corporate Governance

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.

Assets | Types of Assets | Classifications

Assets
Definition
Asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity (IASB Framework).
Explanation
In simple words, asset is something which a business owns or controls to benefit from its use in
some way. It may be something which directly generates revenue for the entity (e.g. a machine,

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.

Types and Examples

Following are the most common types of Assets and their Classification along with the economic
benefits derived from those assets.
Asset

Classification

Machine

Non-current

Office
Building

Non-current

Vehicle

Non-current

Inventory

Current

Economic Benefit

Used for the production of goods for sale

to customer.

Provides space to employees for

administering company affairs.

Used in the transportation of company

products and also for commuting.

Cash is generated from the sale of

inventory.

Cash

Current

Cash!

Receivables

Current

Will eventually result in inflow of cash.

Principles of Internal Control

1. Simple Record and Books
The principal of the internal control is also the simple records such as the record of
employees, plant register list of shareholders etc are kept in usual simple manner books
should be kept up to date and at regular internals these should be balanced. He different
persons should make handling of cash transactions. For instance the cashier should not be
allowed to record the cash in the accounts book. He should have no concern with written
ledgers.
2. Principle Relating to Staff
It is also the part of the internal control. The employees are placed on the business according
to their ability. The employees are bound for the duties for which they are assigned. Duties of
each staff member should be clear and there should be no confusion and doubt in this regard.
In case of any staff member absence duties arrangements should be made in advance.
3.

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.

7. Record of Goods and Assets

All the companies assets and property record should be maintained properly. There should be
also the security measures for the property.
8. Surety Bonds
To protect the company from fraud and to make the internal control more effective surety
bonds can be taken from the employees.
9. Division of Duties
Division of duties is a part of internal control. The employees can be placed on jobs
according to their abilities. The duties are assigned to which they are accountable.
10. Rotation of Duties
Rotation of duties is a principle of internal control. An employee must be from one seat
another. It is necessary for increasing the efficiency and avoiding the chances of errors and
fraud.
11. Division of Work
Division of work is a principle of internal control. The total amount of work is determined. It
is divided among the departments branches and sections. It has become possible due to
specialization and division of labour.
12. Subsidiary Record
Subsidiary record is a principle of internal control. The detail every account is maintained.
Stock of goods may consist of many items. As a whole it is called stock account or stock
control account and every group of items can be stated in subsidiary record.
13. Control Accounts
Control accounts are proposed to check the accuracy of the accounting books and other
record. The total debtors accounts and total creditors accounts or sales ledger adjustments
and purchase ledger adjustments accounts are prepared.

What are Internal Controls?

Internal control, as defined in accounting and auditing, is a process for assuring achievement of
an organization's objectives in operational effectiveness and efficiency, reliable financial

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:

Segregation of Duties: Duties are segregated among different people to

reduce the risk of error or inappropriate action. Normally, responsibilities for authorizing
transactions (approval), recording transactions (accounting) and handling the related asset
(custody) are divided.
Approvals, Authorizations, and Verifications: Management authorizes employees to
perform certain activities and to execute certain transactions within limited parameters. In
addition, management specifies those activities or transactions that need supervisory
approval before they are performed or executed by employees. A supervisors approval
(manual or electronic) implies that he or she has verified and validated that the activity or
transaction conforms to established policies and procedures.
Security of Assets (Preventive and Detective): Access to equipment, inventories,
securities, cash and other assets is restricted; assets are periodically counted and compared
to amounts shown on control records.

Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:

Reviews of Performance: Management compares information about current performance

to budgets, forecasts, prior periods, or other benchmarks to measure the extent to which
goals and objectives are being achieved and to identify unexpected results or unusual
conditions that require follow-up.
Reconciliations: An employee relates different sets of data to one another, identifies and
investigates differences, and takes corrective action, when necessary.
Physical Inventories
Audits

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.

Key Steps in Risk Management

A common definition of risk is an uncertain event that if it occurs, can have a positive or
negative effect on a projects goals. The potential for a risk to have a positive or negative effect is
an important concept. Why? Because it is natural to fall into the trap of thinking that risks have
inherently negative effects. If you are also open to those risks that create positive opportunities,
you can make your project smarter, streamlined and more profitable
All risk management processes follow the same basic steps, although sometimes different jargon
is used to describe these steps. Together these 5 risk management process steps combine to
deliver a simple and effective risk management process.
Step 1: Identify the Risk. You and your team uncover, recognize and describe risks that might
affect your project or its outcomes. There are a number of techniques you can use to find project
risks. During this step you start to prepare your Project Risk Register.
Step 2: Analyze the risk. Once risks are identified you determine the likelihood and
consequence of each risk. You develop an understanding of the nature of the risk and its potential
to affect project goals and objectives. This information is also input to your Project Risk
Register.
Step 3: Evaluate or Rank the Risk. You evaluate or rank the risk by determining the risk
magnitude, which is the combination of likelihood and consequence. You make decisions about
whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk
rankings are also added to your Project Risk Register.
Step 4: Treat the Risk. This is also referred to as Risk Response Planning. During this step you
assess your highest ranked risks and set out a plan to treat or modify these risks to achieve
acceptable risk levels. How can you minimize the probability of the negative risks as well as
enhancing the opportunities? You create risk mitigation strategies, preventive plans and
contingency plans in this step. And you add the risk treatment measures for the highest ranking
or most serious risks to your Project Risk Register.
Step 5: Monitor and Review the risk. This is the step where you take your Project Risk
Register and use it to monitor, track and review risks.
Risk is about uncertainty. If you put a framework around that uncertainty, then you effectively
de-risk your project. And that means you can move much more confidently to achieve your
project goals. By identifying and managing a comprehensive list of project risks, unpleasant
surprises and barriers can be reduced and golden opportunities discovered. The risk management
process also helps to resolve problems when they occur, because those problems have been
envisaged and plans to treat them have already been developed and agreed. You avoid impulsive

reactions and going into fire-fighting mode to rectify problems that could have been
anticipated. This makes for happier, less stressed project teams and stakeholders. The end result
is that you minimize the impacts of project threats and capture the opportunities that occur.
For busy professionals who need to meet continuing professional development requirements and
boost their career opportunities, our online courses provide a flexible and cost-effective way to
achieve this by providing anywhere, anytime access and a supportive online community.
Continuing Professional Development offers a series of online project management courses to
advance your project management skills and your career. Our Risk Management Online
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

The scope of the act focuses on:

Internal controls.

Process.

Policies.

Activities.

Compliance and reporting.

Transparency.

Accuracy.

Governance.

Accountability.

Responsibility.

Avoidance of conflict of interest.

The Main Features of the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act of 2002 came in the wake of several high-profile corporate accounting
scandals, including those involving Enron, WorldCom and Tyco International. Confidence in
publicly traded companies collapsed when the media revealed the details of unethical insider
trades, corporate hubris and corruption of outside auditors. Congress enacted the Sarbanes-Oxley
Act, named after Sen. Paul Sarbanes (D-Maryland) and Rep. Michael Oxley (R-Ohio), to rein in
such practices.
Greater Oversight of Accounting Practices

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.

Increased independence of auditors and analysts

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

Sarbanes-Oxley allows the Securities and Exchange Commission to penalize or bar

securities professionals for inappropriate behavior, such as insider trading. The law also allows
the SEC to punish executives who violate regulations. The SEC may bar executives convicted
under Sarbanes-Oxley from directorships or officer ships in public companies. The act increased
prison sentences and fines for a number of corporate crimes. It also extended the statute of
limitations for shareholders to sue for fraud or deceit perpetrated by the company.
Tighter Controls on Insider Activity

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.