Page 27 - AA Integrated Workbook STUDENT 2018-19

Corporate governance

Objectives

1.1 Importance of corporate governance

Corporate governance is the means by which a company is operated
and controlled.

The aim of corporate governance is to ensure that companies are run
well in the interests of their shareholders, employees, and other key
stakeholders such as the wider community.

A company following good corporate governance principles should be less exposed
to risk of directors abusing their powers.

Advantages of following good corporate governance principles:

 Greater transparency

 Greater accountability

 Efficiency of operations

 Better able to respond to risks

 Less likely to be mismanaged

1.2 Relevance of corporate governance to the external auditors

A company complying with good corporate governance principles is likely to have a
stronger control environment, therefore less risk of material misstatement in the
financial statements.

External auditors may be required to report on whether companies are compliant with
corporate governance regulations.

There is significantly more communication between audit committees and external
auditors in the current environment. If the company, including the audit committee,
demonstrates good corporate governance, the external auditors have someone with
which to share responsibility. This should result in the company taking more
responsibility for its actions, the independence of the auditor being greater, and the
overall quality of the audit being higher.

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