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Table of Contents s
1.0cIntroduction.................................................................................................. ............... 3
1.1cCase 1- Corporate governance and audit......................................................... 3-5
2.0cCase 2 ± Audit and sole Traderships, partnership and limited liability company....... 6-7
3.0cCase 3 ± Professional Values, Ethics and Attitudes.................................................... 7-8
4.0cConclusion............................................. ....................................................................... 8
5.0cBibliography................................................................................................................. 9

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9
Introduction s
In this project I will be concentrating on corporate governance and audit. It will first look into
the impact of credit crunch and how corporate governance can help to reduce followed by
internal auditors and external auditors. I will also talk about the key difference between sole
trader, partnership and limited liability companies, Professional ethics and the difference
between fraud and error and responsible for the detection and prevention.

9 9 Case 9 ± Corporate Governance and Credit Crunch s

9 Corporate governance has always been there even before the credit crunch. It is that fact
that for corporate governance to be effective in avoiding credit crunch and other bad
situations like this all the existing companies need to follow it effectively. Corporate
governance provides a guideline on how a company should be managed and controlled and it
also emphasises on having an efficient internal control department with an Audit Committee.
Under corporate governance the Audit committee monitors all the business transaction and
stays vigilant to ensure that managers are acting in the shareholders interest. Basically most
of the bank manager over several years has been ignoring the basic principle of corporate
governance as they were making profits and used risky policies to further enhance the profit
so they can be remunerate handsomely at every subsequent year end. This cumulative
approach of short-termism from all the bank managers has resulted in µCredit Crunch¶. (Paul
Moxey and Adrian Berendt 2008).

There is nothing one could have done to reduce the impact of Credit Crunch as it occurs due
to the past transactions over the several years. It is like a disease where prevention of
something spreading must be the key aim of the entire organisations & governments rather
than the cure. (Paul Moxey and Adrian Berendt 2008).

 Corporate governance is a framework within which companies are directed, controlled and
held to account. It is use on a day to day basis in the management of enterprises which is a
task delegated by boards to executive management. Corporate governance has a more
strategic function: it is concerned with steering a company in a direction that is consistent
with its long-term values and objectives. Corporate governance is very important because it
helps to prevent corporate scandals, fraud and potential civil and criminal liability of the
organisation and it is also good business. The corporate governance framework is vital in
public bodies. It lets the public know that our organisation is w ell-managed and ensures that
the business we conduct is transparent. (Frederick Lipman and L.Keith Lipman 2009).

The credit crunch is a sudden shortage of funds for lending, leading to a resulting decline in
loans available. It can occur for varies reasons such as; sudden increase in interest rates or
direct money controls by the government etc. The recent credit crunch was driven by sharp
rise in defaults on subprime mortgages. These mortgages were mainly in America but
resulting shortage of funds spread throughout the world. (Mortgage guide UK 2008)

Main cause of credit crunch has been a fundamental failure in corporate governance. They
have ignored the key point that good corporate governance is about boards directing and

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controlling the organisational so they operate in their shareholders interest. Poor corporate
governance and risk management are heart of credit crunch. There are several key factors
such as; there was failure to manage the link between risk and remuneration centres, Excess
of risk taking and short-termism resulting from remuneration structure and bonuses, Risk
management department lacked influence or power and Weaknesses in reporting on risk and
financial transactions. All these factors are combined with information between parties to
transaction and imperfection in regulation, led to an excess of money supply and ultimately to
the market dislocation. There are some further contributory factors were; over complexity of
products and lack of understanding by management of the associated risk, excessive reliance
on leverage, misalignment between the interests of originators of, and investors in, complex
financial products, cultural and motivation factors such as influence as a human greed. (Paul
Moxey and Adrian Berendt 2008)

To help improve understanding about governance performance, ACCA is publishing a set of

ten corporate governance and risk management principles which we believe have to be
observed to achieve good corporate governance. (Paul Moxey and Adrian Berendt 2008)

Principle 1 of The Agenda says:

µë

 


 

 




  


    
 


. (Paul Moxey and Adrian Berendt 2008)

There should be clear understanding of what corporate governance is for and the purposes.
Good corporate governance is about boards directing and controlling the organisations in the
interests of long-term owners. It is also about boards being accountable to company owners
and accounting properly for their stewardship. It means complying with the broader spirit of
good governance. Recent events indicate that good governance has lacking many financial
institutions, it is time now proposed to focus on better governance performance not just
complied. (Paul Moxey and Adrian Berendt 2008).

