1.

Purposes of code of corporate governance for listed companies and the role of agency
principle in corporate governance.

Corporate governance is defined as the process and structure used to direct and
manage the business and affairs of the company towards promoting business prosperity
and corporate accountability with the ultimate objective of realising long-term shareholder
value while taking into account the interest of other stakeholders.

The Corporate Governance Code sets out standards of good practice in relation to
issues such as board composition and development, remuneration, accountability and audit,
and relations with shareholders. It is basically a set of code that governs the company’s
overall operation.

There are many purposes of code of corporate governance for listed companies.
The main purpose is to ensure that organisations are properly run in the best interests of
their stakeholders. Besides that, code of corporate governance aims to align board’s interest
with that of shareholders. It is also a framework of control mechanisms that provides system
of checks and balances to support the companies in achieving its goals while preventing
unwanted conflicts. Furthermore, it identifies the distribution of rights and responsibilities
among different stakeholders in the company, monitor stakeholders’ act who controls the
resources owned by shareholders. It also outlines the rules and procedures for decision
making, internal control and risk management. Lastly, it produces long term value as good
corporate governance boosts investors’ confidence.

The purposes of such codes are as follows. First, they guide and specify behaviour
in matters of governance, internal control and risk management with the objective that by
complying with the code, corporate governance will be improved and enhanced. Second,
they aim to encourage best practice and to improve management performance by
preventing practices that might reduce shareholder value. Third, codes aim to underpin
investor confidence in that high levels of compliance ten to be appreciated by shareholders
and poor level of compliance are sometimes punished. It enables boards to demonstrate
the value they place upon the agency relationship and to more adequately discharge the
agency responsibilities placed upon them. Fourth, the codes aim to reduce fraud, waste and
inefficiency. Fifth, the codes are thought to be a way of reducing chances of governmental
legislation being implemented.
 Agency principle plays a big role in corporate governance especially in listed
companies where there is a separation of ownership and control. The separation of
ownership and control is based on the agency theory, which identifies the agency
relationship where one party (the principal) delegates work to another party (the agent). In
the context of corporation, the owners or shareholders are the principals whereas the board
of directors are the agents. Agency problems arise when the agent does not or partially act
in the best interests of the principal. For example, the agent might misuse his or her power
for pecuniary, or the agent not taking appropriate risks in pursuance of the principal’s
interest. Another problem relating to principal-agent relationship is the problem of
information asymmetry where agent will have more information than the principals.
Therefore, this agency principle views corporate governance as a mechanism essentially to
monitor the relationship and minimize the agency problem. Managers are supposed to be
the agent of a corporation’s owners but they must be monitored in order to make sure
there is no abusive of power. Agency principle helps to determine the agents’ incentives
appropriately by considering what interests motivate the agent to act. Agency principle also
plays a role in developing corporate governance. It ensures corporate governance has the
rules, standards and procedures to reduce agency problems and at the same time to reward
agents who have performed well in the best interests of principals. Corporate governance
becomes a control mechanism that ensures overall operation of the company is performed
in accordance to standard quality and law compliance effectively and efficiently. Corporate
governance controls and make sure agents behave in the best interest of the principals.
 2. The roles of non-executive directors (NEDs) in listed companies generally and the
criteria/guidelines used in determining remuneration of non-executive director’s (NEDs).

What is non-executive directors (NEDs)?

A non-executive director is a member of a company's board of directors who is not part of the
executive team. A non-executive director typically does not engage in the day-to-day
management of the organization, but is involved in policymaking and planning exercises. Non-
executive directors are engaged part time by the organisation, bring relevant independent,
external input and scrutiny to the board, and typically occupy positions in the committee
structure.

Advantage of NEDs

 Separation and detachment from the content being discussed is more likely to bring
independent scrutiny.
 Sensitive issues relating to one or more areas of executive oversight can be aired without
vested interests being present.
 Non-executive directors often bring specific expertise that will be more relevant to a risk
problem than more operationally-minded executive directors will have.

Disadvantages of NEDs

 Direct input and relevant information would be available from executives working directly
with the products, systems and procedures being discussed if they were on the
committee. Non-executives are less likely to have specialist knowledge of products,
systems and procedures being discussed and will therefore be less likely to be able to
comment intelligently during meetings.
 Non-executive directors will need to report their findings to the executive board. This
reporting stage slows down the process, thus requiring more time before actions can be
implemented, and introducing the possibility of some misunderstanding.

Roles of NEDs - Non-executive directors have four principal roles.

a) The strategy role recognises that NEDs are full members of the board and thus have the
right and responsibility to contribute to the strategic success of the organisation for the
benefit of shareholders. The enterprise must have a clear strategic direction and NEDs
should be able to bring considerable experience from their lives and business experience
to bear on ensuring that chosen strategies are sound. In this role they may challenge any
aspect of strategy they see fit and offer advice or input to help to develop successful
strategy.
 b) In the scrutinising or performance role, NEDs are required to hold executive colleagues to
account for decisions taken and company performance. In this respect they are required
to represent the shareholders’ interests against the possibility that agency issues arise to
reduce shareholder value.
c) The risk role involves NEDs ensuring the company has an adequate system of internal
controls and systems of risk management in place. In this role, NEDs should satisfy
themselves on the integrity of financial information and that financial controls and
systems of risk management are robust and defensible.
d) Finally, the ‘people’ role involves NEDs overseeing a range of responsibilities with regard
to the management of the executive members of the board. This typically involves issues
on appointments and remuneration, but might also involve contractual or disciplinary
issues and succession planning.

