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ACC 704 TOPIC 9: ROLE OF TRANSPARENCY IN CORPORATE GOVERNANCE ACC 704 TOPIC 9: ROLE OF TRANSPARENCY IN CORPORATE GOVERNANCE

Evaluate the principal means by which companies can become transparent ØTransparency and accountability need Evaluate the principal means by which companies can become transparent ØTransparency and accountability need each other and can be mutually reinforcing. Together they enable citizens to have a say about issues that matter to them and a chance to influence decision-making and hold those making decisions to account. ØEach concept is part of a strategy used for and by citizens to have the means, resources and opportunities to influence decision-making and affect development outcomes.

Evaluate the principal means by which companies can become transparent ØAs a principle, public Evaluate the principal means by which companies can become transparent ØAs a principle, public officials, civil servants, managers and directors of companies and organisations and board trustees have a duty to act visibly, predictably and understandably to promote participation and accountability. ØSimply making information available is not sufficient to achieve transparency. Large amounts of raw information in the public domain may breed opacity rather than transparency.

Evaluate the principal means by which companies can become transparent Information should be managed Evaluate the principal means by which companies can become transparent Information should be managed and published so that it is: Relevant and accessible: Information should be presented in plain and readily comprehensible language and formats appropriate for different stakeholders. Timely and accurate: Information should be made available in sufficient time to permit analysis, evaluation and engagement by relevant stakeholders

Evaluate the principal means by which companies can become transparent Accountability means ensuring that Evaluate the principal means by which companies can become transparent Accountability means ensuring that officials in public, private and voluntary sector organisations are answerable for their actions and that there is redress when duties and commitments are not met. Accountability is an institutionalised (i. e. regular, established, accepted) relationship between different actors. One set of people/organisations are held to account (‘accountees’), and another set do the holding (‘accounters’).

Evaluate the principal means by which companies can become transparent • There are many Evaluate the principal means by which companies can become transparent • There are many ways people and organisations might be held to account. Accountability relationship as having up to four stages: • Standard setting: setting out the behaviour expected of the ‘accountee’ and the criteria by which they might validly be judged. • Investigation: exploring whether or not accountees have met the standards expected of them. • Answerability: a process in which accountees are required to defend their actions, face skeptical questions, and generally explain themselves. • Sanction: a process in which accountees are in some way punished for falling below the standards expected of them (or perhaps rewarded for achieving or exceeding them).

Evaluate the principal means by which companies can become transparent Horizontal accountability consists of Evaluate the principal means by which companies can become transparent Horizontal accountability consists of formal relationships within the state itself, whereby one state actor has the formal authority to demand explanations or impose penalties on another. Its focus is on internal checks and oversight processes. Example: executive agencies must explain their decisions to legislatures, and can in some cases be overruled or sanctioned for procedural violations. Public Accounts Committee – scrutinize govt expenditure

Evaluate the principal means by which companies can become transparent Vertical forms of accountability Evaluate the principal means by which companies can become transparent Vertical forms of accountability Are those in which citizens and their associations play direct roles in holding the powerful to account. Elections are the formal institutional channel of vertical accountability. But there also informal processes through which citizens organize themselves into associations capable of lobbying governments and private service providers, demanding explanations and threatening less formal sanctions like negative publicity.

Evaluate the principal means by which companies can become transparent Diagonal accountability Operates in Evaluate the principal means by which companies can become transparent Diagonal accountability Operates in a domain between the vertical and horizontal dimensions. It refers to the phenomenon of direct citizen engagement with horizontal accountability institutions when provoking better oversight of state actions. Citizens by-pass cumbersome or compromised formal accountability systems to engage in policy-making, budgeting, expenditure tracking and other similar activities.

