Cor­po­rate gov­er­nance

Each month, Jan Bladen takes us through one of the top 10 rea­sons good boards fail and how to im­prove your chances of sur­vival

Gulf Business - - CONTENTS -

Why good boards fail: part 7

PRIN­CI­PLE 7: FI­NAN­CIAL FAIL­URE

Ac­ci­den­tal or de­lib­er­ate fi­nan­cial mis­re­port­ing is one of the most com­mon com­po­nents in nu­mer­ous re­cent cor­po­rate scan­dals.

While many cases of fi­nan­cial fail­ure have in­volved ei­ther de­lib­er­ate fraud or con­flicts of in­ter­est, nu­mer­ous other cases demon­strate a board that merely failed to act on its over­sight re­spon­si­bil­i­ties. This fi­nan­cial neg­li­gence in the board­room has of­ten re­sulted in sub­stan­tial share­holder losses.

An ac­count­ing scan­dal in 2014 at one of Saudi Ara­bia’s largest telecom­mu­ni­ca­tions com­pa­nies wiped out ap­prox­i­mately $380m in pre­vi­ous prof­its. The com­pany re­vealed that it had miss-ac­counted rev­enues and the cor­po­ra­tion’s share price slumped around 35 per cent in one month.

More re­cently, the trou­bled Saudi con­trac­tor Mo­hammed Al Mo­jil Group an­nounced the res­ig­na­tion of its en­tire board with im­me­di­ate ef­fect, days af­ter the firm’s chair­man Mo­ham­mad Al Mo­jil and his son were sen­tenced to five years in prison for mis­rep­re­sent­ing the com­pany’s value. Saudi Ara­bia’s Cap­i­tal Mar­ket Au­thor­ity fur­ther banned a ‘ big four’ ac­coun­tancy firm from pro­vid­ing ac­count­ing ser­vices in Saudi Ara­bia for two years, fol­low­ing its in­volve­ment with the com­pany, ac­cord­ing to re­ports.

Boards must en­sure that they have the fi­nan­cial skills and ex­per­tise to un­der­stand all fi­nan­cial as­pects of a cor­po­ra­tion so that they may ef­fec­tively dis­charge their re­spon­si­bil­i­ties vis-à-vis the or­gan­i­sa­tion’s fi­nan­cial stew­ard­ship and ac­count­abil­ity. A board’s fi­nan­cial over­sight du­ties in­clude:

• Es­tab­lish­ing fi­nan­cial con­trols • En­sur­ing com­pli­ance with fi­nan­cial poli­cies and pro­ce­dures

• Ap­prov­ing an an­nual bud­get

• Per­for­mance track­ing (ac­tual cash flow, ex­penses and in­come vs. bud­geted) • En­sur­ing the long-term fi­nan­cial sus­tain­abil­ity

• Defin­ing ex­ec­u­tive com­pen­sa­tion Typ­i­cally, a board also del­e­gates their re­spon­si­bil­i­ties to the au­dit com­mit­tee for:

• Over­see­ing the fi­nan­cial re­port­ing and dis­clo­sure process

• Elect­ing ac­count­ing poli­cies and prin­ci­ples

• Over­see­ing the re­ten­tion, per­for­mance and in­de­pen­dence of ex­ter­nal au­di­tors

• Over­see­ing reg­u­la­tory com­pli­ance, ethics, and whis­tle-blower re­quire­ments

• Over­see­ing the in­ter­nal con­trol process and re­view­ing the per­for­mance of the in­ter­nal au­dit func­tion

Jan B laden is man­ag­ing part­ner of Gov­er­nance Creed, and qual­i­fied as the first ac­cred­ited board di­rec­tor of the Mud ar a In­sti­tute of Di­rec­tors( I oD) in Dubai. An in­de­pen­dent board mem­ber on sev­eral boards, B laden was for­merly the lead and se­nior ex­ec­u­tive ad­vi­sor to the board at A bu D ha bi Global Mar­ket( AD GM ), and the found­ing chief op­er­at­ing of­fi­cer of the Dubai Fi­nan­cial Ser­vices Au th or ity(DF SA ). Gov­er­nance Creed is a niche ad­vi­sory firm spe­cial sing in gov­er­nance frame­work de­sign, board per­for­mance, strat­egy de­vel­op­ment pro­cesses and cor­po­rate risk op timi sat ion.

Boards must en­sure that they have the fi­nan­cial s k i l l s and ex­per­tise to un­der­stand all fi­nan­cial as­pects of a cor­po­ra­tion

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