Corporation &

Corporate Governance
 LEARNING OBJECTIVES

Define c orporation.
Identify and elaborate on the attributes of a corporation.
Enumerate the different stakeholders of a corporation.
Distinguish between multinational and transnational corporation.
Describe how MNC s and TNC s affec t host c ountries.
Define corporate governance.
Explain the fundamental principles of c orporate governance.
Describe the concept of agency theory in corporate governance.
Detail the roles of the non executive director, chief of finance (CFO), audit
committee and external auditor in governance.
List down the reasons on the need for external auditors by corporations.

M V . D E C H O S A
 What is a Corporation?
REPUBLIC ACT No. 11232 : An Act Providing for the
Revised Corporation Code of the Philippines

Sec tion 2 - Corporation Defined.

A c orporation is an artificial being created by

operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incidental to its existence.

M V . D E C H O S A
 Attributes of a Corporation
By fiction of law a corporation is a juridical person whose personality is separate
Artificial Being
and distinct from its owners. Corporation has some of the rights that a natural
person possesses. It can sue or be sued in court, it can own and dispose
properties, and it is supposed to be given independence by its owners in terms
of existences. It can be convicted on criminal offenses.

It comes into existence through a charter or grant from the state. It cannot exist
Created by by a mere agreement or unilateral and self declaration of existence. Functions
Operation of Law
of corporations are governed strictly and it has to do within the bounds of what
is being provided in the corporate charter.

M V . D E C H O S A
 Attributes of a Corporation
A corporation can continue to exist even in death, incapacity or insolvency of
Right of
any stockholder or member. The corporation will not be dissolved even when
Succession
there are transfer of ownership.

Which means it is authorized to do activities within the purposes of its creation, it

Powers, Attributes
& Properties as its own traits, and it operates based on what has been expressly provided in
the charter including those that are considered incident to its existence as a
corporation.

M V . D E C H O S A
 Shareholder
The people who invest
their c apital in the Employees
corporation.
They are the people who
c ontribute their skills, abilities
and ingenuity to the
Management corporation.

The group of people

running the day-to-
day activities.

Stakeholders of Clients
a Corporation They are the buyers of its
produc ts and servic es for
final c onsumption,
enjoyment, etc.
Creditors
The party who lend
the c orporation
goods, servic es and
money. Government
Businesses means jobs. Jobs provide
Public income to individuals as salaries and
salaries translates to purchasing
C orporations provides the
power.
c itizens with the essentials like
goods, servic es, employment
and tax money for public
programs.

M V . D E C H O S A
 Stakeholders of a Corporation
The party with the authority to implement the policies as determined by the Board in directing
the course/business activities of the corporation, SEC, Code of Corporate Governance. This is
Management the group of people running the day-to-day activities, composed of decision makers from the
top to bottom of the corporate hierarchy. They are entrusted by the stockholders to do some
maneuverings for the corporation to reach its destination. They shape the future of the
organization.

The party who lend the corporation goods, services and money. The y may gain from the
corporation by way of interest for money loaned or profit for goods sold or services rendered,
Creditors thus it is important that in running the corporate affairs, the concerns of the creditors are taken
into consideration. Note that in the Philippine setting, our laws are protective of the creditors. It
is evident in the fact that whenever there is a liquidation, the first priority of payment belongs to
the outside creditors.

M V . D E C H O S A
 Stakeholders of a Corporation
The people who invest their capital in the corporation. The people who, in some
Shareholders cases considered as the first believer of what the entity can do. They bet their money
and assume the high risk of having their money going down the drain. Unlike
creditors, they are part-owner of the entity and cannot demand payment from the
corporation.

They are the people who contribute their skills, abilities and ingenuity to the

Employees corporation. They are the ones who invested their future in the company with full trust
and confidence that the entity would make them secure. Employees and
corporations have a symbiotic relationship. Employees do what is best for the
corporation so that the corporation can provide them gainful and satisfying work.

M V . D E C H O S A
 Stakeholders of a Corporation
The very reason for the existence of the corporation, the buyers of its products and services for
final consumption, enjoyment, etc. They are of the paramount considerations in the operation
Clients
of the corporation. To balance best the interest of the customer, first there has to be a unilateral
and voluntary acct of compassion by the businesses to consumers.

