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Enterprise Governance - IFAC

CIMA26 Chapter Street, London SW1P 4 NPT+44 (0)20 7663 GovernanceGetting the Balance RightIFAC is the global organisation for the accountancyprofession. It works with its 159 member organisations in118 countries to protect the public interest by encouraginghigh quality practices by the world s accountants. IFAC members represent million accountants employed inpublic practice, industry and commerce, government, s overall mission is to serve the public interest,strengthen the worldwide accountancy profession, andcontribute to the development of strong booklet was prepared by the Professional Accountantsin Business Committee (PAIB) of IFAC. The PAIB Committeeserves IFAC member bodies and the more than one millionprofessional accountants worldwide who work in commerce,industry, the public sector, education, and the not-for-profitsector.

This report: • defines and explains the concept of enterprise governance; • provides a brief summary of the case study findings and identifies key areas for attention;

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Transcription of Enterprise Governance - IFAC

1 CIMA26 Chapter Street, London SW1P 4 NPT+44 (0)20 7663 GovernanceGetting the Balance RightIFAC is the global organisation for the accountancyprofession. It works with its 159 member organisations in118 countries to protect the public interest by encouraginghigh quality practices by the world s accountants. IFAC members represent million accountants employed inpublic practice, industry and commerce, government, s overall mission is to serve the public interest,strengthen the worldwide accountancy profession, andcontribute to the development of strong booklet was prepared by the Professional Accountantsin Business Committee (PAIB) of IFAC. The PAIB Committeeserves IFAC member bodies and the more than one millionprofessional accountants worldwide who work in commerce,industry, the public sector, education, and the not-for-profitsector.

2 Its aim is to enhance the profession by encouragingand facilitating the global development and exchange ofknowledge and best practices. It also works to build publicawareness of the value of professional accountants. The PAIBC ommittee was formerly called the Financial andManagement Accounting of the PAIB Committee, 2003 The PAIB Committee welcomes any comments you may have on this report. Comments should be sent to:PAIB Technical ManagerInternational Federation of Accountants545 Fifth Avenue14th floorNew YorkNew York 10017 USAE-mail: +1 212-286-9570 Copies of this report may be downloaded free of charge from the IFAC website at : 1-931949-24-7 Copyright February 2004 by the International Federation ofAccountants.

3 All rights reserved. With the exception of IFAC memberbodies, no part of this publication may be reproduced, stored in aretrieval system, or transmitted, in any form or by any means,electronic, mechanical, photocopying, recording, or otherwise withoutthe prior written permission of the International Federation ofAccountants. Translation requests should be submitted to Connell, ChairUKGerhard PrachnerAustriaEdward K F ChowHong KongRodolfo Di DatoItalyPichai ChunhavajiraThailandSantiago C LazzatiArgentinaRaymond G DarkeCanadaSrinivasan RamanathanIndiaYeo Tek LingMalaysiaRecep PekdemirTurkeyJohn PettyAustraliaPatrick RochetFranceAbolghasem FakharianIranPeter A M SampersNetherlandsWilliam L BrowerUSAE nterprise GovernanceThis report: defines and explains the concept of Enterprise Governance ; provides a brief summary of the case study findings andidentifies key areas for attention; proposes ways of addressing these priority areas and.

4 Introduces the concept of a strategic focus on what goes right and wrong in listed , most of our recommendations are relevant toother public-interest entities and small and focus is on the processes inside a company. Externalprocesses such as external audit and regulatory complianceare important but they are not covered in this developing this report, we have drawn on a considerablebody of earlier work, particularly in the field of corporategovernance. We have not duplicated this work, but built onit. We emphasise that it is important to balance goodcorporate Governance with the creation of sustainable summary of key corporate Governance developments isprovided in Appendix Professional Accountants in Business Committee (PAIB)of the International Federation of Accountants (IFAC) wasasked by the IFAC Board in October 2002 to explore theemerging concept of Enterprise Governance .

