Corporate governance is a matter closely related to the audit expectations gap but is wider as it concerns the structure that should be in place both within the company and those imposed by society to control how companies are governed. The committee on ‘the financial aspects of corporate governance’ was set up because of increasing lack of confidence in the existing controls on companies, including the internal controls within companies, how they reported and the way in which auditors conducted their work and reported their findings.
Corporate governance guidelines are developed so that it can be seen whether directors are maximizing returns to shareholders, that business risk is set at a reasonable level, that a director on the board of directors does not become dominant to the detriment of the shareholders, and that the remuneration of the directors is reasonable.
Corporate governance is the system by which companies are directed and controlled. It provides the architecture of accountability – the structures and processes to ensure companies are managed in the interest of their owner.
The committee on the financial aspects of corporate governance was set up in 1991, in response to some of the scandals of 1980.
All listed companies have to set up an audit committee to oversee the auditors work and to act as intermediaries between the auditors and the board of directors. The combined code, the UK’s corporate governance guidelines, says that the audit committee should be composed of at least three non – executive directors who should review the audits and its cost-effectiveness, as well as monitor the auditor’s independence and objectivity. Most are chaired by a senior non – executive director and have anything from three to seven members who have between them an experience of financial, legal and operational roles. The audit committee has traditionally listened to the auditor’s concerns and if the auditor needed more co-operation from the company it would lean on the directors.
The corporate governance framework operates at a number of levels. There are some areas where for example, parliament or the financial service authority has decided that it is appropriate to impose requirements on companies.
Companies will need to be compliant with the law and the rues and regulations that are imposes against them, they have a duty of care to make sure the they are compliant, failing to do so may have consequences in terms of fines and penalties imposed against them. The corporate governance framework sets out the policies which they should abide by and is in place to set standards of compliance.