Principle 2 of The Agenda says:

ë
 

 ë
  






 



 



 






  



 (Paul
Moxey and Adrian Berendt 2008).

Boards should set the right things and behave accordingly, paying particular attention to
ensuring the continuing ethical health of their organisation. It should also ensure that they
have appropriate procedures for monitoring their organisations µethical health¶. We should
remember the impact on employees and on society. While bank boards owe their primary
duty to shareholders they also have obligation to other stakeholders. (Paul Moxey and Adrian
Berendt 2008).

Principle 3 of The Agenda says:

ë
   





 
 
 

 
 

 

      
   

 

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 (Paul Moxey and Adrian Berendt 2008).

A fundamental role of the board is to provide direction and control. Control means that board
should monitor. It was clear that non executive did not monitor executive management
properly or provide sufficient challenge or oversight. Board should set clear goal,
accountabilities, appropriate structure and committees, delegated authorities and policies they
should provide sufficient resources to achieve goals on day to day operations and monitor
managements progress towards the achievement of these goals. (Paul Moxey and Adrian
Berendt 2008).

Principle 4 of The Agenda says that:

ë



 
 


  





 


    
!














"


    


 
 

#



  





 



  


 
  




    
  


  
ë


 



 




 
   


 

 

 





 
 (Paul Moxey and
Adrian Berendt 2008)

All organisations should face risk and to be success in achieving their strategic objective will
usually require understanding, accepting, managing and taking risks. Risk should consider as
part of decision making at all levels in organisation. Boards need to understand the risks
faced by the organisation, satisfy themselves that the level of risk is acceptable and challenge
executive management when appropriate. (Paul Moxey and Adrian Berendt 2008)

There are so many causes of credit crunch but major failure was in corporate governance.
Regulatory boxes may have been ticked but fundamental principal of good governance were
breached. Performance based remuneration needs to support good long-term performance and
should take risk in the account. Risk management will have to improve within the business.
There are many questions which needed to be answered about accounting and reporting.
(Paul Moxey and Adrian Berendt 2008)

To see the improvement in corporate governance and risk management, there should be
flexibility in companies and structures. Corporate governance and risk management should
never fully evolve and may always be improved. It is important, therefore, that requirements
do not create a straight jacket which prevents innovation and improvement in the ways
organisations conduct themselves. (Paul Moxey and Adrian Berendt 2008)

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Case  ± Audit and Sole traderships, Partnership and Limited liability companies

 9

a This is a limitation of scope as the auditor is unable to audit a purchase balance because
evidence that should be available is not available. Although this is a material matter but it is
not big enough for the financial statements to be misleading. Hence, the audit report will be
of modified opinion called µQualified with except for¶. This opinion says that µthe financial
statements are true and fair except for purchases which we have not been able to audit¶. (F8
ACCA 2010).

b Internal audit is part of the internal control system. The role of internal audit will differ
according to the organisation¶s objectives but is likely to include review of internal control
system, risk management, legal compliance and value for money. It monitors and reviews the
effectiveness of company¶s internal audit function. All the listed companies where there is no
internal audit function, the audit committee should consider annually whether there is a need
for an internal audit function and make a recommendation to the board, and the reasons for
the absence of such a function should be explained in the relevant section of the annual report
and listed companies with an internal audit function should also review annually its scope,
authority and resources. (F8 ACCA 2010).

The Key difference between internal auditors and external auditors are:

Internal auditors are appointed by directors and they report back to board of directors.
Internal audit is an activity designed to add value and improve an organisation¶s operations.
There is no legal requirement in internal audit. Ideally should be independent but hard to
achieve and they are often employees of the organisation. (F8 ACCA 2010).

External auditors are appointed by shareholders for statutory audit and they report back to
shareholders. External audit is an exercise to enable auditors to express an opinion on the
financial statement. There are legal requirements for statutory audit. They are independent of
the company and its management. (F8 ACCA 2010).