5 A particularfocus of the project was to consider why corporategovernance often fails in companies and, more importantly,what must be done to ensure that things go report complements an earlier IFAC report,RebuildingPublic Confidence in Financial Reporting: An InternationalPerspectivewhich looked at ways of restoring the credibilityof financial reporting and corporate disclosure. Theinternational perspective distinguishes both these reportsfrom other literature in this PAIB established a steering committee comprisingrepresentatives from five countries: France, Hong Kong, Italy,the United Kingdom and the United States. The members ofthe steering committee are listed on page 2.

6 We undertooka series of case studies covering ten countries and tenmarket sectors. The case studies considered both corporategovernance and strategic important feature is that we considered successstories and well-known failures such as Enron andWorldCom. It became very apparent to us that while theheavy emphasis on corporate Governance issues has beennecessary in the light of recent scandals, it is important toremember that good Governance on its own cannot make acompany successful. Companies need to balanceconformance with performance. This is a fundamentalcomponent of Enterprise Professional Accountants in Business Committee (PAIB) ofIFAC was asked by the IFAC Board in October 2002 to explorethe emerging concept of Enterprise Governance .

7 A particular focusof the project was to consider why corporate Governance oftenfails in companies and, more importantly, what must be done toensure that things go GovernanceIntroduction2 The steering committee is grateful to all those in IFAC smember bodies who assisted in researching and preparingthe case studies and in particular to Jasmin Harvey, GillianLees and Richard Mallett in the technical department of theChartered Institute of Management Accountants (CIMA)who provided invaluable project management thanks also go to Richard Sharman and DavidSmith of KPMG who prepared the section on Enterprise report reflects the personal views of the members ofthe PAIB steering committee and not necessarily the viewsof the organisations of which they are ConnellFCMAC hairman, IFAC PAIB CommitteeChairman, CIMA Technical CommitteeFebruary 2004 Steering CommitteeUnited Kingdom Bill Connell (Chairman)Richard MallettChartered Institute of ManagementAccountants (CIMA)FrancePatrick RochetAssociation Fran aise des EntreprisesPriv es (AFEP)Hong KongEdward ChowHong Kong Society of Accountants (HKSA)

8 ItalyLuca SavinoConsiglio Nazionale dei Dottori CommercialistiConsiglio Nazionale dei Ragionieri e Periti CommercialiUnited StatesPriscilla PayneInstitute of Management Accountants(IMA )3 Executive summary41 Context and background92 Principles of Enterprise governance103 Case studies134 Strategic oversight205 The CIMA Strategic Scorecard266 Enterprise risk management327 The acquisition process and therisk management process to support it388 Board performance479 Appendices491 Objectives of the project492 Synopsis of international corporate Governance developments493 Summary of the case studies534 Case study analysis555 References and further reading57 ContentsEnterprise GovernanceThe Professional Accountants in Business Committee (PAIB)

9 Of IFAC was asked by the IFAC Board in October 2002 toexplore the emerging concept of Enterprise Governance . Aparticular focus of the project was to consider whycorporate Governance often fails in companies and, moreimportantly, what must be done to ensure that things and focus of workThe scope of our work involved researching the emergingconcept of Enterprise Governance and developing guidelinesto explain the many facets of this concept. As part of thiswork, we also reviewed recent developments in corporategovernance as well as analysis of what makes strategiessuccessful in Governance definedThis report defines Enterprise Governance as the set ofresponsibilities and practices exercised by the board andexecutive management with the goal of providing strategicdirection, ensuring that objectives are achieved, ascertainingthat risks are managed appropriately and verifying that theorganisation s resources are used responsibly (InformationSystems Audit and Control Foundation, 2001).

10 Enterprise Governance constitutes the entire accountabilityframework of the organisation. There are two dimensions ofenterprise Governance conformance and performance, thatneed to be in is also called corporate Governance . It coversissues such as board structures and roles and executiveremuneration. It has had significant coverage in recent yearsfollowing the various corporate Governance scandals andthere will continue to be developments in this area. Codesand/or standards can generally address this dimension withcompliance being subject to assurance/audit. There are alsowell-established oversight mechanisms for the board to useto ensure that good corporate Governance processes areeffective eg, audit performance dimension focuses on strategy and valuecreation.


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