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The role of the Auditors in the UK Corporate Governance

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par N'semy Aubin Mabanza
University of Wales, Cardiff Law School - LLM (Master of laws) in Commercial Law 2004
  

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1.5 Audit Committee in the USA

Traditionally, directorate audit committees were first proposed in 1939 as a direct

result of the Mckesson & Robbins scandal and in 1940 by the New York Stock

Exchange ( NYSE) and the Securities and Exchange Commission (SEC), were not

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widely used for many years. Revived interest in audit committees began with a

recommendation for their use by the executive committee of the AICPA in 1967

which stated: 'that publicly owned corporations appoint committees composed

of out side directors (those who are not officers or employees) to nominate the

independent auditors of the corporation' s financial statements and to discuss the

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auditor's work with them.

68 . A .Chambers , ' Tolley ' s Corporate governance'.

69 . The Turnbull Report is guidance to directors on implementing the section on

Internal control within the Combined Code.

70 .J . Baden , ' The Developing role of Audit Committees 'internal control'.

71. A . Chambers , ' Tolley ' s corporate governance'.

Moreover, the audit committee' s members shall meet the requirements of the

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NYSE, the SEC and any other applicable law or regulation. The audit committee

shall be independent non executive directors and shall meet at least four times

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annually or more frequently as circumstances dictate. In 2002,the Sarbanes-Oxley

Act (SOA) operated an important reform on the Accounting Industry. On the other

hand, the New York Exchange ( NYSE ) submitted a rule filing to the SEC which

includes new proposed corporate governance Standards intended to be codified in a

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new section 303A of the Exchange's Listed Company Manual.

The SOA established a new law against executives who commit corporate fraud and

increase the Securities and Exchange Commission ( SEC) budget for auditors and

investigators; the law is also intended to restore investor confidences in US market

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after the 2001' s scandals. This reform was a land mark event, representing the most

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important changes in the Federal Securities laws since the 1930s. However, even if

there are some common points between the new US corporate governance standards

and the Combined Code, the new proposed US Standards do not distinguish between

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'Principles' and `Provisions'. The scope of these new proposed US Standards is thus

much narrower than the scope of the UK's Combined Code which gives much more

comprehensive coverage of essential elements of corporate governance; the

proposed US Standards appear to be a focussed `fix' designed to address almost

exclusively the corporate governance weakness revealed by the recent US corporate

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debate. Section 303 A of the new proposed US Standards requires that listed US

companies must have a majority of independent directors not merely non-executive.

72.Norman E . Auebach, ' Audit Committees New Corporate Institution'

73.A.Chambers,'Tolley's Corporate governance'.p.1145

74.ibid

75.A.Chambers,'Tolley's corporate governance'.

76.ibid

77. ibid

78. ibid

The proposed new US Standards elaborate upon the criteria to assess

`independence' whereas in the UK independence is expressed simply as:

... independence of management and free from any business or other relationship

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which could materially interfere with the exercise of their independent judgement.

Non - executive directors considered by the board to be independent in this sense

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should be identified in the annual report. A. Chambers points out another element of

comparison between the new proposed US Standards and the UK Combined Code.

In the UK it is for the board to decide whether a director is independent, indeed the

guidance to the US proposed Standards also states that the concern is `independence

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from management' and a proposal Standards reads:

`No director qualifies as «independent «unless the board of directors affirmatively determines that the directors has no material relationship with the listed company

(either directly or as a partner, shareholder or officer of an organization that has a

relationship with the company).

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Regarding the specific criteria, the new proposed US Standards provides as follows:

`No director who is a former employee of the listed company can be «independent»

until five years after the employment has ended.

No director who is, or in the past five years has been, affiliated with or employed by

a (present or former) auditor of the company (or of an affiliate) can be independent

until five years after the end of either the affiliation or the auditing relationship.

No director can be» independent» if he or she is, or in the past five years has been, part of an interlocking directorate in which an executive officer of the listed company

serves on the compensation committees of another company that concurrently employs the director.

Director with immediate family members in the foregoing categories are likewise subject to the five years «cooling-off» provisions for purposes of determining

«independence».

79 . A. Chambers , ' Tolley ' s corporate governance'.

80. Combined Code `Provision A 3.2.

81 A . Chambers , ' Tolley ' s corporate governance'.

82.New Proposed US Standards 2.(a),(i) to (iv).

In practice, there are many other possible impediments to independence; notable

amongst the above four given criteria is the introduction of a past audit relationship as

an impediment to independence; it is also notable that, in the third independence

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tests, interlocking directorships are seen as an impediment to independence.

Under the new proposed Standards, all members of the audit committee should be

independent directors. According to this section, the audit committee is sole authority

to hire independent auditors, and to approve any significant non-audit relationship

with the independent auditors and it must set clear hiring policies for employees or

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former employees of the independent auditors'. In addition, the new proposed

Standards prescribes that the audit committee must receive at least annually a report

on the independent auditor's quality control and information about certain inquiries

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and investigations of the independent auditor within the last five years.

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