Why Corporate Governance Matters Accounting Essay

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Corporate governance was introduced somewhere in the 16th and 17th centuries during the formation of the East India Company, Hudson's Bay Company, Levant Company and other major chartered companies. Corporate governance is a form of policy where audit committee is responsible to inspect if there is any scandal or violation of the federal law took place in a corporate company. The audit committee is not just any committee but it is a group of external auditors, Moreover, it is the base of a country economic growth and it also creates a form of trust and transparency between investors and management. However, some chartered companies has become more corrupted which leads the corporate governance institutions to be more firm. One of the highly publicized corporate scandals that involved U.S companies is Enron. Brian R. Cheffins (2012)

Due to not abiding the laws set by the corporate governance, Enron faced the lawsuits by shareholders and employees, which have invested heavily by using the pension in Enron stock. Therefore, the author argues on the case of Enron which yields the question: Why Enron failed to create good corporate governance? .Brian have argued on this part that Enron never gave enough attention to the importance of the economic impact of the transaction and as the financial statement impact, continue creating favorable earnings for wall street earnings to dominate process making decision, and there was a lack of communication and orders from the board of directors and as well who should analysis the related-party transactions and the level of such analysis, the board of directors was unaware of other conflicts of interests and as well as lack of transparency, where shareholders has been blind folded with fake financial report. So the question is how can frauds happen in such a large company even there are internal auditors and as well as directors to route an organization. Brian R. Cheffins (2012), as in the case of Megan Media Holdings Berhad, an investment holding company that provides management consultancy service. The company engages in manufacturing and marketing data storage products such as computer diskettes, video cassette tapes and so on. The failure begin when the preliminary report found that the financial has been misstated and a total amount of RM211 million deposits for 13 production was a make believe, without the knowledge of internal auditors. Therefore, internal audit function plays a key role in assisting the councils to carry out duties. Norlia, Norwani, Zam, Zuriyati, & Ibrahim, C. (2011)

However the aim of this investigation is to study the role of the internal auditor function in corporate governance. There are many aspects of corporate governance which involves the internal auditors to play a major role in governing their company's routes. Regarding the issue of corporate governance, it has reflected to the investigation of the function role of internal auditors in corporate governance.

This report will begin with some sub-topics. It will shed some light on corporate governance history in Malaysia and definition, as a boost to start the literature review and as well considering some case study to relate the investigation, through these topics, it will give the reader the clear picture on the subject of the investigation

Moreover, this investigation does not only focus on the duties of the internal auditors but, it also focuses on the function and the contribution in creating well corporate governance. The study also explains the importance of audit function and how internal audit function plays its role in corporate governance, and with some explanation on implication of corporate governance on the audit professionand as well the auditor tool. In the final part of the literature review, at the final part, conclusion will be the whole discussion on what can be learned by doing this

investigation, as well research methodology will be explaining on the objective and how this has been done.

LITERATURE REVIEW

2.0Introduction of Literature Review

In this topic, there are matters will be discussed which are relevant to corporate governance. Internal auditors have become foremost in corporate governance due to the responsibilities committed to, as well the role as advisors for providing ideas to the superiors or managers in order to improve their company's management . The role and function of internal auditors will be the main part of this discussion.

There will be some cases which are related to corporate governance which will be also the part of the discussion in order to provide a clear understanding on this subject, as well as explaining on corporate governance and a little about the history in Malaysia, as well why it matters and on the recent why corporate governance fail. Therefore, a topic role of internal auditor in corporate governance, as it is divided to some subtopics.

In general, the explanations will incorporate together and display the relationship between corporate governance and internal auditors and concluding the discussion.

2.0 (A) Corporate Governance failure History in Asia country

Failure of corporate governance has attracted world attention, when the big companies such as Enron in United Kingdom and WorldCom in United States collapse in 2001 and 2002 respectively. Regarding to this matters, the author begin to research on other perspective of the world, such as Asia countries.

Malaysia

Many corporate governance miscarriages also took place at national level in Malaysia. It is just another aspect of corporate misconduct up the nation's merit. Malaysia Airline Systems (MAS) faces a crisis when Tan Sri Tajuddin Ramli via Naluri Berhad who is the single largest shareholder in MAS and was appointed both as chairman and Chief Executive Officer involved in an unprofitable business activities whereby Tan Sri had over expansion the flight destination. The capital spending escalates due to setting many orders on planes. The company was accumulated loss from the year 1998 to 2001. In the financial reporting, it was a mismatch between earnings and spending. However Port Klang Free Zone (PKFZ), was top hit corporate governance scandal in Malaysia, where minister were involved as shareholders of the company, foreign investors, Jebel Ali Free Zone, due to lack of transparency, problems begin to occur. After looking at the cases above, the author wide up more on why corporate governance matters. Norlia, Norwani, Zam, Zuriyati, & Ibrahim, C. (2011)

Therefore further explanation on this matter will be explained, why corporate governance matters?