Important roles to be played by NEDs

1) Non-Executive Directors should constructively challenge and help develop proposals on

strategy.
2) Non-Executive Directors should scrutinise the performance of management in meeting
agreed goals and objectives and monitor the reporting of performance.
3) Non-Executive Directors should satisfy themselves on the integrity of financial information
and that financial controls and systems of risk management are robust and defensible.
4) Non-Executive Directors are responsible for determining appropriate levels of
remuneration of executive directors, and have a prime role in appointing, and where
necessary removing, executive directors and in succession planning.
5) Non-Executive Directors provide objective criticism on board matters – “constructive
challenge” – and facilitate strategic decisions by the executive directors.
6) Non-executive directors also have a mentoring role to advise and guide Chairmen and
Chief Executives where issues arise, or prior to them being brought up in board meetings.

1. Bring an external, independent perspective

2. Challenge executive recommendations
3. Assist in setting and revising strategy and objectives
4. Share collective board responsibilities including ensuring that there are proper risk
management and internal control frameworks which are implemented across all aspects of
the business
5. Consider management’s plans on succession planning.
Scrutinising the performance of management against the objectives of the company
 6. Sharing collective board responsibilities for ensuring there are systems which support the
integrity and quality of management information
7. Helping determine appropriate levels of remuneration of executives, possibly considering
if there is a culture of excessive reward or ‘reward for failure
8. Advising the board on the basis of his or her external knowledge and experience.

Criteria or guidelines in determining remuneration of NEDs

The main reason why NEDs are usually not allowed to receive share options or other
performance-related elements as part of their reward packages is because it could threaten their
independence and hence their usefulness to the company’s shareholders. Because non-executives
comprise the remuneration committee, it would be inappropriate for them to decide on their own
rewards. It would be an abuse of the responsibility and trust invested in them by shareholders were
NEDs to reward themselves too much or incentivise themselves in an inappropriate way.

Therefore, the remuneration of non-executive directors is decided by the board, or where

required by the articles of association, or the shareholders in general meeting. Non-executive
directors should be paid a “fee commensurate with the size of the company, and the amount of
time that they are expected to devote to their role. The remuneration is generally paid in cash
although some advocate remunerating non-executive directors with the company’s shares to align
their interests with those of the shareholder. However, it has generally be viewed as not being a
good idea to remunerate them with share options as opposed to shares because this may give
them a rather unhealthy focus on the short term share price of the company.

Nonetheless, in 2010 the International Corporate Governance Network (ICGN) published its
Non-executive Director Remuneration Guidelines and Policies. The recommendations include that
the annual fee should be the only form of cash compensation paid to non-executive directors, and
that there should not be a separate fee for attendance at board meetings or at committee meetings.
However, it is recognized that companies may way to differentiate the fee amount to reflect the
differing workloads of individual non-executive directors, for example, where a non-executive
director is also a committee chair.

Interestingly, the guideline states that, in order to align non-executive director-shareowner

interests, non-executive directors may receive stock awards or similar. However, any such “equity-
based compensation to non -executive directors should be fully vested on the grant date… a marked
difference to the ICGN’s policy on executive compensation which calls for performance based
vesting on equity based awards”. ICGN’s policy of requiring non-executive directors to retain a
significant portion of equity grants until at least two years after they are retired from the board
ensures that interests remain aligned.
 The determination of remuneration of our Executive and Non-Executive Directors shall be
a matter to be determined by our Board as a whole after taking into consideration the Remuneration
Committee’s recommendation. In the case of Executive Directors, the remuneration package is
structured to reward corporate and individual performance while for Non-Executive Directors the
remuneration reflects the experience and level of responsibilities undertaken. Remuneration of Non-
Executive Directors is determined with regard to the Company’s need to maintain appropriately
experienced and qualified Board members and shall be aligned with market practice.

The Remuneration Committee makes recommendations to the Board in relation to the

remuneration for Non-Executive Directors. The Committee surveys comparable remuneration levels
in the external market and makes appropriate recommendations to the Board on adjustments if
deemed necessary. The Remuneration Committee may from time to time seek independent advice
on the remuneration of the Non-Executive Directors and make recommendations to the Board in
relation to any increase in total fees. The Remuneration Committee is guided by the provisions of
the Companies Act 2016 and the Main Market Listing Requirements which require shareholders’
approval for payment of Directors’ Fees and Benefits annually.
 3. The roles and functions of audit committees and their relationships with external auditors.

Describe what an audit committee is.

