Corporate Governance In the Public Sector A presentation

Corporate Governance In the Public Sector A presentation for the Institute of Certified Public Accountants of Kenya during the International Public Sector Accounting Standards, IPSAS’s Workshop 7 th & 8 th April 2011 Laico Regency Hotel, Nairobi. Chachi S. Francis, MBA (Free State), BSc (Nairobi) 1

Definitions • Corporate: – Involving or shared by all members of a group. – Connected with a corporation. • Corporation: – An organization that is recognised by law as a single unit. – A legal person (in law). • Govern: – To control or influence somebody/something or how something happens. • Governance: – The activity of controlling a country/organisation. 2

contd…definitions • • Transform: – Change the form/appearance of something. Transformation: – The process by which the form/appearance of a thing is changed. • Q: in your day to day work: –what are the inputs? Outputs? –Who are your stakeholders? What are their interest? 3

Corporate Governance • Corporate governance is the exercise of power / control / influence over a legal entity/organization/country. • The Concept originated in the Private Sector: • Corporate failures: - weak management boards - over-powerful chief executives - weak internal controls • Private sector is characterized by: - lack of segregation of chairman and chief executive roles. - lack of audit committee/internal audit functions - weak control/override of controls. 4

contd…Corporate Governance Initial focus was on: • Financial reporting and accountability. • Separation of chief executive and chairman roles. More recent focus on: • Identifying and managing risk. • Securing independent element on Board. • Defining the role of audit committees and relationship with audit, internal and external (audit charter? ). 5

Corporate Governance Factors influencing corporate governance: • • • Is there an issue about concentration of power? • • Is there an issue of risk and if so how well is it managed? Is there clarity about reporting to stakeholders? Is there clarity about accountability? Indeed what is meant by accountability? Is there need for an independent element to review executive management and to liase with audit? 6

An issue for the public sector? Constitution of Kenya and corporate governance Sec 166. (1) The President shall appoint— – (a) the Chief Justice and the Deputy Chief Justice, in accordance with the recommendation of the Judicial Service Commission, and subject to the approval of the National Assembly; and – (b) all other judges, in accordance with the recommendation of the Judicial Service Commission. SIXTH SCHEDULE (Article 262, TRANSITIONAL AND CONSEQUENTIAL PROVISIONS) – (2) A new Chief Justice shall be appointed by the President, subject to the National Accord and Reconciliation Act, and after consultation with the Prime Minister and with the approval of the National Assembly. 7

contd…Constitution of Kenya and corporate governance National values and principles of governance Sec 10. (1) The national values and principles of governance in this Article – bind all State organs, State officers, public officers and all persons whenever any of them— (a) applies or interprets this Constitution; (b) enacts, applies or interprets any law; or (c) makes or implements public policy decisions. 8

National values (2) The national values and principles of governance include – a) patriotism, national unity, sharing and devolution of power, the rule of law, democracy and participation of the people; (b) human dignity, equity, social justice, inclusiveness, equality, human rights, non-discrimination and protection of the marginalised; (c) good governance, integrity, transparency and accountability; and (d) sustainable development. 9

Bill of rights 20 (3) In applying a provision of the Bill of Rights, a court shall — (b) adopt the interpretation that most favours the enforcement of a right or fundamental freedom. 21 (4) In interpreting the Bill of Rights, a court, tribunal or other authority shall promote — (a) the values that underlie an open and democratic society…… 10

Corporate Governance Public Sector Definition: “The system by which organisations are directed and controlled” Underlying this definition are three principles: - Openness - Integrity - Accountability 11

Objective of IPSAs • IPSAs aim to: – improve the quality of general purpose financial reporting by public sector entities, leading to better informed assessments of the resource allocation decisions made by governments, thereby increasing transparency and accountability. 12

Corporate Governance Openness: - gives stakeholders confidence in decision making processes, actions of entities, and in the individuals concerned. 13

Corporate Governance Integrity: - honesty and objectivity. - propriety in the stewardship of public funds and resources. - dependent on control framework. - Dependent on personal standards and professionalism of individuals within entity - reflected in decision making procedures and quality of financial and performance reporting. Propriety: behaviour considered to be acceptable. 14

Corporate Governance Accountability: - process whereby entities and individuals within them are responsible for their decisions and actions, including stewardship of public funds and performance - achieved though clarity of responsibilities and roles 15

Corporate Governance principles These principles are reflected in four “dimensions” of public sector governance: - standards of behaviour (Balance of Power and Authority) - organisational structures and processes - control - external reporting 16

Standards of corporate governance/ Balance of Power § There should be a governing body of a Public Sector Entity with: ü Chairperson of the Governing body (e. g. Board of Directors / Governors / Trustees, ü Non-executive Members of Governing body. § § § ü Executive Management. Organisation leaders determine values and standards. Organisation should publish formal code of conduct. Code of conduct should cover: probity and propriety, selflessness, objectivity, honesty. Relationships – actual or potential conflicts of interest including political interests to be disclosed. Gifts, hospitality and entertainment controlled to ensure ‘no undue influence’. 17

Structures and processes Other Regulators PPOA, ERB, KACC, etc etc Public Stakeholders Shareholders Board Auditor CEO 18

contd…structure and processes • Clear policy on hiring and removal (of staff, directors, contractors). • Clarity of roles of shareholders, BOD, management. • Clear qualification requirements. • Clarity of remunerations. • Clear code of conduct and made available to all persons involved (staff, directors etc). • Clarity of Board schedule of meetings, reporting, etc. • Clarity of corporate social responsibility interventions. 19