2.0 (B) Why Corporate Governance matters?

According to Jan Cattrysse (2005), it is important for the boards to understand the importance of corporate governance. The quality of corporate governance will have an effect on:

Efficiency of Corporate Assets use

Efficiency of corporate assets is where the corporate governance put up the efficient use of resources since organizations actually practice good and effective corporate governance. By doing this it will attract the investor capital, as well as; the organization will prove to the potential shareholders, the ability of producing goods and services more efficiently. Jan Cattrysse (2005).

Ability to attract low-cost capital

Corporate governance may help, but with several conditions, whereby, the investors are provided with several of guidelines to safeguard the shares.

In addition, the investors are willing to pay more for a company with good corporate governance because:

The company will perform better in future.

By doing this, it will help to reduce risk. Jan Cattrysse (2005).

Ability to meet social expectations

This indicates one of the most important views of internal control, compliance with regulations, including 'meeting social expectations'. Furthermore, these specific expectations are often located in the area 'smooth' aspects of corporate governance. There is no list of expectations which changed profoundly from nation to nation, from sector to sector and from culture to culture. Jan Cattrysse (2005).

Overall performance

Considering the three factors, the main reason is the missing for the overall performance is the responsibility of the board and management staffs.

There is no guarantee for improving performance in corporate governance. However, it should contribute more efficient use of assets, pulling towards low-cost capital, meeting expectations of stakeholders and shareholders, in direction of helping to avoid or prevent corruption within the organization. By doing this, it will lead to enhance better performance. Jan Cattrysse (2005).

2.0 (C) Corporate Governance guarantees?

According to Abdullah,Z. (2007) ,it is important to find out about the guarantees can be offered by corporate governance.

By understanding the development of good corporate governance, it can help to avoid from risk areas which cannot entirely be kept under control. Internal auditor who experience one of these obstacles, for example, lack of time commitment by board members in a company. It may have to be practiced with more patience in order to solve the problem.

Good corporate governance has no assurance for good company performance!

In other way, according to the author can imagine a chairman is explaining the poor results of the company, on the hand, it can be said that pointing out the company uploads is the highest standards of corporate governance.

Internal auditor must be aware that contributing good corporate governance is one aspect of the job. Moreover, by referring the definitions of internal control and internal auditing, it defines the evaluation and change for better in corporate governance process as only one aspect of internal auditing. Holm & Laursen. (2007).

In the first place, directors of the company should know the best decision to take for the company, as well as, the principles of good corporate governance and the best practice. Furthermore, it can be measured with the use of comply or explaining measure, where internal auditors must offer their clients with regard to the remarks and recommendations that they have made in their audit reports, as well as non-compliance reports are acceptable but with the condition of providing explanations or the auditor agree with the explanation or the explanations can be addressed to the audit committee. Jan Cattrysse (2005).

Good corporate governance has no guarantee for successful business!

In simple words, if directors do not understand the business, therefore the business will go broke. In these days, it is apparent that the codes and/or the reports are widely spread all over the world, nevertheless, these codes do not offer solutions for sure guarantee success. Creating good corporate governance always begins with good internal control, it all depends how effective and efficiently it works. However, more explanations can be explore in Role of Internal Auditor Function in Corporate Governance. Jan Cattrysse (2005).

ROLE OF INTERNAL AUDITOR FUNCTION IN CORPORATE GOVERNANCE.

2.1(A) What is Internal Audit.

In common, internal audit normally defined as 'An independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objective by bringing a systematic disciplined approach evaluate and improve the effectiveness of risk management, control and governance processes' Al-Jabali, A.Mhd, Osama Abdalmanam,Khalifeh, N.Z, (2011). Therefore, the function of internal auditor plays a key role. Internal audit functions to provide two main services: assurance and consulting service. T.Flemming Ruud, (2003)

Assurance services: offers an independent assessment on risk management, control, and governance processes of the organization, for instance which include financial, performance, compliance system security, avoiding and reducing negative impacts of an organization. In conclusion, assurance service is provided to create an independent and objective by internal auditors.