The gov’t has several interest but the most apparent is the taxes that the corporations are

Government paying. Taxes makes the gov’t afloat and survive, referred as the “lifeblood theory” of taxation.
Aside from taxes, it helps the economy in general. Businesses means jobs. Jobs provide income
to individuals as salaries and salaries translates to purchasing power.

Also, the services rendered by the corporation somehow lessens the burden of the government;
i.e. health services, education, vital industries (power, water, transportation) .

M V . D E C H O S A
 Stakeholders of a Corporation
The public has a stake in corporations considering that corporations provides
Public the citizens with the essentials like goods, services, employment and tax money
for public programs.

For instance, concerns on natural resources. There is a great public interest in

businesses that belong to extractive industries like mining, logging & petroleum
exploration.

M V . D E C H O S A
 Purposes of a Corporation

To Offer Vital To Offer Goods

Early Stage To Increase Services to the and Services to
Survival Profit G eneral Public the Mass Market

1 2 3 4

According to Milton Friedman, the social responsibility of business is “to increase profit”.

M V . D E C H O S A
 Shareholders,
Bondholders and
Directors
KNOW THE PLAYERS OF THE CORPORATION

M V . D E C H O S A
 Shareholders/ They are artific ial or natural persons that are

Stockholders legally regarded as owners of the corporation.

Stockholders are bestowed with special privileges depending on the class of their stockholdings.

These rights may include:

1. The right to vote on matters such as elections of the board of directors.

2. The right to propose shareholder resolutions.

3. The right to receive dividends.

4. Pre-emption right which is the right to purchase new shares issued by the company to maintain its percentage of ownership
in the company. Also called right to first refusal.

5. The right to liquidating dividends. That is the right to receive the company’s assets during liquidation or cessation of business.

Stockholder’s rights to a company’s assets come only second to the rights of the outside creditors of the company.

M V . D E C H O S A
 Shareholders/ They are artific ial or natural persons that are

Stockholders legally regarded as owners of the corporation.

Shareholders are considered principals, and the directors and officers are considered agents under the
agency theory in governance.

As principals, they are expecting things that the agents would do would be the paramount benefit of the
stockholders.

Although the directors and officers of the company are bound by fiduciary duties to act in the best interest of
the shareholders, still the shareholders themselves deserves an independent third party that would attest on
what the management team is doing. This is where external auditors would come in the picture to lend
credibility on the reports prepared by the management.

M V . D E C H O S A
 Bondholders A person or entity that is the holder of a currently outstanding bond.

▪ Bonds are a debt security under which the issuer owes the holders a debt and, depending on the terms of the bond, is
obliged to pay them interest (the coupon) and or repay the principal at a later date, which is termed the maturity.

▪ The volatility of bonds (especially short and medium dated bonds) is lower than that of equities ( stocks ). Thus bonds are
generally viewed as safer investments than stocks.

▪ Bonds are often liquid – it is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much.

▪ Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its
bondholders will often receive some money back (the recovery amount).

▪ There are also a variety of bonds to fit different needs of investors.

A bond being a certificate of indebtedness by the issuing corporation provides some advantages on the
holder. The holder has the complete authority to manage the bond in any way that he sees fit and
advantageous to him. He can even sell them for it is an investment on his part.

M V . D E C H O S A
 Board of A collegial body that exercises the corporate powers of all

Direc tors
corporations formed under the Corporation Code . It conducts all
business and controls or holds all property of such corporations.

The Board of Directors (Board) is primarily responsible for the governance of the
corporation. It needs to be structured so that it provides an independent check on
management. As such, it is vitally important that a number of board members be
independent from management.
The BOD will be headed by the chairman of the board who is considered the most
influential person in the corporation. The board’s activities will be determined by the
powers, duties and responsibilities delegated to it or conferred by an authority, which is
detailed in the corporation’s by laws.

M V . D E C H O S A
 Duties of the Board of Direc tors
▪ Governing the organization by establishing broad policies and objectives
▪ Investment policies
▪ Diversification policies

▪ Selecting, appointing, supporting and reviewing the performance of the chief executive

▪ Ensuring the availability of adequate financial resources

▪ Approving the annual budgets

▪Accounting to the stakeholders the organization’s performance

Additional information on this topic : SEC MEMORANDUM CIRCULAR NO. 2 Series of 2002

M V . D E C H O S A
CHAPTER 01 | Corporation & Corporate Governance

Multinational
& Transnational
Corporations February 22, 2021
 M UL TIN A TIO N A L
& TRA N SN A TIO N A
L C O RP O R A TIO N S

⩥ Enterprises that manage production or delivers

servic es in more than one c ountry.

