Realigning the roles of the Board and The Audit Committee Caribbean Association of Audit Committee Members Robertine A Chaderton 2010 Caribbean Consulting

Realigning the roles of the Board and The Audit Committee

Caribbean Association of Audit Committee Members

Robertine A Chaderton 2010

Caribbean Consulting GroupBasseterre

St. [email protected]

The role of the Board (in the past – internationally)

• The Board is the legal entity for managing the company/entity on behalf of the shareholders

• The Board hires senior management to look after the day to day operations of the business

• The Board owes a duty to the shareholders to act in the best interest of the company/entity

• The Board is made up of persons who understand the business operations and can set policy


The role of the Board (in the past – in the Caribbean)

• Connected individuals organise themselves to operate a business entity –the ‘old boys’ club’

• The Chairman of the Board who may also be the Managing Director runs the business with the main objective to earn a profit for the shareholders

• The Board provides oversight for the company• Decisions may often be made by a small group of

Board members


The role of the Audit Committee(in the past - internationally)

• Oversight of the external auditors• Reviews the financial statements• Receives the report from the internal auditors


The role of the Audit Committee(in the past – in the Caribbean)

• Virtually non existent in many countries until the past 5 years or so

• A sub committee of the Board that looked at the financial statements before the AGM


The effect of the financial crisis(globally)

• Began to show mid 2007-2008; fall of Lehman Bros - October 2008

• Financial markets have fallen• Investments show severe loss in value• Governments have to come up with rescue packages

to bail out financial institutions• Collapse of US sub prime mortgage markets &

reversal of housing boom in other industrial economies


The reason for the global financial crisis

• “The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. … The vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.

• … But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

• … At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way.”

Paul Krugman, The Madoff Economy, New York Times, Opinion, December 19, 2008


http://www.nytimes.com/2008/12/19/opinion/19krugman.html

The effect of the financial crisis(regionally)

• Credit markets frozen• Investments show severe losses in value• Spending in developed countries falls off

significantly• Affects the livelihood of everyone –

globalisation – inter connected economies


Transparency (1)• Transparency means disclosure; essential to risk

assessment • Corporate governance reform increases

transparency- non controversial• Sarbanes Oxley Act 2002, the outcome of the

financial scandals of Enron & WorldCom, requires detailed reporting of off balance sheet financing & the setting up of special purposes entities

• Allows for a contractual and monitoring relationship between the Board & the CEO


Transparency (2)

• Stiff penalties imposed for mis-reporting• Owners assess the CEO’s ability based on the

information available to them • CEO will be replaced if assessment is low• CEO has career concerns• CEO may massage figures, include/exclude

transactions to ensure there is no fall in profits


Accountability(1)

Definition:The duty to provide an account (not

necessarily a financial account) or reckoning of those actions for which one is responsible


Accountability (2)

• Responsibility to undertake certain actions or to desist from taking action

• Responsibility to account for those actions• The Board directors have a responsibility to manage

the resources (financial and non financial) entrusted to their care by the shareholders

• The Annual Report with the financial statements is the mechanism for discharging accountability


Accountability (Agency model)


Accountee

(Principal)

Accountor

(Agent)

•Instructionsabout actions

•Reward

•Power over resources

•Information about actions

(dischargeof

accountability)

ACTIONS

RELATIONSHIPCONTRACT

The role of the Board - now

• Sarbanes Oxley Act 2002• The Board is ultimately responsible for the safety and

solvency of the company/entity• The Board as a whole must determine its own

schedule: select meaningful content for Board meetings; hold strategic planning retreats; discuss matters among themselves

• Function of Board should be separate from senior management


Role of the Board – in the future • The Board should prepare charters & procedures for itself

and its committees and identify best practices for corporate governance

• The Board has the right to hire professionals to help them meet their responsibilities

• Senior management should come to Board meeting to discuss functional matters and then let the Board take decisions

• The Board needs to be educated about its role in the hierarchy; separateness and superior position over management; assertive and attentive to the issues of the company


The role of the Audit Committee- now

• Central facet in good corporate governance• Evolving• Requirement for companies listed on the

Stock Exchange (must be a qualifying audit committee i.e. must have at least one ‘financial expert’ and an independent director)


The role of the Audit Committee in the future

• Responsible for external auditing processes to ensure independence of firm of external auditors and integrity of financial statements

• Responsible for internal audit processes to assure company’s internal controls are efficiently applied

• Responsible for regulatory and legal compliance to assure company’s code of conduct meets requirements

• Responsible for risk management to assure allocation of company’s resources (financial , human, tangible assets, other) are optimised


Conclusion

• Boards in the Caribbean must use Audit Committees to help them fulfill their corporate responsibilities

• Separate management from the Board• Management must not feel threatened by the Audit

Committee • Audit Committee must advise the Board on financial

information disclosed in financial statements


Points to ponder• How effective is your Board?• Have you ever done a Peer Review?• How well & how often does your Audit Committee

communicate with the Internal Auditors and the External Auditors?

• If your company was in a financial crisis would your Audit Committee members be the first to spot it from the financial statements?

• Are you concerned about the over exposure of financial institutions to sovereign debt?



Documents

Realigning the roles of the Board and The Audit Committee Caribbean Association of Audit Committee Members Robertine A Chaderton 2010 Caribbean Consulting