Assurance service is vary from consulting service in that both are advisory and related client activities, according to character of the scope which have been agreed by the clients in the purpose of to add value and to improve operation of an organization, for instance that includes council, advice, facilitation, process design, and training. T. Flemming Ruud, (2003)

In the discussion the character of an internal audit function

There are three processes to evaluate, and improve the effectiveness, following are the processes.

'Risk Management Processes: identification and evaluation of potential risks that might affect the achievement of objectives of an organization and determination of adequate corrective actions. A link can here be made to critical success factors.

Control Processes: policies, procedures, and activities which ensure that risks are kept within the limits defined by management in the risk management process.

Governance Processes: procedures which allow stakeholders to evaluate risk and control processes defined management.' T.Flemming Ruud, (2003).

The authors discussion of the backdrop, T. Flemming Ruud.( 2003) also marked that internal audit function can throw in both of the system by analyzing the function and trustworthiness together with sustaining the design of these system by offering internal audit function depending on the positioning in the organization. Finally, the author will like to explain about the importance of internal audit function.

2.1(B) Importance of internal audit function.

In extends, the importance of internal audit function also play a part of it. The need of internal audit function is not something merely, but it is necessary rather than without in an organization. According to , organizations with internal audit function are more efficient in detecting frauds within their organizations likewise those without, furthermore, it is not necessary that an organization with internal audit function does not involved in corporate fraud; it is all depend on how the board of directors practices good governance,. In connection to make a clear understanding, a case study that involved in corporate fraud, Satyam, one of India's largest and most respected software and IT service company, has involves in a 1.47 billion- dollar fraud. The chairman of the company was involve in manipulating the financial statements, by understated the liabilities, overstated the assets, continue misstated accounts receivable and by creating fake cash deposit, the recent of committing this fraud to attract business as well to avoid any possible hostile takeover. Furthermore, the internal audit was not aware of this fraud being practice in the organization. Al-Jabali, A.Mhd, Osama Abdalmanam,Khalifeh, N.Z, (2011)

After discussing the backdrop of the case, the point here is that the internal control was weak, as well the risk management and control security. It could be the internal auditors were not getting enough information from the board of directors, or might be instructed to only discharge responsibility partially which is not regarding the manipulation of the financial statement by the board of directors. Apparently, the main purpose of having internal audit function, as a monitor within the organization activity, and add value through improving control system. . Therefore, to extant more about internal audit function, the most essential part, 'how internal audit function plays its role in corporate governance will be explain next.

2.1 (C) How Internal audit Function plays its Role in Corporate Governance?

After highlighting the importance of internal audit function, the important part is, 'How internal audit function plays its role in corporate governance to create good governance?' Therefore, this matter has been argued by Jan Cattrysse (2005), that one of the internal regulating devices utilised by the Institute Internal Audit is the 'Professional Practice Framework', not only including 'Codes and Ethics' as well as set of 'Standards for the Professional Practice of Internal Auditing'.

Below are the three standards:

Performance Standard 2100 discuss on the nature of the work. Internal auditor plays a role in corporate governance by evaluating the activity and contributes to the improvement of risk management, control and governance systems.

Implementation Standard 2120. A1 discuss about the assurance features provided by internal auditor on the effectiveness of controls surrounding the organization's governance, as well operation and information Cunningham, G.M & Harris, J.E. (2006), these include:

Reliability and honesty of financial and operational information

Efficiency of operations

Safeguarding of assets

Accomplishment with laws, regulations and contracts

Performance Standard 2130 it deals with governance. The internal audit activity should asses and make proper counsel for leading the betterment of the governance process in its accomplishment of the following objectives:

'Promoting proper ethics and values within the organization

Ensuring better organizational management and accountability

Efficiently communicating risk and governing information to appropriate areas of the organization

Efficiently coordinating the activities of and communicating information among the board, external and internal auditors, and management'.

T. Flemming Ruud. (2003). Have emphasize the same matter on effectiveness of governance which can be contributed in many ways by internal audit, foremost internal audit can assist corporate governance in identifying risk factors, analyzing the consequences, it also assist management in giving main concern in risk management and control system, thus, it can also add assurance on risk management processes as it is intended to be function, all through consulting service. Furthermore, internal audit function can assist management and the board by risk management and control processes. In conclusion is that the internal audit and corporate governance must be incorporate to build good governance in an organization; therefore, to improve the quality and add value of the internal audit function will be explain in the implications for corporate governance in audit profession.

2.1(D) What are the Implications for corporate governance in audit profession?

As the role of internal auditor is to help the organization to maintain a system of internal controls for financial statements, moreover, there are wide ranges of opportunities and responsibilities present themselves in the wake of corporate governance.