Multinational Corporation ⩥ Entities that have their management

(MNC) headquarters in one c ountry (home c ountry) &

Transnational Corporations
operate in serveral other c ountries (host
countires)
(TNC)
⩥ Industries like manufac turing, oil, c onsulting,
ac c ounting, telec ommunic ations, etc .

15
M UL TIN A TIO N A L
& TRA N SN A TIO N A
L C O RP O R A TIO N S

MultinationalCorporation
(MNC)
have investmentsin other c ountries

do not have coordinated product offerings in

each country

focused on adapting their products and service

to eac h individual loc al market
consumer
goods
manufacturers

MCDONALDS 7-ELEV EN
 UNITED NATIONS COMMISSION ON
TRANSNATIONAL CORPORATIONS
AND INVESTMENT
Enterpriseswhic h own or c ontrol produc tion
or service facilities outside the country in
whic h they are based.

⩥ Operates in more than one country at a

Transnational time

Corporation (TNC)
⩥ headquarters in one c ountry

⩥ operates wholly/partially owned

subsidiariesin one or more c ountries

⩥ muc h more c omplex firms

⩥ invested in foreign operations

⩥ c entral c orporate fac ility but give dec ision-

making, R&D and marketing powers to eac h
individual foreign market
individual
foreign
markets

SHELL ACCENTURE
 M UL TIN A TIO N A L
& TRA N SN A TIO N A
L C O RP O R A TIO N S

M ost TNC s and M NC s are Highly influential to C ountries and regional

massive with budgets that globalization, ec onomic politic al distric ts at times
outweigh smaller nations' and environmental tender incentives
gross domestic produc t lobbying.
(GDP)
 MOTIVES

Escaping the Protec tionist

Desire for Growth Policies
Through direc t foreign investment, a
A new foreign market might provide
corporation can bypass high tariffs that
opportunities for new growth.
prevent its good from being
c ompetitively priced.

Preventing C ompetition
Reduce Costs
The most c ertain method of preventing
This c an be ac hieved mainly through the
ac tual or potential c ompetition from
use of c heap foreign labor in developing
foreign businesses is to ac quire those
countries.
businesses.
 Q U A R KG R O V E V EN TUR ES

• ability to disrupt traditional

Transnational corporations ec onomies, impose

monopolistic prac tic es and
with headquartersin the assert a politic al and ec onomic

United Stateshave
agenda on a country

played an increasingly • ability to use foreign

dominant role in the world subsidiariesto minimize their tax

liability
economy.
15
M UL TIN A TIO N A L
& TRA N SN A TIO N A
L C O RP O R A TIO N S

Company
Overview
WALT DISNEY C O M PA N Y

07
The Walt Disney
Company

M EDIA PARKS AND STUDIO C O NSUM ER INTERAC TIVE

NETWORKS RESORTS ENTERTA INM EN T PRODUCTS M EDIA
CHAPTER 01 | Corporation & Corporate Governance

Corporate
Governance February 22, 2021
 C O R P O R A TE
G O V ER N A N C E

Corporate
Governance
Malaysian High Level Finance C ommittee Report
on Corporate Governance:

The process and structure used to direct and manage the

businessand affairsof the c ompany towards enhancing
business prosperity and corporate accountability with the
ultimate objec tive of realizing long-term shareholder va lue,
whilst taking into account the interests of other stakeholders
C O R P O R A TE
G O V ER N A N C E

Corporate
Governance
The Wall Street Journal (23 June 1999)

The process and structure used to direct and manage the

business and affairs of the company towards enhancing
business prosperity and corporate accountability with the
ultimate objective of realizing long-term shareholder value,
whilst taking into account the interests of other stakeholders
 C O R P O R A TE
G O V ER N A N C E

Corporate
Governance
SEC Memorandum C ircular No. 2, Seriesof 2002,
C ode of C orporate Governance

