CORPORATE GOVERNANCE IN ADMINISTRATIVE PROCESSES AND REPORTING (STUDY OBJECTIVE 8)

The four primary functions of the corporate governance process—management oversight, internal controls and compliance, financial stewardship, and ethical conduct—were introduced in Chapter 5. Each of these functions is applicable to the administrative and reporting processes, as these processes must include a proper corporate governance structure in order to properly deter instances of fraud, theft, and misuse or manipulation of administrative resources and reports.

The systems, processes, and internal controls described in this chapter are part of a corporate governance structure. When management designs and implements administrative processes, it assigns responsibility for executing the related capital, investment, and general ledger functions to various employees. It must be mindful of the risks of stolen or misused capital, alteration of documents or reports, and other frauds in this process. Accordingly, it must also implement and monitor internal controls to minimize these risks. As management considers these assignments and monitors the underlying processes and controls, it is carrying out its corporate governance functions of proper management over sight and internal controls and compliance.

In recent years, the corporate governance process for many companies has been challenged by the adoption of the Sarbanes-Oxley Act and/or by the company's commitment to converge toward International Financial Reporting Standards (IFRS). These increased reporting requirements have made it imperative for companies to be well organized with the right resources to carry out the new tasks, adjust their systems and controls, and collect the additional information needed for compliance. It is essential that top management provides foresight and oversight in handling these and other transitions where new reporting requirements are introduced. Although this objective may not seem complex, securing dependable data across an entire organization requires a sharp network of high-achieving leaders, employees, and technology.

When management has designed, implemented, and continually manages processes and internal controls, it is helping to insure proper stewardship of the company's assets. Corporate governance requires proper financial stewardship, and since financing and investing transactions that are included in the administrative processes are concerned with proper use of cash—the asset on a company's balance sheet that is most susceptible to theft—financial stewardship is especially important.

One method of exercising corporate governance over administrative processes and financial reporting is through the company's budgeting process. If management is involved in the establishment and monitoring of measurable goals, it can be confident that it is addressing its financial stewardship obligation. Budget information can be monitored to help managers identify problem areas, as well as to establish responsibility for various functions and evaluate employee performance.

Finally, good corporate governance depends upon the ethical conduct of management. When management sets an appropriate tone at the top by consistently demonstrating and encouraging ethical conduct, it is more likely that a stronger system of corporate governance will result. Improved effectiveness and efficiency and reduced risks of fraud tend to accompany workplace environments marked by effective corporate governance.