© ©


Sole Trader ± A sole trader is an organisation owned by one person and owns the assets and
liable for all the debts. There isn¶t any legal formality required to set up a sole trader
business. This form of business is inappropriate for large businesses or those involving a
degree of risk. F4 ACCA (2010).

Partnership ± Partnership is like sole trader but two or more person joined with the
ownership of the business. The liabilities are similar to as being a sole trader. Personal assets
belonging to the partner may be used to pay off the outstanding debt. F4 ACCA (2010).

Limited Liability companies- A private limited company can have one or more members
and can¶t publically offer the company shares, Where on the other hand public limited
company must have no less than two shareholders and shares can be issued publically. A

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limited liability company are companies where the liabilities are limited based on the
principles that company¶s outstanding debts and liabilities are those of the company and not
of the members. F4 ACCA (2010).

© 


Fraud

In the corporate context the fraud can be defined as the removal of funds or assets from a
business or the intentional misrepresentation of the financial position of a business. The
common frauds include payroll frauds, conspiracy with other parties and stealing assets.
Other more subtle frauds are teeming and lading and manipulation of bank reconciliations
and cashbooks to conceal theft. (F8 ACCA 2010).

¦rror

An error represents an unintentional misstatement of the financial statement. It may be

material or immaterial.

An external auditor job is to give an opinion on the financial statement as to whether it show
a µTrue and Fair view¶. The responsibilities of directors and internal auditors with regards to
fraud by distinguishing between: fraud prevention and fraud detection. (F8 ACCA 2010).

The main focus of the work of the internal auditor is checking that the internal control
systems in a company are working correctly. Part of that work may be to conduct a detailed
review of systems to ensure that fraud is not taking place. (F8 ACCA 2010).

Fraud Prevention:

Fraud prevention is entirely the responsibility of directors. The external auditor has no legal
obligation to prevent fraud but has a professional obligation to advise clients on how best to
prevent it. (F8 ACCA 2010).

Fraud Detection:

Fraud Detection is also the responsibility of directors, but external auditors have some
responsibility. (F8 ACCA 2010).

3
Case 3: Professional values, ¦thics and Attitudes s

Integrity - All professional accountants to be straightforward and honest in all their business
and professional relationship and integrity also imply fair dealing and honesty. (F8 ACCA
2010).

Professional Competence and Due Care ± All professional accountants have a duty to
maintain their professional knowledge and skills at the level required to ensure that client or
employers receive competent professional service and they should act in accordance with
applicable technical and professional standards when providing professional services. (F8
ACCA 2010).

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Confidentiality ± A professional accountant should maintain confidentiality and do not

disclose any client information to third parties unless they have a legal or professional right
or duty to disclose. (F8 ACCA 2010).

Professional Behaviour ± All the professional accountants should respect the laws and
regulations and they should never act in a manner that would discredit their profession. (F8
ACCA 2010).

Objectivity - All professional accountants not to compromise their professional or business

judgment because of bias, conflict of interest or the undue influence of others. (F8 ACCA
2010).

4
Conclusion s
It can be concluded that the issues discussed in this report shows that the corporate
governance is very important for the organisation, therefore organisations should follow all
principals efficiently to help to reduce future credit crunch.

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’
Bibliography s
Frederick Lipman and L eith Lipman µCorporate governance¶
<http://accounting smartpros com/x’’9
4 xml> (3
th May 
9


Mortgage guide µCredit crunch ¦xplained¶

<http://www mortgageguideuk co uk/blog/debt/credit-crunch-explained/> (3
th May

9


Paul Moxey and Adrian Berendt µCorporate Governance and Credit Crunch¶ 


<http://www accaglobal com/documents/corpgov_credit_crunch pdf> (
9st June 
9


F8 ACCA (2010).$

. London: Inter Active World Wide limited,
2010.ISBN 978-1-907217-55-5

µDefinition of
error¶<http://wiki.answers.com/Q/What_is_the_difference_between_error_and_fraud_in_aud
iting> (1st June 2010)

F4 ACCA (2010). µCorporate Business & Law¶. London: Inter Active World Wide limited,
2010