This Practice Note summarises the principles of corporate governance; how such a regime monitors corporate conduct of companies; and why such a regime is crucial in assisting shareholders. Maintained The Hong Kong Corporate Governance Code This Practice Note summarises the application, purpose and provisions of the Hong Kong Corporate Governance Code, which sets out standards of good practice for companies in relation to leadership and effectiveness of the board of directors, remuneration, accountability and relations with shareholders. Maintained This Practice Note discusses the responsibilities that are specific to the board and the responsibilities that the board may delegate.
While the five broad components of internal control did not change in the updated Framework, the new guidance accompanying the risk assessment component presents companies with an excellent opportunity to define and achieve important operational, reporting and compliance objectives.
Indeed, for some companies, the new guidance — and the linkages to an existing strategic planning process it requires — can substantially change how they manage their business, create operational efficiencies and even boost profitability. The Framework introduces 17 principles of internal control, each attached to one of the five components, and within each principle are included several points of focus.
All principles of the Framework that are relevant should be present and functioning for an entity to conclude it has effective internal controls. While points of focus help users understand each principle, they are not explicit requirements.
The analysis below focuses on the four principles for the risk assessment component Principles 6, 7, 8 and 9. Specify objectives with clarity This principle lays the groundwork to do the risk assessment itself. For some companies, this may be an area to consider enhanced processes and related documentation.
A company ordinarily needs to describe its operational, reporting external financial, external nonfinancial, internal and compliance objectives. Operations objectives Objectives for external financial reporting requirements are an important focus of external auditors, and hence a focus of company financial staff.
It is important for management to be vigorous in specifying objectives for each category as appropriate to the organization. Specifying operations objectives can be particularly valuable.
The points of focus for the operations objectives can help a company become better managed and help it mitigate risk. Indeed, from an operational standpoint, they can be as important as those objectives that apply to financial statement risk.
Developing and implementing operations objectives is essential for executing the strategic planning that some companies sorely lack.
For many firms, especially large companies that already have a robust strategic planning process, the new risk assessment guidance may have little impact. But many medium-size firms, and in particular, start-up firms, have not developed robust strategic planning processes. Those companies could benefit from achieving sufficient clarity of objectives in order to identify and assess risk.
Reporting objectives The Framework included language applicable to various forms of company reporting other than external financial reporting. But with the passage of the Sarbanes-Oxley Act, and related Securities and Exchange Commission rulemaking, the COSO internal control framework became closely associated with external financial reporting .
The Framework discusses in detail the use of the guidance for other reporting situations in order to provide context for applying the components and principles more broadly. Internal reporting systems have also become more important and sophisticated—not only for managing the company, but ensuring that expanded regulatory requirements are met.
Compliance objectives In following the compliance objectives of Principle 6, a company also has to manage the enormous amount of guidance it receives from a wide variety of regulatory bodies. A recommended approach would be to first meet COSO requirements.
Next, homogenize, where reasonable, the language in your documentation to other compliance mandate checklists that address a similar attribute Financial Industry Regulatory Authority, Basel III, etc.
Identify and analyze risks across the entity Principle 7 is used to answer the following questions: There are four types of responses: Under the guidance, the focus was on transactional risk, i. The Framework, with its emphasis on organizational objectives, puts a greater weight on entity-level risk.
Moreover, this approach demands that risk be looked at on an ongoing basis, rather than as a once-a-year exercise. Consider the potential for fraud in assessing risks to the achievement of objectives This principle looks at how fraud could prevent the entity from achieving the objectives identified in Principle 6.
The assessment management performs with respect to this principle considers fraudulent reporting, possible loss of assets and corruption resulting from the various ways that fraud and misconduct can occur. In tackling the demands of the new principle, companies can adopt various approaches.
The degree of estimates and judgments in external financial reporting Methodology for recording and calculating certain accounts, like inventory Fraud schemes and scenarios common to the industry sector and markets where the company operates The geographic regions where the company does business Nature of automation Unusual and complex transactions subject to significant management influence Last-minute transactions 2 Consider approaches to how individuals in the firm might circumvent or override fraud controls.
Identify and assess changes that could significantly impact the system of internal control This principle requires an assessment of change in the organization on an ongoing basis — both externally and internally —that could affect risk. External changes include those in the economic, regulatory and physical environment.
Implementing the risk assessment component All of the relevant principles in the Framework should be present and functioning in order for management to conclude that internal controls are effective. Many companies are starting with the Framework, determining if there are existing controls that satisfy the principles and then considering what new controls or improved documentation may need to be implemented to evidence how a principle is satisfied.
As discussed above, points of focus may be particularly helpful in assisting management and auditors in evaluating principles that may not have been as thoroughly developed in the Framework. As a best practice, management should at least consider every point of focus, determine whether the relevant points of focus are present and determine if other considerations are appropriate.
They should then document and support that the appropriate number of points of focus have been satisfied to substantiate that the underlying principle is in place and operating effectively.an analysis of the report the sun also rises by konstantin heiller I an analysis of two principals of corporate governance leadership and effectiveness apologize for the excess of expenses of Ravil, its ornate coffee shops sprayed unanimously.
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