Audit committee is a group of at least three, or in the case of smaller companies, two,
independent non-executive directors, acting independently from the executive, to ensure that the
interests of shareholders are properly protected in relation to financial reporting and internal control.

Describe roles of an audit committee.

The Smith Review defines the audit committees’ roles in terms of ‘oversight’, ‘assessment’,
and ‘review’, indicating the high-level overview that audit committees should take; they need to
satisfy themselves that there is an appropriate system of controls in place but they do not undertake
the monitoring themselves.

It is the role of the audit committee to review the scope and outcome of the audit and to
try to ensure that the objectivity of the auditors is maintained. The audit committee also provides
a useful bridge between both internal and external auditors and the board, helping to ensure that
the board is fully aware of all relevant issues related to the audit. Besides that, audit committee has
a role in reviewing arrangement for whistle blowers. If there is no risk management committee, the
audit committees should assess the systems in place to identify and manage financial and non-
financial risk in the company.

Identify the THREE (3) reasons why audit committees have been formed and are currently in
operation.

1. Companies require them to hire, link, oversee both internal audit and external audit. Audit
committee may identify suitable and non-suitable, right or wrong doing of both audits and
take any corrective action if required.
2. Companies require them to identify and improve companies’ financial performances and
quality, risk control and management.
3. Companies require them to satisfy information users’ demand by reducing information
asymmetry and at the same time by safeguarding confidential information to those who
are members of the company only.

Describe FIVE (5) functions of an audit committee.

In relation to the authority’s internal audit functions:

 oversee its independence, objectivity, performance and professionalism

 support the effectiveness of the internal audit process

 promote the effective use of internal audit within the assurance framework.
 1. Consider the effectiveness of the authority’s risk management arrangements and the
control environment.
2. Review the risk profile of the organisation and assurances that action is being taken on
risk-related issues, including partnerships with other organisations.
3. Monitor the effectiveness of the control environment, including arrangements for ensuring
value for money and for managing the authority’s exposure to the risks of fraud and
corruption.
4. Consider the reports and recommendations of external audit and inspection agencies and
their implications for governance, risk management or control.
5. Support effective relationships between external audit and internal audit, inspection
agencies and other relevant bodies, and encourage the active promotion of the value of
the audit process.
6. Review the financial statements, external auditor’s opinion and reports to members, and
monitor management action in response to the issues raised by external audit.

Describe the relationship between the external auditor and the audit committee of the
company receiving audit services.

The Smith report (2003) highlights the audit committee’s involvement in the following
aspects of the external audit process. In terms of appointment, the audit committee is responsible
for making a recommendation to the board and shareholders on the appointment, reappointment
and removal of the external auditors. If recommendation is not accepted, it shall be included in the
director’s report explaining the recommendation and the reason it is not accepted. Audit committee
also carries out annual assessment on the qualification, expertise and resources, effectiveness and
independence of external auditors. If any external auditor resigns, an investigation regarding the
resignation is performed by audit committee.

In the aspect of terms and remuneration, audit committee approve the terms of
engagement and appropriate level of remuneration to be paid to external auditors. In terms of
independence, audit committee should have procedures to ensure the independence and objectivity
of external auditors annually. They also should develop and recommend to the board the company’s
policy in relation to the provision of non-audit services.

Furthermore, at the start of each annual cycle, audit committee should consider whether
the auditor’s overall work plan appears consistent with the scope of the audit engagement, having
regard also to the seniority, expertise and experience of the audit team. Audit committee also review
with the external auditors the finding of their work that includes audit issues and solution occurred
during audit. Plus, it reviews the audit representation letters, management letters and monitor
management’s responsiveness to the external auditor’s findings and recommendations. At the end
of audit cycle, the audit committee should review the effectiveness of the audit process. One of the
methods is to obtain feedback about the conduct of the audit from key people involved.

OR

The audit committee nominates and assists in selecting the external auditors to audit and/or
review the organization’s accounts and issuing their opinion about the correctness and accuracy of
the organization’s financial statements, and that they present fairly the financial position of the
organization. In order to protect and preserve the shareholders’ interests, the audit committee
oversees the nature and scope of work of the external auditors, evaluates their effectiveness, and
recommends the proper audit fees that should be paid to them. The audit committee assists in
ensuring that the external auditors are independent, and that there is no conflict of interest which
may weaken the external auditors’ ability of issuing their opinion about the organization’s financial
statements and financial position.

The external auditors submit their reports to the audit committee where both parties discuss
important issues, such as management’s errors, irregularities, and fraud; problems or obstacles in
the internal control process; and problems related to the preparation of financial statement or
financial reporting.

The audit committee reviews the external auditors’ management letter and submits its
relevant notes to the board of directors. The committee also reviews the external auditors’ plans
and arrangements of works, and may ask the external auditors to report to it about any differences
or disputes between them and the organization’s management. The audit committee also facilitates
the communications between the external auditors and the organization’s board of directors and
attends their relevant meetings.
 4. Attributes of the accounting profession, the role and impact both positive and negative of
accountants in society generally.

