Corporate governance: directors, shareholders and the Audit Committee
| Date | 01 April 2004 |
| Pages | 150-157 |
| DOI | https://doi.org/10.1108/13590790410809077 |
| Published date | 01 April 2004 |
| Author | Mohammed B. Hemraj |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 11 No. 2
Corporate Governance: Directors, Shareholders and
the Audit Committee
Mohammed B. Hemraj
INTRODUCTION
Directors, shareholders and audit committees have
important, albeit dierent roles to play in ensuring
companies' success. The aim of this paper is to analyse
the dierent roles played by directors, shareholders
and audit committees. The paper concludes that
directors need to be properly monitored and as share-
holders have failed in this task it is left to the audit
committee to ensure that directors discharge their
duties to the company more eectively.
DIRECTORS' RESPONSIBILITIES
Company directors are responsible for the truthful-
ness and fairness of company accounts.
1
However,
the courts have been traditionally reluctant to make
the duties of the directors too onerous. For example,
in the leading case of Re City Equitable Fire Insurance
2
the court held that the larger the business carried out
by the company, the more numerous and important
the matters that must of necessity be left to the man-
agers, the accountants, and the rest of the sta.
Nevertheless from more recent cases the courts
seem to be suggesting a higher standard of care
should be exercised by the directors.
3
On ®rst reading, s. 245 of the Companies Act 1985
appears to make the director of a company a guaran-
tor of the truthfulness and fairness of the ®nancial
statement. However, as the courts presently interpret
the provisions of the Companies Act within the
normal scope of a duty of reasonable care and skill,
a director who in good faith signs a set of accounts
which has been prepared by a quali®ed accountant
of good reputation escapes liability for the failure of
these accounts to show a true and fair view. Section
245 allows, as a defence, proof that the director
took all reasonable steps to ensure compliance with
the requirements of the said section.
4
Beyond their normal obligation to manage the
business of the company or a group in the share-
holders' best interests, the directors have additional
responsibilities. These are: (a) to safeguard the assets
of the company, (b) to prevent and detect fraud
and other irregularities and (c) to maintain adequate
accounting records. The eectiveness of accounting
procedures and ®nancial control can be greatly
improved if it is monitored by the company's own
internal auditor
5
and reviewed regularly by its audit
committee. As the issue of any annual report and
®nancial statement ful®ls the directors' legal responsi-
bility to provide a true and fair view of the state of a
company's aairs at the end of each ®nancial period
and its pro®t or loss for the year, there is a need for
the directors consistently to employ suitable account-
ing policies and follow accounting standards. Where
judgment and estimates are to be made by the
directors, these should be applied reasonably and
prudently.
6
As ®nancial statement users do often not appreciate
the above-mentioned duties of the directors the pro-
blem of the expectation gap then arises. This was
tackled by auditors stating at the beginning of their
report what the directors' responsibilities were, thus
drawing them to the attention of the ®nancial
statement users.
7
The increases in fees, in addition to bonuses and
share options, awarded to directors (especially in
the UK in the then privatised utilities companies)
gave the impression that the directors were consider-
ing their own interests ®rst, rather than that of the
company they managed and those of the shareholders
who made the necessary funds available to the com-
pany in the ®rst place. Even where the company is
on the verge of insolvency, there is seldom a cut in
the directors' salary.
8
The company formulates policies through its
board of directors, which through its chief executive
tells the management how well it expects the com-
pany to perform in accordance with the company's
policies and direction. The board assumes its proper
role by spotting the trouble earlier on by comparing
the actual performance of the company with the
expected target and seeking reasons for any deviation.
Once reasons are identi®ed, then corporate strategy
should be designed to correct the situation.
9
The problem is that a director (particularly a non-
executive director) who may ask an initial question,
the answer to which may lead to more questions, is
Page 150
Journal of Financial Crime
Vol.11,No. 2, 2003,pp.150 ±157
#HenryStewart Publications
ISSN 1359-0790
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