Evaluate the principal means by which companies can become transparent ØTransparency is obviously a Evaluate the principal means by which companies can become transparent ØTransparency is obviously a buzzword. Ømuch harder to actually do transparency in the day-to-day grind of business, especially online business. Øreason why transparency is so appealing is largely due to cultural trends and human behavior. Øit makes sense that we like companies who are transparent, too. ØIt’s about being a real person, a real leader, and a real company.

Evaluate the principal means by which companies can become transparent Transparency International defines corruption Evaluate the principal means by which companies can become transparent Transparency International defines corruption broadly as the abuse of entrusted power for private gain. This can happen anywhere, and can be classified as grand or petty, depending on the amounts of money lost and the sector where it occurs. International community, through the creation of several instruments, has been working towards a global standard of transparency that sets out specific complimentary responsibilities for Host States (i. e. states in which commodities are found) and Home States (i. e. states where companies active in the commodity sector are headquartered).

Evaluate the principal means by which companies can become transparent q Social media is Evaluate the principal means by which companies can become transparent q Social media is a new way to be transparent. People express themselves more openly and in a more public way than ever before. q We do business in a culture that has experienced the erosion of privacy. q It’s no longer seen as a virtue to be private. q Whistle blowers and hackers are hailed as celebrities, and less are being maligned as traitors. q we get a little nervous and change a password or two, but it’s almost like it’s an expected thing. q Privacy is on the decline, and transparency is the new virtue du jour.

Evaluate the principal means by which companies can become transparent • Transparency produces trust. Evaluate the principal means by which companies can become transparent • Transparency produces trust. Who can trust a company or person who doesn’t disclose information, who keeps everything close to the vest, who doesn’t share anything? • few ways to build trust, one of them is to be transparent. The opposite of transparency is secrecy, which only serves to erode trust. • Entire organizations exist for the sole purpose of encouraging transparency. Why? Because a culture that is more transparent can build trust. Trust defeats corruption. • Transparency wins, because transparency engenders trust.

Evaluate the principal means by which companies can become transparent v A culture of Evaluate the principal means by which companies can become transparent v A culture of transparency takes shape when leaders intentionally manifest their own personal transparency, and encourage it in the attitudes and behaviors of their team members. v In other words, transparency starts from the top. v Be transparent about the price. v Be transparent about guarantees v Be personally transparent v Be transparent about business mistakes and successes v Be transparent about change

Role of financial reporting and audit as mechanisms of corporate governance Corporate governance structures Role of financial reporting and audit as mechanisms of corporate governance Corporate governance structures serve: 1) to ensure that minority shareholders receive reliable information about the value of firms and that a company’s managers and large shareholders do not cheat them out of the value of their investments 2) to motivate managers to maximize firm value instead of pursuing personal objectives

Role of financial reporting and audit as mechanisms of corporate governance Financial accounting information Role of financial reporting and audit as mechanisms of corporate governance Financial accounting information is the product of corporate accounting and external reporting systems that measure and routinely disclose audited, quantitative data concerning the financial position and performance of publicly held firms. Parties contracting with the firm desire information both about the firm’s ability to satisfy the terms of contracts and the firm’s ultimate compliance with its contractual obligations.

Role of financial reporting and audit as mechanisms of corporate governance The quality of Role of financial reporting and audit as mechanisms of corporate governance The quality of financial disclosure can impact firms’ cash flows directly, in addition to influencing the cost of capital at which the cash flows are discounted. Three channels through which financial accounting information improves economic performance 1. financial accounting information of firms and their competitors aid managers and investors in identifying and evaluating investment opportunities.