A profession is defined in the Oxford Dictionary as an occupational area or vocation that

‘involves prolonged training and a formal qualification’.

The key attributes listed below provide valuable guidance in recognising the existence of a
profession:

− systematic body of theory and knowledge;

− extensive education process for its members;
− ideal of service to the community;
− high degree of autonomy and independence;
− code of ethics for its members;
− distinctive ethos or culture;
− application of professional judgment; and
− existence of a governing body.

What are the Traditional/ Functional attributes of a profession as described by Greenwood? [p24]
1. Systematic body of theory and knowledge [p27]: whole range of skills and expertise should
relate to and by supported by a well-founded body of knowledge. In accounting, important topics
include

a. financial and management accounting theories and practices

b. auditing theories and practices

c. accounting or business information systems

d. aspects of law (commercial/corporate/taxation)

e. economics and quantitative methods.

2. Extensive educational programs [p28] focused on the development of intellectual skills,

knowledge and experience (theory and practice) with an emphasis on lifelong updates (CPD)
through mentoring, professional development and continuing education programs.

a. awareness that is a misrepresentation and unethical to accept work if one lacks the
requisite skills to undertake the work competently.
3. Ideal of service to the community [p28]/Act in the public interest/serve society/service ideal.
The services is for the social good and to benefit society rather than just the profession's self-
interest.

a. The well-being of society: Accountants contribute to the well-being of society by

preparing information that ensures the efficient, orderly functioning and facilitates better
decision making for of business, not-for-profit and government enterprises.

b. The pursuit of excellence/excellent service: Accountants accepts responsibility for

maintaining and updating his/her knowledge and skills, and applying such skills and
competence with due professional care in the best interests of society

c. Community services - pro bono work (for the public good at no fee) completed with the
same care and skill as paid work.

d. reasonable pricing (rather than monopoly pricing)

e. act as a moral agent - capable of making moral judgements on behalf of others Note:
even a CPA who becomes a manager must continue to maintain the service ideal and
comply with the professional ethical requirements.

4. High degree of autonomy and independence [p30]

a. membership and membership rules, education requirements, professional ethical

standards and disciplinary process (which can be in addition to legal processes) [p24]

b. Self-regulation and professional discipline - judged by their informed peers rather than
by regulators whose knowledge is inevitably more limited and may have a bias resulting
from less experience. Internal sanctions for matters that a legal process might ignore or not
be able to identify (eg ethical breaches that are not legal breaches) [p25]

c. Professional judgement [p30] is free from the direction or influence of others and
detached from the risk of financial gain (or loss) as a result of the advice provided; it is
governed by the professional rules and laws and not influenced by inappropriate outside
interests.
5. Code of ethics for its members [p31]] to establish expected standards of behaviour, the need
for members to act in the public interest, disciplinary framework.

Guidance and disciplinary framework of CPA

 APES 110  Various other APES statements  Constitution of CPA Australia and by laws 
Relevant legislation such as corporate law and accounting standards regulation

6. Distinctive ethos or culture [p32] - values, norms and symbols

7. Application of professional judgement [p32] to diagnose and solve complex, unstructured

values-based problems of the kind that arise in professional practice.

 Professionals must choose the outcome that professional best meets the social ideal
rather than merely the best outcome for the client at that moment.

 Difference between professional and technical judgement is the awareness of the

uncertainty, complexity, instability, uniqueness and value conflict.

 Be good at defining the right problem to be solved and skilfully communicating to

clients.

8. Existence of a governing body [p33] to

a. speak for the profession as a whole

b. set up standard of education and membership have CPD

c. setting and monitoring of high standards of professional conduct

d. Apply disciplinary sanctions if standards not observed.

e. Ensure high standards of performance and conformance by the professional body such
as establishing policies and strategies and appropriate codes of conduct.

Role of accountant in society

Accountants play different roles in different work environment in the society. In public practice
firms like big four firms, accountants’ roles include assurance and audit, taxation services, financial
management, internal audit services and so on. In private or business sector, accountants can be
either board of directors, chief financial officer, financial accountant, treasury accountant and so
on. Accountant’s general role in the society is a information provider who produces a relevant,
transparent and reliable financial information for both internal and external stakeholders like
investors, creditors and suppliers.

Positive and negative impacts accountants have towards the society

Refer week 2 reading

 5. Audit independence, the treats to independence from the provision of non-audit services
and the application of the public interest principle.

What is audit independence?

Audit independence is a quality possessed by auditors and refers to the avoidance of being
unduly influenced by a vested interest. This freedom enables auditors to audit client’s work with
integrity and objective approach. It is important for auditors to have a ‘fresh pair of eyes’ to
oversight and act without bias or prejudice. In this case, auditors act solely in the interests of
shareholders and not of any faction in the company. The accuracy of reporting is maintained.

Explain why the provision of non-auditing services to an audit client may compromise the
auditor’s independence. You are to provide relevant examples how independence can be
adversely affected.