Refers to a system whereby shareholders, c reditors and

other stakeholders of a c orporation ensure that
management enhanc es the value of the c orporation as it
competes in an increasingly global market place
C O R P O R A TE
G O V ER N A N C E

Corporate
Governance
Sir Adrian Cadbury (Global Governance Pioneer)

Corporate governance is concerned with holding the

balanc e between ec onomic and soc ial goalsand
between individual and c ommunal goals. C orporate
governance framework is there to encourage the efficient
use of resourc es and equally to require ac c ountability for
the stewardship of those resources. The aim is to align as
nearly as possible the interests of individuals, corporations
and society.
 C O R P O R A TE
G O V ER N A N C E

CORPORATE The struc tures and proc esses

by whic h c ompanies are

GOVERNANCE direc ted and c ontrolled.

Good Corporate
Governance
helps companies operate more efficiently c ontributes to development

mitigate risk and safeguard against

mismanagement

improve access to capital that will fuel

growth

makes companies more accountable

and transparent to investors

provide tools to respond to stakeholder

concerns
CHAPTER 01 | Corporation & Corporate Governance

FUNDAMENTAL
OBJECTIVES
OF CORPORATE
GOVERNANCE February 22, 2021
 FUNDAMENTAL OBJECTIVES
OF CORPORATE GOVERNANCE

CONSCIOUS CONSIDERATION OF THE

INTERESTS O F O THER STA KEHO LDERS
IMPROVEMENT OF SHAREHOLDER VALUE
When a c ompany meetsthe objec tive of inc reasing the
Shareholders' value can be improved by making a pre-
shareholder value, it will have greater internally-generated
commitment to build better relations with primary stakeholders
resourc esin improving its c ommitment in meeting its
like employees, customers, suppliers and communities.
environmental, c ommunity and soc ial obligations.
CHAPTER 01 | Corporation & Corporate Governance

WHAT
GOOD
GOVERNANC
E PROMOTES
February 22, 2021
WHAT
GOOD GOVERNANCE
PROMOTES

TRANSPARENCY
Transparency is vital with respect to corporate governance due to the critical nature of reporting financial
and non-financial information.

A C C O UNTA BILITY
It is acknowledging and taking charge for and being transparent about the impacts of the company's
policies, decisions, actions, products and its associated performance.

PRUDENCE
Prudence is defined within the Code of Governance as "care, caution and good judgement as well as
wisdom in looking ahead."
CHAPTER 01 | Corporation & Corporate Governance

BENEFITSOF
GOOD
GOVERNANCE February 22, 2021
 BENEFITSOF
GOOD GOVERNANCE

Reduced Vulnerability Marketability

Adopting good corporate governance This leads to easy ac c ess to c apital in financ ial
prac tices leads to an improved system of markets which helps the company survive in an
internal c ontrol. even more c ompetitive environment.

Credibility
Valuation
The c ompany does not need to spend
M ore than 84%of the global investors are
more resourc es in c omplianc e with the
willing to pay a higher price or a premium for
regulatory and other financ ial institutions'
the shares of a well-governed c ompany over
requirementsnec essary sinc e all these
one considered poorly governed given all
things are already integrated in
financ ial figures c omparably equal.
c ompany's operating approac h.
CHAPTER 01 | Corporation & Corporate Governance

In traditional approach (neo-

classical) approach, corporation is
treated as a single entity, it is often
called holistic approach. It is one of

AGENCY the features of a sole proprietorship.

Owner-managers have no conflicts
of interests. In big companies, we

PROBLEMSIN almost always have the separation

of owners and managers. Financial

CORPORATIONS
manager should work is the best
interests of the owners by taking
actions that increase the value of
the company. However, we’ve also
seen that in large corporations
ownership can be spread over a
huge number of stockholders.
 1. Agency Relationships and C osts

• The connection between owners and managers is ca lled an principal-agent

problem and the conflict is called an agency relationship. Such a relationship
exists whenever someone(the principal) hires another (the agent) to represent his
interests. The shareholders are the principals; the managers are their agents.
Shareholders want management to increase the value of the firm, but managers
may have their own axes to grind or nest to feather. Agency costs are incurred
when (1) managers do not attempt to maximize firm value and (2) shareholders
incur costs to monitor the managers and influence their actions.
 2. Goals of financial management

•Assuming that we restrict ourselves to for-profit businesses, the goal of financial

management is to make money or add value for the owners. This goal is a little
vague, of course, so we examine some different ways of formulating it in order to
come up with a more precise definition. Such a definition is important because it

leads to an objective basis for making and evaluating financial decisions.