Role of financial reporting and audit as mechanisms of corporate governance 2. channel through Role of financial reporting and audit as mechanisms of corporate governance 2. channel through which we expect financial accounting information to enhance economic performance is its governance role. 3. The third channel through which we expect financial accounting information to enhance economic performance is by reducing adverse selection and liquidity risk

Role of financial reporting and audit as mechanisms of corporate governance There have been Role of financial reporting and audit as mechanisms of corporate governance There have been major changes over time in the context in which Audit Committee’s (AC) operate and cultural and structural differences internationally will influence their operation, but overall there has been an increasing degree of codification and harmonization of ‘‘best practice’’ Arguments associated with the promotion of ACs emphasize their potential contribution to, for example, the relationships between directors, investors and auditors, the discharge of accountability and directors’ execution of their responsibility

Role of financial reporting and audit as mechanisms of corporate governance ACs impact on Role of financial reporting and audit as mechanisms of corporate governance ACs impact on external audit and internal control and audit. Consequence of reviews of alleged weakness in audit effectiveness that recommendations for AC requirements have been made and actual outcomes in this area are therefore an important subject for evaluation. The potential for ACs to influence a number of factors concerning external and internal audit is asserted in professional literature and in policy documents

Role of financial reporting and audit as mechanisms of corporate governance The AC can Role of financial reporting and audit as mechanisms of corporate governance The AC can strengthen the internal audit function (COSO, 1994; Turnbull, 1999) and internal audit can in turn be an important resource to the AC in fulfilling its responsibilities. It is also argued that ACs should be responsible for overseeing management’s assessment of business risk and that they can strengthen management’s ability to identify and assess both internal and external risks and hence potential opportunities and challenges facing the entity in achieving its operating, financial, and compliance goals.

Role of financial reporting and audit as mechanisms of corporate governance ACs impact on Role of financial reporting and audit as mechanisms of corporate governance ACs impact on external audit and internal control and audit. Consequence of reviews of alleged weakness in audit effectiveness that recommendations for AC requirements have been made and actual outcomes in this area are therefore an important subject for evaluation. The potential for ACs to influence a number of factors concerning external and internal audit is asserted in professional literature and in policy documents

Transparency in the Public Sector Transparency International defines corruption broadly as the abuse of Transparency in the Public Sector Transparency International defines corruption broadly as the abuse of entrusted power for private gain. This can happen anywhere, and can be classified as grand or petty, depending on the amounts of money lost and the sector where it occurs. Grand corruption Acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good. Petty corruption Definition: everyday abuse of entrusted power by low- and mid-level public officials in their interactions with ordinary citizens.

Transparency in the Public Sector Public sector The government and its decentralised units – Transparency in the Public Sector Public sector The government and its decentralised units – including the police, military, public roads and transit authorities, primary schools and healthcare system – that use public funds and provide services based on the motivation to improve citizens’ lives rather than to make a profit. Øa picture of corruption in the public sector begins to emerge – any kind of abuse of entrusted power for private gain that takes place within the government or government bodies counts. ØThose who have been entrusted with power – public officials, for example – can benefit privately in several ways.

Transparency in the Public Sector Some of these are: Bribery the offering, promising, giving, Transparency in the Public Sector Some of these are: Bribery the offering, promising, giving, accepting or soliciting of an advantage as an inducement for an action which is illegal, unethical or a breach of trust. Inducements can take the form of gifts, loans, fees, rewards or other advantages. Embezzlement when a person holding office in an institution, organisation or company dishonestly and illegally appropriates, uses or traffics the funds and goods they have been entrusted with for personal enrichment or other activities Patronage form of favouritism in which a person is selected, regardless of qualifications or entitlement, for a job or government benefit because of political affiliations or connections.

Transparency in the Public Sector Nepotism form of favouritism based on acquaintances and familiar Transparency in the Public Sector Nepotism form of favouritism based on acquaintances and familiar relationships whereby someone in an official position exploits his or her power and authority to provide a job or favour to a family member or friend, even though he or she may not be qualified or deserving. Conflict of interest situation where an individual or the entity for which they work, whether a government. business, media outlet or civil society organisation, is confronted with choosing between the duties and demands of their position and their own private interests. Procurement a multi-step process of established procedures to acquire goods and services by any individual, company or organisation – from the initial needs assessment to the contract’s award and service delivery.

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