There are several factors that may impair auditors’ independence through nonaudit services.
Possible threats are self-interest, self-review, familiarity, advocacy and intimidation. The self-interest
threat points to situations where the auditor or audit firm gains from a financial interest in the
audited entity. This may be due to anxiety of losing the client. As an overall explanation, self-interest
threats may occur when work performed creates a financial relationship between the client and the
auditor. This is especially the case when providing non-audit services, which is connected to the
service fees. Generally, higher non-audit fees results in higher risk for threat of independence.

The self-review threat is associated with the complexity of continuing a neutral position when
auditors’ assess their own work. It can be difficult to be critical toward one-self in situations when,
for example, former work needs to be opposed. As an auditor, one must get to know the audit
client in order to detect risks.

However, there is also a risk where the auditor builds a closer relationship with the audit client, this
is called the familiarity threat. For instance, having a too long or close relationship the audit clients’
directors may influence their decisions or the auditor might fail to give an objective opinion.

Under the conceptual framework, non-audit services may represent both a self-review threat and a
management participation threat. Essentially, the risk is that an auditor will either 1) cross the line
from external auditor to internal extension of management, or 2) be in a position to essentially
audit his or her own work.

Management Participation Threat.

The risk that comes from an auditor assuming the role of management,rather than being
independent of it.
The failure of auditor independence was not high on the list of citizen concerns prior to the collapse
of the Enron Corporation. However, the public’s attention to audit regulation and its trust in financial
institutions witnessed an abrupt shift following Enron’ bankruptcy. Enron may have been the most
important failure of auditor independence, but it was by no means the first, it was not the largest,
and has not been the last. The earnings restatement that precipitated Enron’s fall revised profits
downward by $650 million. Yet prior to Enron, Waste Management Inc. overstated earnings by $1.43
billion over a five-year period, and U.S. regulators found that their auditors, Arthur Andersen LLP,
conspired to hide accurate accounting data from the public. Andersen agreed to pay $7 million to
settle federal charges of audit fraud at Waste Management, and another $220 million to settle
litigation with Waste Management shareholders. In another case, Andersen was charged with audit
fraud by the Securities and Exchange Commission (SEC) in its audit at the Sunbeam Corporation.
The shareholders of Sunbeam sued Andersen for fraudulent accounting and Arthur Andersen agreed,
in April of 2001, to pay $110 million to settle the claims. Since Enron’s fall, WorldCom (another
Andersen client) has restated earnings by revising its earlier profit reports downward by a shocking
$9 billion. In all of these cases, the auditors clearly failed to provide thorough independent review
of the client’s financial reports.

The financial statement audit is of vital importance to the stability, growth, and healthy development
of financial markets. Investors, creditors, and other users of financial statements need reliable
financial information. Auditor independence provides financial statement users confidence in
audited financial statements. Arthur Andersen and Enron have been chosen as a case study to show
how auditor independence influences the quality of information in audited financial statements.
Enron, a leading energy commodities and service company in the United States of America, declared
bankruptcy in 2001 after it announced it was reducing net income for current year and previous
years due to accounting misstatements. Then its auditor, Arthur Andersen, failed in 2002. As of the
end of May 2002, Enron’s financial statements were misleading, the effect of these shortcomings
on the dramatic decrease in the price of Enron’s stock. Arthur Andersen as an auditor of Enron has
an important role and responsibility for misleading numbers presented in Enron’s financial
statements. Enron’s collapse is a significant event in the accountancy profession because its auditor,
Arthur Andersen, was one of the big 5 audit firms. This scandal due to impairment of auditor
independence and fraudulent financial reporting raises questions of the role of the auditors in
alerting investors, employees, suppliers, customers and the public. The case study shows that there
is a link between non-audit services and audit independence. Since fees generated by non-audit
services greater than audit fees, providing non-audit services to audit clients violates auditor
independence.
List the safeguards that AA might have used to reduce the threats of independence to an
acceptable level.

When threats are identified, appropriate safeguards should be applied to eliminate threats
or reduce them to an acceptable level. The first safeguard that AA might have used is to use
different partners and teams with separate reporting lines for the provision of non-assurance
services to an assurance client. The second safeguard that AA might have used is to cultivate a firm
leadership that stresses the importance of independence and the expectation that members of
assurance teams will act in public interest. Besides that, AA should have policies and procedures
that will enable the identification of interests or relationship between the firm or member of the
assurance team and assurance clients. It is also important for AA to have a timely communication
of a firm’s policies and procedures and any changes thereto, to all partners and professional staff,
including appropriate training and education thereon. AA can also involve an additional professional
accountant to review the work done or otherwise advise as necessary. AA can consult an
independent third party or involve another firm to perform or reperform part of the assurance
engagement. Rotation of senior personnel and removal of individual who has financial interest
reduce the threat to independence as well.