Control Risk Management • Internal Audit • Audit Committees • Internal Control • Budgeting, Financial Management, Training. • Identify nature and extent of major risks. • Review of past risks. • Identify new risks arising from new objectives and activities. • Anticipate future risks and changes to risk. • Assess ability to reduce incidence of risk. 20

External Reporting Annual Reporting including: § Use of Appropriate Accounting Standards. § Performance against targets. § External Audit. § Statement of aims and objectives. § Commentary on the accounts and performance. § Statement of compliance with relevant codes. 21

Role of the governing body - defines the vision, mission and long-term objectives within policy and resource framework. - oversees delivery of planned results. - appoints senior management - approves and adopts annual report, including financial statements. - ensures there is an effective system of internal control. - oversees the processes of risk management 22

Chairperson separate from Chief Executive • preferably independent (non-executive). • provides leadership and cohesion. • ensures there is an effective process for reviewing performance of governing body (Board assessment). • ensures that the governing body has adequate support and information. • ensures that the business of the governing body is undertaken efficiently and on a timely basis. 23

Audit Committee • • At highest level of the organisation Is independent of executive management. Is a sub-committee of governing body. Membership confined to non-executives. Chairman to be other than chairman of board Meetings normally attended by Finance officer, internal auditor and external auditors. Have authority to investigate any matter. 24

Audit Committee’s Terms of Reference • May also known as the Audit Charter. • General roles include: • oversight over management’s responsibility for effectiveness of internal control system. • review adequacy of policies and practices for ensuring compliance with regulations, policies, etc. • review adequacy of internal audit resources. • recommend/approve appointment/removal of head of internal audit. • review activities and programme of internal audit, and co-ordination with external audit. • oversee entity’s relationship with external auditor. 25

Trends in corporate governance in the public sector Now considered a serious issue in the public sector because of concerns about: • Excessive confidentiality in decision making. • Avoiding influence of special interests? • Inefficiency in public expenditure. Now greater demand for: • Openness and accountability in government, with • Greater willingness to challenge decisions. 26

Control of public money (Constitution of Kenya) A state organ may be denied funds only for a serious material breach or persistent material breaches. However, a decision to stop the transfer of funds: • may not stop the transfer of more than fifty per cent of funds due to a county government. • shall not stop the transfer of funds for more than sixty days; and • will require the approval of both houses of parliament within thirty days or else the decision lapses. 27

Controller of Budget and Auditor General § The new constitution of Kenya separates the functions of: Ø“Controller of Budget”; and Ø“Auditor General. § Q: What are the implications if both positions were to be held by one person? 28

Controller of Budget § Role of The Controller of Budget: üto oversee the implementation of the budgets of the national and county governments by authorising withdrawals from public funds. üto submit to each House of Parliament a report on the implementation of the budgets of the national and county governments every four months. 29

Auditor General § The Auditor-General: ümay audit and report on the accounts of any entity that is funded from public funds. üSubmits audit reports to Parliament or county assembly. üTo be audited by a professionally qualified accountant appointed by Parliament. 30

Parliament/county assembly § Parliament or the county assembly shall, within 3 months after receiving an audit report, debate and consider the report and take appropriate action. 31

The link to globalization • Globalisation: – The process by which regional economies, societies, and cultures have become integrated through a global network of political ideas, communication, transportation, trade, technology, culture etc. • In essence, the world has become a global village and hence the evolution of uniformity/standards: – Air travel safety standards – IT / Telecommunication standards (computers, mobiles etc). – Radiation standards (X-rays, transceivers, scanners etc). – Financial standards (IFRS, IPSAs etc). – Audit standards (IAS). – Etc • The UN system has adopted IPSAs. 32

Benefits of corporate governance 1. The separation of ownership and control. 2. Alignment of the interests of the organization, shareholders , board, employees as well as the community in which the organization operates. 3. Protection of organizations as they are important to the welfare of individualsa) They create jobs, generate income and income tax. b) They produce a wide variety of goods and services. c) They provide mechanisms for savings and investments. 4. Creation of efficient organizations. 5. Environmentally and socially responsible corporate organizations. 6. Promotes competitiveness. 7. Gives confidence to investors. 33

Parting shot The primary responsibility for ensuring that Good Corporate Governance prevails in an institution lies with the BOARD of DIRECTORS of the corporate body. 34

Summary Do we agree: • Corporate governance is an issue for the public sector? • There is a link with efficiency/effectiveness? • About the standards that should be covered? • That there will be effects upon the organisation? • About the impacts on reporting and control? • That personal behaviour has to be covered? Overall, will raising the standards of corporate governance lead to better public services? 35

• • • Further reading Garratt, B. (ed. ). 2003. Developing Strategic Thought: A Collection of the Best Thinking on Business Strategy. London: Profile Books. Peters, T. 2003. Re-imagine! Business Excellence in a Disruptive Age, . London: Dorling Kindersley. Noel Hepworth, 2003. Corporate Governance in the Public Sector, CEF Conference, Slovenia. Wikimedia Foundation, Inc. 2011, International Public Sector Accounting Standards, retrieved 4 th April 2011, from www. wikipedia. org. Wikimedia Foundation, Inc. 2011, Globalization, retrieved 4 th April 2011, from www. wikipedia. org. International Federation of Accountants. International Public Sector Accounting Standards Board, retrieved 4 th April 2011, from www. ifac. org. Commonwealth of Australia. 2009. Corporate Governance: Handbook for the board: 5 Useful guides and checklists, retrieved 4 th April 2011, from www. w 3. org. United Nations Development Programme. 2009. Orientation Session on International Public Sector Accounting Standards (IPSAS). David Woodward, 2004. Corporate Governance in the Public Sector. European Internal Audit Conference. Eudora Koranteng. 2004. Corporate Governance. Ghana. Thank You! fchachi@gmail. com 36