 2. Goals of financial management

• If we were to consider possible financial goals, we might come up with some ideas like the following:
▪ To survive
▪ To avoid financial distress and bankruptcy
▪ The beat to competition.
▪ To maximize sales or markets share.
▪ To minimize c osts.
▪ To maximize profits.
▪ To maintain a steady earnings growth.
3. Do Managers act in the Stockholder’s interests?
4. Managerial Compensation

Management will frequently have a significant economic incentive to

increase share value for two reasons. First, managerial compensation,
particularly at the top, is usually tied to financial performance in general an
oftentimes to share value in particular. For example, managers are
frequently given the option to buy stock at a bargain price. The more the
stock is worth, the more valuable is this option. In fact, options are
increasingly being used to motivate employees of all types, not just top
management.
 5. Control of the firm

ultimately rests with stockholders. They elect the board of directors who in turn,
hire and fire management. An important mechanism by which unhappy
stockholders can act to replace existing management is called a proxy fight.

A proxy fight is the authority to vote someone else’s stock.

 6. Stakeholders
Management and stockholders are not the only parties with an interest in the
firm’s decisions. Employees, customers, suppliers and even the government all
have a financial interest in the firm.

AG ENCY THEORY IN G OVERNANCE

Agency theory suggest that the firm can be viewed as a loosely defined contract between resource
providers and the resource controllers. It is a relationship that came into being occasioned by the
existence of one or more individuals, called principals, employing one or more other individuals,
called agents, to carry out some service and then entrust decision making rights to the agents.
 EFFECTSOF AGENCY IN GOVERNANCE

▪ Conflict of Interest ▪ Shareholder Activism

▪ Management Opportunism ▪ Managerial Defensiveness
▪ Incurrence of Agency Cost

CONCEPT OF GOAL CONGRUENCE

is the harmony and alignment of goals of both the principal and the agent which is consistent with the
overall objectives of the organization. While it is true that in agency relations, the presence of self-
interested behavior is a given, nevertheless, managers can be encouraged to act in shareholder’s best
interests by giving incentives which will compensate them for good performance on one hand at the same
time give them disincentives on their poor performance on another.
 PERFORMANCE INCENTIVES AND
DISINCENTIVES
*Shares Incentives-this can be done when a company is a publicly-listed company and managers are
given a chance to subscribe shares of the company at a discounted price.

*Shareholder’s Intervention--there is a visible shift of character of shareholders by a large scale.

*Threat of being fired-the shareholders who have ultimate control over of the corporation c a take a
straight and hostile approach by threatening the board, executives, and managers with removal from
office if they place their personal interests over that of shareholders and that of maximizing the value of the
firm.

*Takeover Threat-it is but normal for board, executives and managers to move heaven and earth to avoid
or discourage corporate takeovers as they are aware that their job would at least be at risk if not to be lost
totally if takeover takes place.
 ROLES OF THE NON-EXECUTIVE DIRECTORS

Definition

• One who is not part in the executive function of the management

team.
• Is not an employee of the company or connected with it in any
other view.
• His/her role is to give a meaningful contribution to the board by
providing objective critic ism.
• Bring an independent judgment to bear on issues of strategy,
performance and resources.
ROLES OF THE NON-EXECUTIVE DIRECTORS

Responsibilities:

• Strategy

• Establishing Networks

• Monitoring of Performance

• Audit
ROLES OF THE NON-EXECUTIVE DIRECTORS

Strategy

• To offer a creative contribution and to act as a

constructive reviewer in looking at the goals and
plans developed by the chief executive and his
executive team.

• Contribute in the development of the company’s

long term goals and vision.

• Partic ipate in settling long-term broad operational

principles and policies that benefits the stakeholders
in areas that concerns on company stability,
increasing the firm value, and in increasing
shareholders value.
ROLES OF THE NON-EXECUTIVE DIRECTORS

Establishing Networks

• To represent the company in the some external corporate

undertakings. To connect the company to the outside
world in the process, gain benefit from networks of
businesses.
ROLES OF THE NON-EXECUTIVE DIRECTORS

Monitoring Performance

• Take the responsibility for monitoring the performance of

executive management, more particularly on matters
relating to the progress made towards realizing the
established company strategies.