 Ensuring that the accounting service is not performed by a member of the audit team.
 Involving an additional appropriately qualified individual to review the work done or
otherwise advise as necessary. This could be someone from within the firm, who is not
involved in the audit team, or someone from outside the firm.
 Discussing independence issues with the board of directors or audit committee
 Disclosing to the board of directors or audit committee the nature of the services provided
and extent of fees charged. Include section in engagement letter.
 Policies and procedures to ensure members of the audit team do not make or assume
responsibility for management decisions for the audit client.
 Requiring source data for the accounting entries to be provided by the client.
 Requiring all underlying assumptions to be provided and approved by the audit client.

Standards of auditor independence should identify appropriate safeguards that the auditor
should implement in order to mitigate threats to independence that arise from permissible
activities and relationships.

Standards of auditor independence should address specifically the need to ensure

appropriate rotation of the audit engagement team such that senior members of a team
do not remain in key decision-making positions for an extended period.

Standards of auditor independence should require the auditor to identify and evaluate all
significant or potentially significant threats to independence, including those arising from
 recent relationships with the entity being audited that may have preceded the appointment
as auditor, and document how the auditor has applied safeguards to mitigate those threats.

Explain how AA failed to act in accordance to the public interest principle.

Public interest is concerned with delivering benefit for the general public at large,
as opposed to solely serving the interests of a company and its shareholders.

Auditor independence is widely assumed by financial markets. Investors, employees, and

strategic partners rely on audited financial statements as if they represent truthful and reliable
information regarding firms’ financial health. While a corporation’s managers often have powerful
incentives to make their performance appear better by improving reported earnings, yearly audits
are supposed to help immunize the company’s financial reports from the threats posed by such
incentives. Shareholders count on auditing firms to provide these independent reviews. Yet, for
independence to exist, audit firms’ reports must not be affected by the interests of the client, or for
that matter, the auditor.

The auditing profession performs a role in giving reasonable assurance to the public and
users’ of financial statements, specifically investors and creditors, of the reliability and credibility of
a firms’ financial statements. To fulfil this role, there are several principles that auditors should
espouse. One of the most important principles is independence. By demonstrating their
independence, auditors’ opinions on financial statements will be valued by the users. In essence,
auditor independence refers to an absence of interest by the auditor in the auditing assignment,
thereby avoiding material bias that could affect the reliability and credibility of the financial
statements. The auditing profession promotes the principle of independence to define, defend, and
extend the profession (Sikka and Willmott, 1995). It is widely accepted that independence is the
most priceless asset in the auditing profession and the basic principle that underpins the reputation
of the auditing profession in the public eye. By conducting an auditing work independently, auditors
protect the public’s confidence in such services. In fact, the viability of the profession depends on
how it can ensure adherence to the principle of independence. Despite this, several firms’ scandals,
directly or indirectly involving auditors, have damaged public confidence in auditor independence.
These scandals have taken place not just in one country but across the world: HIH Insurance (March,
2001) and One.Tel (July, 2001) in Australia; Enron (October, 2001), Hewlett-Packard Although these
scandals cannot solely be attributed to the failures of the auditors, the public perceived that a large
part of the responsibility lay with them. This is because the public expects the auditing profession
to perform not just as watchdogs that give them reasonable assurance but also as bloodhounds
that track out everything even when there is nothing to provoke auditors’ suspicion. Moreover, it is
also widely believed that these scandals took place because of the auditors’ lack of independence,
as a result of accommodating their clients’ interests during audits. (2012), and WorldCom (June,
2002) in the US; Vivendi (July, 2002) in France; Ahold (February, 2003) in the Netherlands; Parmalat
(February, 2003) in Italy; and Kanebo (2006) and Olympus (2011) in Japan, among others. These
scandals have caused the public suffering huge losses and have also damaged the reputation of
the auditors and the auditing profession. In fact, the Enron failure led to the collapse of the Arthur
Andersen audit firm, which at the time was one of the Big Five audit firms.
 6. Short case studies both identifying and looking at the treatment of ethical issues and ethical
dilemmas.

Principles for professional qualified accountant

1. Professional behaviour
Accountants must comply with all relevant laws and regulations and shall avoid any
action which may discredit the profession.
2. Integrity
Integrity requires accountants to be straightforward and honest in all their professional
and business relationship. Integrity implies a fair dealing and truthfulness.
3. Professional competence and due care
All accountants have a continuing duty to maintain their professional knowledge and
skill at a level required to ensure that employers receive competent professional service
and at the same time they must act diligently in accordance with applicable technical
and professional standards when providing professional services.
4. Confidentiality
Accountants must respect the confidentiality of information acquired as a result of
professional and business relationships, and shall not disclose any such information to
third parties without proper and specific authority or unless there is a legal or
professional right or duty to disclose. Similarly, confidential information acquired as a
result of professional and business relationships shall not be used to the personal
advantage of members or third parties.

5. Objectivity
Accountants should not allow any bias, conflicts of interest or the undue influence of
others to compromise their professional or business judgement.

General principles

1. HONESTY. Ethical executives are honest and truthful in all their dealings and they do not
deliberately mislead or deceive others by misrepresentations, overstatements, partial truths, selective
omissions, or any other means.

