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Corporate Governance, Andersen, 2016, disclosure of conflicts of interests…

- - - - address coordination
      - foster conformity and achievement of objectives
        
        INSTITUTIONAL THEORY
        
        isomorphism - role of trends and societal legitimacy
        
        people: satisfiers, conforming norms
        
        institutional
        
        competitive
        
        traditions, trends, norms matter
      - guide individual behaviour to match the interest of the org
        
        AGENCY THEORY :
        
        people: self-interested, rational, risk-averse
        
        reducing information assymetries
        
        COSO Framework 1992, 2013 for IC
        
        main problems in IC
        
        human errors
        
        external events
        
        key elements
        
        monitoring
        
        constant adaptation needed
        
        information
        
        can serve as dynamic feedback mechanism
        
        IT integration key
        
        control activities
        
        implementation
        
        policy
        
        across the org
        
        1 more item...
        
        control environment
        
        'tone from the top'
        
        Enterprise Risk Management
        
        ERM and IC as complementary
  - - - ends
        
        logic of precaution
        
        logic of opportunity
      - means
        
        engineered
        
        organic
    - - reputational risk
        
        compliance over actual RM
        
        defensiveness in orgs
    - - illusion of control and risk appears manageable
      - checklist
        
        personal accountability
        
        mitigate human error
      - digitalization
        
        trustless blockchain
        
        BUT: rejects the unknown
    - - bad
        
        concerns are silenced
        
        NO ACCOUNTABILITY
        
        fear of reputational damage
      - good
        
        concerns are voiced
        
        because no individual suffers
        
        mistakes accepted
        
        experimentation over compliance
        
        uncertainty embraced
  - - - Three lines of defence
        
        1st: Management control (day to day)
        
        first and mid line managers handling day to day risks
        
        3rd: Internal Audit
        
        examining the first two
        
        2nd: Risk Management and compliance
        
        implements IC and RM on organizational level
      - revised by IIIA 2020
        
        new model has more focus on embedding RM iinto everyday
      - risk apetite
      - risk mapping
    - - successful practices of RM by CROs
        
        'risk talk'
        
        jargon does not help but harms
        
        humility and confidence
        
        embedding RM into business operations
        
        developing context-specific tools
        
        frugal, minimal operations
        
        their role is to facilitate
    - - Good CG and shareholder-orintedness
        
        higher systemic risk :explode:
        
        goal: increase profitability by risk taking
        
        independent directors encouraging risk taking
    - - biggest risks are strategic and not operational
        
        you need ERM
        
        are artefacts useful?
        
        NO
        
        “wicked problems”
        to solve these, you can’t rely on risk artefacts but on mindful judgements of decision-makers
        
        YES
        
        can reduce cognitive uncertainty when risk representations align with actor perceptions.
- - - - Gunn et al. 2019
        
        high concentration of big 4
        
        lower quality audit
        
        competition is good for quality
        
        higher prices
    - - competition is bad
        
        Pan et al. 2023
        
        increased competition of auditors
        
        focus on client retention
        
        less professional skepticism
        
        lower audit quality
        
        1 more item...
    - - increase competition by regulation
        
        BEIS (2022)
        
        Market opening measures
        
        Gov can introduce market share cap
        
        use of legal subsidiaries
        
        Audit committees
        
        ARGA will set minimum standars for audit committees regarding auditor appointments and oversight
        
        enforceable standards
        
        shareholder engagement with audit
        
        Stewardship Code revisions
        
        formal mechanism for audit committees to gather shareholder feedback
        
        Operational separation of audit and non-audit practices
    - - Gray et al. 2019
        
        professional skepticism
        
        postulates of auditing
        
        independence of auditors
        
        verification by evidence of the subject of auditing
        
        credibility
        
        truth and fairness of auditing
        
        ethical dilemma - reporting on your clients
        
        audit quality is NOT DEFINED by the frameworks
        
        bc of technological change, more transactions can be reported on
        
        FRC as main regulator in the UK
  - - - expectations vs reality
        
        Gray et al. 2019
        
        audit expectations gap
        
        performance gap
        
        deficient standards
        
        deficient performance
        
        lack of independence
        
        incompetence
        
        reasonableness gap
        
        unreasonable expectations from society
    - - Manita et al. 2020
        
        better quality
        
        more data analysed
        
        new auditor profile will emerge
        
        new services
    - - Knechel et al 2020
        
        auditing as a service, not an economic good
        
        focus should not be on indepence but on cooperation
        
        standardization is bad for quality
        
        unique needs should be addressed
- - - - SOX - Sarbanes-Oxley Act 2002
        
        protecting capital and shareholder interest but less focus on otherstakeholders
      - the dominant paradigm
        
        Andersen, 2016
        
        mechanisms used by suppliers of finance to ensure fair return
        
        moral hazards arising from the separation of ownership and control in the corporate form
        
        board overseeing strategic risk-taking
- - - - McGahan 2021
        
        which stakeholders are relevant? - Tobacco
        
        value co-creators
        
        consumers too
    - - principal-agent theory
        
        Agents: BoD and auditors responsible for CG
        
        monitoring
        
        ex-post monitoring: auditors after decisions
        
        ex-ante monitoring: monitoring during executive decisions
        
        BoD
        
        "Tone from the top"
        
        Principal: shareholders
        
        assumes everybody acts in their self-interest
        
        want stewardship
        
        want accountability
        
        UK Stewardship Code 2020
        
        corporate purpose
        
        ESG
        
        risk oversight
        
        systemic risk
        
        market-wide risk
        
        active ownership
  - - - gov bailout
- - - - role of directors
        
        promoting the success of the company
      - financial statements
      - company secretary
      - shareholder rights
      - audit requirements
  - - - Basel III. 2010
        
        improve banks' resilience to shocks and stress
        
        prescribed net stable funding ration and liquiduty coverage ratio
        
        increase financial system resilience
    - - stricter guidelines could have a positive impact on banks' operations - stronger IC
        
        long-term planning after GFC
        
        comprehensive risk controls
        
        digitalized risk assessment
        
        governance and compliance management
        
        improved internal audit
        
        changes in executive remuneration
        
        CSR
        
        moral foundations and focus on other stakeholders
      - GFC causing decline in economy
        
        caused by over-lending and over-borrowing + high risk loans with loose terms
        
        banks: failed to reassess repaymnet risks
        
        people: low financial literacy
        
        products: increased complexity of financial products
        
        government: non-interventionism
  - - - 'comply or explain'
        
        composition, succession and evaluation
        
        division of responsibilities
        
        audit, risk and interal control
        
        board leadership and company purpose
        
        remuneration
      - Yeoh 2019
        
        risk of overreliance
        
        one size fits all approach
        
        box ticking culture
        
        adherence might limit
        
        managerial creativity
        
        risk-taking
  - - - process focused: box ticking
      - high compliance costs
      - reluctane to go public
      - shift to foreign exchanges
  - - - Financial Reporting Council
        
        regulatory capture since FRC funded in great part by voluntary
        contributions from Big4 and several Big4 members sit on FRC board and key committees
        
        Kingman Review 2018 recommendation
        
        ARGA / future
    - - good CG
        
        global investors willing to pay a lot for it
        
        best governed S&P 500 outperfom worst ones
        
        indexes for evaluation
        
        non exec directors
        
        executive remuneration
        
        effective board committees
- - - - Bias:
        
        optimism bias
        
        confirmation bias
        
        illusion of control
        
        focalism (focusing on a subset of data)