According to Jan Cattrysse (2005), the final challenge for internal auditor is to seek the necessary method to provide the level of reasonable guarantee expected by all the participants. In other words, internal auditor desires to become the key of being able in the corporate governance process.

Audit committees try to enhance their own effectiveness and more often get in touch with internal auditor that represents one of their precious sources of information.

The dual information which in contact, the internal auditor facilitate by its own, as in monitoring the route the company is going too, and as well monitoring on every aspect of internal control, continue counting in rules and regulations, laws and expectations, risk and opportunities etc…..

On long corporate developments, together with curious stakeholders and assurance requirements, it is just not on financial but also on non-financial measurements and reporting increase the audit workload.

Therefore, internal auditor combine incorporate with corporate governance process.

Certainty internal auditors play an important role in corporate governance process is recognized by lots of organizations of vary interest.

'The role of auditors plays an essential role in corporate governance process. The effectiveness of the board and senior management can be improved by:

Recognizing the importance of the audit process

Taking measures that improve the independence and stature of auditors.

Using, in a timely and effective manner, the findings of auditors

Ensuring the independence of the CAE (Chief Audit Executive) through reporting to the board or the board's audit committee

The board should distinguish and acknowledge that the internal and external auditor is significant important agents.'

Indeed, specifically importance is being placed on board of directors and audit committee responsibilities for the role to enhance a better understanding, valuation and management of business risks in corporate governance. Internal auditors should deem this importance as being on the global peak and recognize the contributions that can make audit committee to assist and to carry out the responsibilities. Jan Cattrysse (2005).

2.1(E) The Position of Internal auditor in Corporate Governance

Positioning internal audit function in an organization, according to , there are three terms in positioning internal audit function; advantages position within the organization, broad of functional areas in examining and as well as vary types of audits ability in performing, and in various type of disciplinary background of individual auditors involve from the internal audit team, continue these attractive features will be carry on exist in mostly internal functions and co-sourcing arrangements, somehow the context of full outsourcing of internal audit service will be reducing. Bobrica, A.& Miclaus, P.G. (2007). However, vital in every situation, the organizational status, positioning, and independence of the internal audit function will be considered.

The most important, a complete and clear understanding about governance structure of the organization is a must for developing an effective and independent internal audit function, according to Brenan,N.M & Solomon, J. (2008), the recent why independence has been always a matter in internal audit function, is due to there have been always a necessity of reporting to someone within the company organization, continue if it reports to a proper level of authority within the enterprise, this may have sufficient independence to be independence. Accordingly, for ensure that internal audit can operate effectively and achieve the preferred results, it is tantamount that the mandate is given from an adequately high organizational level. Internal auditors should avoid doing assessing specific operations, and keep away from conflicts of interest, they have to be objective and independent. Independence should be an objective for the internal auditor. In connection, Bhagat, S. & Bolton, B. (2009) the internal auditor often face up with difficult practical and ethical situations when there are conflicts between loyalty to the company and the need to detach themselves from unwanted or as well potentially illegal activities.

2.1(F) Special Aspects deserving Special Attention

Ethical Values and Virtue

Fraud

Special Aspects Attention in Corporate Governance

Corporate Social Responsibility

Risk Assessment and Risk Management

Table1: Special Aspects Attention in Corporate Governance Issues

The author discuss, there are four special aspects deserved attention in corporate governance issues, continue the author will also briefly point out couples of aspects which will be precious contributed by internal auditor towards corporate governance as a whole to one of these issue in particular.

Ethical Values and Virtue

Ethical values and virtue is an aspect where it leads to a higher grade of virtue, which helps to prevent and expose any possibility of deception, as well as to help strengthening the system of internal control.

Therefore, code of ethics and conduct, integrating values such as honesty, trust and virtue should be discussed among members of the organizations, as well to all outside relations, so it is clear and aware about acceptable and unacceptable.

Furthermore, it is a duty of internal auditor to counsel by helping the managers in making decisions of a suitable code should be included in the aspect, and evaluate by doing assessment on the application of the code and being watchful of any code breach. Jan Cattrysse (2005).

Fraud

Fraud is an essential aspect in corporate governance, where the boards of directors have to make sure the system of the internal control to protect the company's assets and shareholders' investment.

The author has discussed regarding the position and the contribution by internal auditor to detect and prevent fraud it is clearly stated in the standard. Moreover, internal auditor should have sufficient knowledge to identify frauds.

The most effective way to prevent fraud is by upgrading the control environment which must be set by the top managers. Jan Cattrysse (2005).