2. INTEGRITY. Ethical executives demonstrate personal integrity and the courage of their
convictions by doing what they think is right even when there is great pressure to do otherwise;
they are principled, honorable and upright; they will fight for their beliefs. They will not sacrifice
principle for expediency, be hypocritical, or unscrupulous.
3. PROMISE-KEEPING & TRUSTWORTHINESS. Ethical executives are worthy of trust. They are
candid and forthcoming in supplying relevant information and correcting misapprehensions of fact,
and they make every reasonable effort to fulfill the letter and spirit of their promises and
commitments. They do not interpret agreements in an unreasonably technical or legalistic manner
in order to rationalize non-compliance or create justifications for escaping their commitments.

4. LOYALTY. Ethical executives are worthy of trust, demonstrate fidelity and loyalty to persons and
institutions by friendship in adversity, support and devotion to duty; they do not use or disclose
information learned in confidence for personal advantage. They safeguard the ability to make
independent professional judgments by scrupulously avoiding undue influences and conflicts of
interest. They are loyal to their companies and colleagues and if they decide to accept other
employment, they provide reasonable notice, respect the proprietary information of their former
employer, and refuse to engage in any activities that take undue advantage of their previous
positions.

5. FAIRNESS. Ethical executives and fair and just in all dealings; they do not exercise power
arbitrarily, and do not use overreaching nor indecent means to gain or maintain any advantage nor
take undue advantage of another’s mistakes or difficulties. Fair persons manifest a commitment to
justice, the equal treatment of individuals, tolerance for and acceptance of diversity, the they are
open-minded; they are willing to admit they are wrong and, where appropriate, change their
positions and beliefs.

6. CONCERN FOR OTHERS. Ethical executives are caring, compassionate, benevolent and kind; they
like the Golden Rule, help those in need, and seek to accomplish their business objectives in a
manner that causes the least harm and the greatest positive good.

7. RESPECT FOR OTHERS. Ethical executives demonstrate respect for the human dignity, autonomy,
privacy, rights, and interests of all those who have a stake in their decisions; they are courteous and
treat all people with equal respect and dignity regardless of sex, race or national origin.

8. LAW ABIDING. Ethical executives abide by laws, rules and regulations relating to their business
activities.

9. COMMITMENT TO EXCELLENCE. Ethical executives pursue excellence in performing their duties,

are well informed and prepared, and constantly endeavor to increase their proficiency in all areas
of responsibility.

10. LEADERSHIP. Ethical executives are conscious of the responsibilities and opportunities of their
position of leadership and seek to be positive ethical role models by their own conduct and by
helping to create an environment in which principled reasoning and ethical decision making are
highly prized.
11. REPUTATION AND MORALE. Ethical executives seek to protect and build the company’s good
reputation and the morale of its employees by engaging in no conduct that might undermine
respect and by taking whatever actions are necessary to correct or prevent inappropriate conduct
of others.

12. ACCOUNTABILITY. Ethical executives acknowledge and accept personal accountability for the
ethical quality of their decisions and omissions to themselves, their colleagues, their companies,
and their communities.

Step one: recognise the situation as one that raises an ethical dilemma

Step two: break the dilemma into its component parts

Step three: seek additional information, including superior’s advice

Step four: identify any relevant law or professional guidance

Step five: be able to justify the decision with sound arguments

Teleological theories means if the benefits of a proposed action outweigh the costs, the decision
or action is considered ethically correct. Under teleological theories, egoism means it is right for a
person to pursue an action in their own interest. Other than that, utilitarianism means a good
decision produces the greatest benefit or pleasure for the majority/ greatest number of people.
7. The important features and highlights of the revised MCCG 2017.

The Comprehend, Apply and Report approach – CARE

Comprehand, Apply and Report or CARE encourages companies to clearly identify the thought
processes involved in practising good corporate governance including providing fair and meaningful
explanation of how the company has applied the practices.

COMPREHEND Understand and internalize the spirit and intention behind the principles and
practices including its intended outcomes.

APPLY Implement the practices in substance to achieve the intended outcomes of building and
supporting a strong corporate governance culture throughout the company.

REPORT Provide a fair and meaningful disclosure on the company’s corporate governance practices.

CARE aims to reinforce mutual trust between companies and their stakeholders by promoting
meaningful disclosures that will be relied upon by stakeholders to have effective engagements with
the company. It also promotes a culture of openness and mutual respect that benefits both the
company and its stakeholders.

CARE will help generate greater interest in corporate governance best practices, facilitate
assessments and stimulate conversations on corporate governance. Collectively, these outcomes will
raise the standard of corporate governance culture of the market overall.

READ MCCG or SUETYEN’s one for CARE further explanation.

Key features of the new Code

1. New structure encourages a more results-driven approach

The new Code has 36 Practices to support three Principles:

Principle A: board leadership and effectiveness,

Principle B: effective audit and risk management, and

Principle C: integrity in corporate reporting and meaningful relationship with stakeholders.