• To monitor and examine the performance of

management in meeting agreed goals and objectives of
the company.

• Suc c ession planning is also part of his responsibilities but

taking into consideration the sensitivity of the matter.
ROLES OF THE NON-EXECUTIVE DIRECTORS

Audit

• To ensure that the company report properly to its

shareholders, this can be done by presenting a true, fair
and real reflection how the company was administered at
any given time.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Definition

• Isa corporate officer principally accountable for managing the

financial risks of the corporation.

• Responsible for financial planning and record keeping as well as

financial reporting to higher management.

• To handle both the cash inflow and outflow and to create

reports about the c orporation‘s spending.

• Supervise and manage a large accounting department, while

coming up with ways to maximize profit to the company.

• Evaluate the way in whic h employees work to determine the

way to most efficiently get work done for the least amount of
money.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Implements Internal C ontrols

• Responsible for conveying the important financial controls to a

company.
➢ Cashflow
➢ Overhead expense
➢ Establishing Credit Policies
➢ Working with majors vendors to attain more favorable payment
terms
➢ Implementing measures for assessing and evaluating optimal
inventory levels
➢ Develop effective controls that provide supervision against
fraudulent activities.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Supervises Major Impact Projects

• Handles and supervises those projects that require

significant quantitative and qualitative interpretations and
analysis in order to reach an understanding of the options
that are available.

• Responsibility for developing a c ompany’s annual budget,

work together with the business owners and division or
department managers to ensure that the final financial
product accurately and objectively projects the real
requisites of the business.

• Carry out a meticulous analysis of a company’s future

capital investment requirements as a prerequisite in
securing additional financing.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Develops Relations with Financing Sources

• To institute good working relationships with banks and other

financial institutions that may impact on the company’s
ability to finance its operations.

• Regular Meetings with officers of the company’s banks to

review ongoing operations, discussing possible future loan
transactions, negotiating more favorable terms for bank lines
of c redit and discussions with private investors on how
additional capital might be invested into the enterprise.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Advisor Management

• Facilitate and help the business owners, executives and

other top managers make the substantial connection
between a company’s operations and its financial
performance that are reflected in the actual figures and
also with that of projections.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Drives Major Strategic Issues

• Take part of getting involved on some major strategic

issues that will have an impact on the company’s long-
term future. Keeping an eye diversification of a particular
product lines, business activities, and portfolio is also part
of the CFOs concern.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Risk Manager

• The CFO is in the best position to foresee risks considering

that they have this rare perspective on how the company
operates.

• CFO are close to the internal control system and financial

reports which pass through many operational areas.

• The CFO may be in the best position to anticipate high

risks transactions and the adverse consequences of a
changing external environment.
ROLES OF THE CHIEF FINANCIAL OFFICER (CFO )

Objective Referee

• CFO needs to demonstrate impartiality such as when

advising the CEO or the board of directors on accounting
matters.

• To present important financial issues is an invaluable

resource but it should always be in the context that it is not
being done to favor somebody.

• The CFO can and should be a trusted adviser in matters of

financial reporting.
ROLES OF THE AUDITCO MMITTEE

Definition

• The audit committee is an essential component in

the overall corporate governance system.

• The objectives of this committee should be geared

toward carrying out practical, progressive changes
in the functions and expectations pla ced on
corporate boards.

• One of the fundamental principles of an effective

audit committee is that committee members should
be independent from the operational aspects of the
company.
ROLES OF THE AUDITCO MMITTEE

Audit C ommittee’s Responsibilities

• An audit committee should be engage mainly in an

oversight function and ultimately is responsible for the
company’s financial reporting processes and the quality
of its financial reporting.

• The c ommittee must have a working knowledge on the

company’s goals and its long-term plans and visions
including the issues the company is facing in trying to
achieve these objectives.