Generally, in an organization there are three tools to battle fraud:

When an organization practices good corporate governance, furthermore, when there is the right information shared among the members in the organization, this will reduce the level of risk of frauds in a company. The major part is internal auditors should be knowledgeable in indicating frauds and aware of fraud risk in the area which is being audit. Internal auditors should be alert in fraud opportunities and as well should focus on the areas where controls are weak or fraud sensitive and recommend further investigation if it is necessary. Advising management and board in improve fraud prevention by changing the culture and traditional. Internal auditor should create a system of having a strict or high risk possible of getting caught in proclaiming fraud in an organization.

As a whole, internal auditor majorly plays a role in detecting frauds and preventing frauds as a direct contribution to good corporate governance, and this should be encouraged by the board and management. Jan Cattrysse (2005).

Corporate Social Responsibility

According to Jan Cattrysse (2005), corporate social responsibility is a recent term that is applied in todays. According to the author there are massive challenges for the present internal auditor to continuously evaluate on new development and to decide on the aspects that can take as an advantage on the organization.

The main point, corporate social responsibility gives more priority on stakeholders of the firm ethically or in a socially responsible manner. Therefore, behaving social responsible, it will increase the human development of stakeholders with and out of corporation.

Risk Assessment and Risk Management

Eventually, fraud is always treated as a separate risk, it is essential to look at the relationship between the internal auditor and risk assessment and risk management in other way. According to Jan Cattrysse (2005), Turnbull states internal auditor is a key role in the management of risk which is important to fulfill the business objective. Therefore, risk assessment and risk management is essential aspects of corporate governance, there are two main parties carry important responsibility, the first is internal auditor and the second is the management. The management responsibility should consider the difference between the original responsibilities of the board with regarding the risk management process. The difference can be formulated, by board responsibilities for total process of risk management and forming own opinion on the effectiveness of the process. The management is responsible for designing and implementing as well monitoring the process of risk management and combines it into daily activities of the company, Jan Cattrysse (2005).

Throughout all the aspects which had mentioned by the author, internal auditor can make a vital contribution to the risk process of the organization; as well add value to their duties. By giving special attentions towards each aspect, it will prevent and create good corporate governance. Jan Cattrysse (2005).

3.0 Conclusion

Catastrophes on business, has not only shaken up USA but also all over the corporate world. This investigation aimed in producing a number of reflections on the phenomenon of corporate governance in the interest of the internal auditor. The author started explaining by the history of corporate governance in Malaysia, as a boost to start and to explain more in detail, on the matters and as well to clear the understanding what corporate governance all about, where the author mention that corporate governance does not guarantees on creating a successful business, this is to clear typical business minded directors out there, that good business is not only successful, when the company can create big junk of profits, but the base, the internal control and how the company being governed in a healthy way.

The author took a closer look at the implications corporate governance can have on the internal auditor in audit profession, on the importance of internal auditor and as well the positions, throughout this paper, the author encountered a number of findings, arguments, on Malaysian companies, those are the issues the internal auditor has to pay.

Furthermore the overall of this paper, is to clear up the understanding on what is corporate governance all about. Good corporate governance, according to other sources, the Cadbury report issued in the UK and the OECD corporate governance guidelines, established, that there is no any simple formula for good corporate governance, directors should adopt such practices which is suitable to the good governance of their organizations on the circumstances, as in Australia is argument and comparison, point out , directors can satisfy themselves, when the directors can really capture what is going on the in the companies, which the directors are responsible for, as well according to the author, directors should put more attention and time on their duties and practice more on the governance techniques that have been develop, as well there must be formed internal control which is more alert, however there is no perfect internal control but to prevent, the most import message in this investigation that the author would like to send out, is the expectations of the stakeholders. Internal control should evaluate the system which provides assurance concerning as well the internal control may also add value by providing assurance to the stake holder. Brenan,N.M & Solomon, J. (2008)

Hopefully throughout this investigation by the author, it may contribute and help the internal auditor and directors, to add value in governing good corporate governance, however this investigation also had mention on the auditor tools, and this may give an idea to the auditors to be more alert in their responsibilities.

4.0 Research Methodology

The author has complete the research using secondary data, such as articles, journals, books; the author also have used the Google Scholar as search engine to download the articles and journals. The objectives of this investigation are:

Highlighting the aspects of issues which result negative outcome for not abiding the rules and regulations set by corporate governance institution.

To provide important business moral values which can help businessmen and businesswomen to work without involving in illegal activities.

To emphasize the importance of corporate governance and the reasons of its formation.

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