A study on compliance, assurance and governance


Good governance practices are now becoming a necessity for organisations around the world including those in the corporate, not-for-profit and public sectors. With the globalisation of economies, the international pressure for adherence continues to increase. As compliance and assurance are key aspects of accountability, risk assessment and management processes within the governance framework corporate boards and management must demonstrate leadership in these areas to ensure the integrity of the governance framework is upheld.

The key concept of governance is stewardship. In its simplest form governance can be described as a system by which corporations are directed and controlled through a framework of rules, relationships, systems and processes. In addition those who control the destiny of a corporation do so not primarily for their own benefit but rather for the benefit of a wide range of groups and individuals which have an interest in the affairs of the corporation. Furthermore, as described by Justice Owen in the HIH Royal Commission, governance encompasses the mechanisms by which companies, and those in control, are held to account (HIH 2003).

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Key principles of corporate governance suggested by the ASX Corporate Governance Council and the Organisation for Economic Co-Operation and Development (OECD) include:

Recognise and manage risk

Respect the rights of shareholders

Remunerate fairly and responsibly

Disclosure and transparency

The role of stakeholders in corporate governance

Safeguard integrity in financial reporting

Promote ethical and responsible decision-making

Structure the board and monitoring of board performance

Although there is no single model of good corporate governance there is consensus that the framework should specify the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders. It should also spell out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

Transparency is an essential element of a well-functioning system of corporate governance. Timely and balanced disclosures to stakeholders are the principle means by which companies can become transparent. Similarly, risk management and an effective system of internal control are vital to effective corporate governance.

However, no corporate governance model will be effective unless there is a culture of compliance within the organisation. In general, compliance means conforming to rules, such as policies, standards or codes, statutory laws and accepted community and ethical standards.

An important catalyst for compliance initiatives is the existence of incentives for unscrupulous directors and managers of enterprises to exploit the resources of the business. Therefore the principle purpose of compliance initiatives is to ensure that those responsible for the governance of an organisation comply with measures intended to protect the interest of all stakeholders.

This can be achieved through the implementation of a compliance program. An effective compliance program can not only reduce an organisations risk of breaking the law but can also promote a culture of compliance and encourages good corporate citizenship (Fels 1999). In addition, compliance programs can;

Identify and mitigate risks,

Improve communication and reporting, and

Increase ethical behaviour within an organisation.

Compliance can also be described as an outcome of an organisation meeting its obligations and should be aligned with the organisation's overall strategic objectives. Furthermore, as part of a good governance framework an organisation will implement assurance programs to provide compliance accreditation to stakeholders.

Assurance can be defined as a process that provides confidence that planned objectives will be achieved within an acceptable degree of residual risk. It can also be described as a core component of the governance framework in which management provides accurate and current information to the stakeholders about the efficiency and effectiveness of its policies and operations, and the status of its compliance with statutory obligations. In addition, assurance plays an important role in transparency as information needs to be verified in order to make it creditable and useful to interested parties.

As assurance services are aimed at direct assessment of risk management, control, or governance processes of an organisation a typical assurance program would include an audit committee, an internal audit function and an external audit function. Be it their annual financial statements, systems of internal control or compliance with contractual or legislative obligations an independent review process adds to the credibility of an entity's disclosures. In other words assurance enhances the degree of confidence of the intended users about the outcome or measurement of an entity's disclosures.

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In response to the loss of investor confidence following numerous corporate failures regulators had little choice but to overhaul both the compliance and assurance elements within the governance framework. The United States responded with the Sarbanes-Oxley Act in 2002 which was considered the benchmark for other countries to follow. In 2004 Australia introduced the Corporate Law Economic Reform (CLERP) 9 Act to help strengthen deficiencies in the areas of auditing, particular the independence of auditors, and financial reporting.

The intent of these measures is to support the relationship between governance, compliance and assurance. In the absence of compliance and assurance the benefits associated with corporate governance are limited. This is supported by Tricker 2000 whose broad definition of corporate governance is that it is concerned with the exercise of power over corporate entities. In the narrow focus of agency theory, that power would be interpreted as the balance between directors and shareholders. Therefore, to achieve agency equilibrium it is essential that corporations implement a governance framework that includes embracing a culture of compliance to ensure conformity to all rules and regulations and the mitigation of risk through stringent assurance programs such as internal and external audits.

Enron, WorldCom and HIH provide good examples of the consequences that result from dysfunctional governance mechanisms. Ineffective risk assurance and corporate governance processes have produce catastrophic results so it is imperative that company management and directors work together to ensure that their organisation have the risk management and control resources required to achieve their organisational goals. In addition the integration of the audit function with the organisations corporate strategy and risk management will further enhance the governance framework and inspire some much need faith back into the corporate market.

Regardless of the effectiveness and efficiency of regulators to enforce good governance practices the risk of corporate failure is still in the hands of company boards and management. However, the risk of loss resulting from inadequate or failure processes, from people and systems or from external events will be lower in a governance environment entwined in compliance and assurance.