➢ Risk identification and response

➢ Pressure to manage earnings
➢ Internal controls and company growth.
ROLES OF THE AUDITCO MMITTEE

Risk Identification and Response

• To be effective, an audit committee must have an

understanding of the risks the company faces, and more
importantly, the company’s internal control system for
identifying and mitigating those risks. Risks that could
affect the company and that the audit committee should
be conscious about include:
ROLES OF THE AUDITCO MMITTEE

EXTERNAL RISK (INDEPENDENT):Rapid Technological Changes

• Audit committee should always be on the lookout for the

company not to be left behind due to advancement of
technology.
ROLES OF THE AUDITCO MMITTEE

EXTERNAL RISK(INDEPENDENT): Downturns in the industry

• Unrealistic earnings expectations by analysts

➢ The committees should be associated with realistic
information and deal with figures from a realistic point,
because this information would be the real basis in putting
up plans for c ompany’s future.

• Operating/Internal Risk
• Key personnel turnover – could hamper the operational
momentum of the company rendering it slow in its
progress in achieving its vision
ROLES OF THE AUDITCO MMITTEE

INFORMATION AND C ONTROL

• Carrying out its responsibility has to address the following

concerns which are considered as perennial in the most
organizations:

➢ Unsuitable control environment that are sometimes toned at

the top.

➢ Lack of sincere management supervision and inappropriate

management override of existing c ontrols whic h is by
desc ription the best habitat for abuse.

➢ Timeliness is another concern since information needs to be

communicated early enough to the stakeholder for these
information to be useful.
ROLES OF THE AUDITCO MMITTEE

Responsible for Financial Reporting:

• Board of Directors and its Audit C ommittee

• Finance and Accounting
• Auditor (Independent)

➢ An Audit Committee that functions well could definitely

send a strong message and partial assurance to the other
stakeholders that the system is in place and it is protecting
the organization both in short and in long-term basis.
BA 224
CHAPTER 1: CORPORATION AND
CORPORATE GOVERNANCE
Ivan Lester Ayson, CPA, MBA (BS REM 2)
Roles of the External Auditor
An audit is an "independent examination of financial information of
any entity when such an examination is conducted with a view to
express an opinion thereon.
 Assures readers that the Financial Statement prepared by
management is accurate.

WHY IS ITNEEDED
 Separation of Ownership and Managements

 To cast away doubts on the information given by management.

 Information risk is the probability that the information circulated by

a c ompany will be false or misleading.
Roles of the External Auditor
Factors that contribute to Information Risks
 Remoteness of information providers to the users
🞑 Less involvement of shareholders in day-to-day operations
🞑 Geographical limitation
 Bias of information providers
🞑 Financial statements is the “report card” of the Management
🞑 Conflict of Interest – as information may be presented in favor
of management
 Volume of Data
🞑 Possibility of erroneous data or improperly recorded
information included due to the volume of transaction
 Complexities of Transactions
🞑 Changes brought about by innovation
🞑 Highly technical information
Roles of the External Auditor
Auditor’s Duty
 Prepares Audit Report
🞑 Opinion on whether the FShave been prepared in a c cordance to
standards and/or relevant legislation,
🞑 Any reservation that the auditor has on the report
 Must consider whether the following are present:
🞑 Proper a c counting records kept by the company
🞑 Financial statement figures that agree with accounting records.
🞑 Adequacy of Notes to FSand other disclosure necessary
🞑 Compliance with relevant law and standards of financial accounting and
reporting.
 Review the other information alongside the Financial Statements
Corporate Governance Awards

 2019 Top-Performing Public ly Listed Companies (PLCs),

ASEAN Corporate Governance Sc orec ard, Institute of
Corporate Direc tors (ICD)
 2018 The Asset Platinum Award for Excellence in
Environmental, Social and Governance (ESG) Practices
 2018 Top 50 ASEAN Public ly Listed Companies (PLCs),
2nd ASEAN Corporate Governanc e Awards
 2017 Top 10 Publicly Listed Companies (PLCs), and Top 5
-Industrial Sector, ASEAN Corporate Governance
Scorecard (ACGS), Institute of Corporate Directors
 2016, 2013, 2012 PSE Bell Award for Corporate
Governanc e, Philippine Stock Exchange
 2016 Governanc e Awardee, Investors’ Forum, Institute of
Corporate Directors (ICD) in partnership with Fund
Managers Association of the Philippines, Philippine
Investment Funds Association, Trust Officers Association
of the Philippines and PJS Corporate Support Inc.
Corporate Governance Awards