Practices are actions, procedures or processes which companies are expected to adopt to achieve
the Intended Outcome.
The Intended Outcome provides companies with the line of sight on what they will achieve through
the Practices.

The new Code also adopts a proportional approach taking into account the varying sizes and
complexities of listed companies.

Certain best practices are only applicable to Large Companies, that is, companies on the FTSE Bursa
Malaysia Top 100 Index or companies with market capitalisation of RM2 billion and above at the
start of the companies’ financial year.

2. Companies are expected to CARE

The new Code introduces the Comprehend, Apply and Report (CARE) approach. The CARE
approach entails a shift from the previous “comply or explain“ approach to an “apply or explain an
alternative” approach, which is meant to promote a more meaningful application of good corporate
governance practices and to encourage listed companies to invest more thought and consideration
when adopting and reporting on their corporate governance practices.

Under this new approach, where there is a departure from a Practice, the company must (i) provide
an explanation for the departure and (ii) disclose a suitable alternative practice it has adopted to
meet the Intended Outcome. Large Companies are further required to disclose actions which
they have taken or intend to take and the timeframe required for them to achieve application of
the Practice.

3. Companies are encouraged to STEP UP

The introduction of the “Step Up” practices is meant to encourage companies to go a step further
to strengthen their governance practices and processes. Companies that aspire to achieve excellence
in corporate governance in particular, Large Companies, should consider the adoption of “Step Up”
practices.

4. Practices have been introduced or enhanced

Here are some of the practices that have been introduced or enhanced under the new Code:

At least half of the board must comprise independent directors. For Large Companies, the board
members must comprise a majority of independent directors and at least 30% of the board should
consist of women directors.
For boards that choose to retain independent directors who have served for more than 12 years, a
two-tier voting process is introduced for the board to seek annual shareholders’ approval. Under
the two-tier voting process, the shareholders’ approval would need a simple majority vote from
both: (i) the largest shareholder or those with more than 33% equity interest; and (ii) shareholders
other than the large shareholders in order for the resolution to be deemed successful. Note that
the previous requirement to seek shareholders’ approval if the board chooses to retain an
independent director beyond 9 years has been retained under the new Code. As a “Step Up” practice,
the board has a policy which limits the tenure of its independent directors to 9 years.

Companies are to name and provide detailed disclosure of each individual director’s remuneration
including fees, salary, bonus, benefits in-kind and other emoluments. Companies are expected to
name and disclose the top 5 senior management’s remuneration component in bands of
RM50,000. As a “Step Up” practice, companies are encouraged to fully disclose the detailed
remuneration of each member of senior management.

New “Step Up” practices have been introduced to promote effective audit and risk management.
It is encouraged that the Audit Committee should only comprise independent directors. The board
is also encouraged to establish a Risk Management Committee, which comprises a majority of
independent directors, to oversee the company’s risk management framework and policies.

CARE approach

Perhaps the most distinct feature of the new code is the comprehend, apply and report (CARE)
approach, where companies have to set out the processes involved in practising good corporate
governance, including providing fair and meaningful explanation of how the company has applied
the practices laid out in the code. Under the MCCG 2017, it’s no longer sufficient for companies to
merely explain the reasons for non-compliance; they will also have to provide alternative steps or
actions that have been taken if the requirements have not been adhered to.

The ‘comprehend’ element asserts that boards should understand and incorporate the integral role
of economic, environmental and social responsibilities towards the company’s performance and
long-term sustainability into their core decision-making processes to ensure that companies operate
successfully and sustain growth. The board should understand that the key principles of corporate
governance such as effective controls, corporate culture grounded on ethical behaviour and
transparency can reduce risk, corruption and mismanagement. Besides that, the board and
management should play their part by ensuring that they and their employees understand corporate
governance (CG) requirements, seek guidance on CG if necessary and attend necessary training and
development.

Under the ‘apply’ element, the MCCG 2017 adopts the ‘apply or explain an alternative’ approach,
which is a shift from the previous ‘apply or explain’ approach. Under this new approach, boards
should apply the practices based on the environment that their companies operate in, the size and
risk related to their business/operations. This means that if the board finds that it is unable to
implement any of the MCCG practices, the board should apply a suitable alternative to meet the
intended outcome.

The driver behind the ‘report’ element is the provision of informative disclosure for shareholders
and potential investors for them to assess the stewardship of management, valuation of the
company and the ownership structure, and consequently enable companies to attract capital and
maintain confidence in the capital market. To facilitate this, companies must therefore provide
meaningful explanation on how it has applied each practice. Where there is a departure from a
practice, the company would have to provide an explanation for the departure, and disclose the
alternative practice it has adopted and how this achieves the intended outcome.

In addition, large companies that depart from a practice are also required to disclose the actions
that they have taken (or intend to take) and the timeframe required for them to be able to apply
the prescribed practice. When doing this, companies must consider and be closely guided by
the guidance.

Companies are also strongly encouraged to adopt the step-up practice(s) and, when they do, to
disclose their application to demonstrate their commitment to the higher standards of
corporate governance.