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How to use audit for corporate governance?

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What is the role of audit for corporate governance? Why do I need an audit, an audit to help the corporate governance. Form Compliance check Can eliminate risks for businesses? How to choose the most prestigious and prestigious auditing company today?

What is corporate governance?

Corporate governance is the way a company is controlled. In order to control a company at the levels discussed above, it is necessary to put in place mechanisms to regulate relationships among key groups: shareholders, the Board of Directors and the Executive Board. Corporate governance is understood as “The structure of relationships and corresponding responsibilities between a key group including shareholders, board members and executives formed to enhance competitiveness. necessary competition and achieve the company's main goal ”.

Corporate governance refers to the enhancement of fairness, transparency and accountability within the company ”. Thus, CG aims to promote efficiency, openness and transparency, contributing to better protect investors and improve competitiveness for businesses themselves.

Auditing of corporate governance is a factor in the corporate governance system, helping the controlling parties to obtain honest and objective financial and accounting information, and thereby perform their positions. their functions and duties.

See more: Auditing services for business management purposes

How to use Audit for corporate governance?

Auditing is a tool for operational control

In private enterprises or limited liability companies, the director of a company / company is usually the owner, must manage, coordinate, inspect and control all business activities of the enterprise. The director of the company will have to try to build a system to control the activities of internal employees in the most effective way. Auditing that the management of a company with such a close relationship is primarily for the administration and compliance with regulations with the state or the third party of the company's board of directors.

Auditing is a tool for Management Control

- In joint stock companies, the birth comes from the need to mobilize large sources of capital from the majority of investors, shareholders do not operate directly but delegate rights to business executives. The executive board has control over the day-to-day operations of the company's assets and resources. At this point, there arose a separation between ownership and management rights. And the executive, not the owner of the business, may lack incentives to effectively control and coordinate the operations of the business.

- Because the Board of Directors is not the ultimate risk taker in the event of a company's loss and also not the ultimate beneficiary in case the company is profitable. So there is a risk that the board of directors may work for their own interests rather than for the interests of shareholders.

Therefore, the shareholders must control the managers' management - this is the function of management control. Shareholders can exercise this control directly or through a representative board - the Board of Directors (Board of Directors). Members of the Board of Directors are elected by shareholders to protect their interests. One of the main functions of the Board of Directors is to supervise the managers who directly operate the company's daily work.

- Auditing for joint stock company governance is mandatory in accordance with law, which is also the foundation for joint stock companies to operate and manage.

Audit is a Compliance Control tool

In addition, in the course of its operation, any business / company will generate direct or indirect benefit relationships with the State, lenders, suppliers and customers. , employees ... The company must ensure the fulfillment of its obligations to the parties having economic and social relations with the aforementioned company.

An audit of corporate governance generally helps stakeholders to ensure compliance with their obligations, making transactions between related parties transparent and feasible. In addition to compliance audit services, Expertis provides additional Accounting service compliance will support your business more comprehensively.

Audit of corporate governance

Auditing reduces the asymmetry of information between control levels

The board of directors is the executives of the company's day-to-day operations, so it has more complete information than the Board of Directors, shareholders and stakeholders on the financial situation and results of production and business activities of the company. . It is the imbalance in the quantity and quality of this information that will provide an opportunity for management to make decisions for their own personal benefit. Auditing by confirming the honesty and objectivity of the financial information provided by the company will lessen the asymmetry of information between managers and shareholders.

Auditing allows to reduce information asymmetry at four levels:
  • The first level is the asymmetry between the executives and the representatives of the shareholders – the Board of Directors. The Board of Directors cannot know all the efforts of the Board of Directors as well as evaluate the appropriateness of the business decisions that the Board of Directors has made. By evaluating internal control procedures, the audit allows directors to be assured that management has (i) actually controlled the company; (ii) develop procedures to protect assets; (iii) implementing strategic decisions and (iv) providing adequate information on management. Board members may request access to management information for the formulation and evaluation of important strategic decisions. The audit will ensure that this information is truthful and objective.
  • The second level is the information asymmetry between shareholders and members of the Board of Directors (who represent the shareholders). Board members have access to internal management information while shareholders can only read annual financial statements and publicly available financial information. Obviously, shareholders must be assured that the aforementioned financial information is reliable after inspection and confirmation.
  • A third level of information asymmetry occurs when a company's shareholders want to issue shares to the public (IPO). The auditors must send a message to potential investors to ensure the reliability of the financial information provided by the joint stock company. In this case, the information asymmetry between operators, owners, and future investors is greatest because of the fact that the stock price does not depend on the book value of the asset. . Indeed, the issuer of shares has a better understanding of the actual situation of the listed company than the purchaser. As a result, new shareholders often offer a lower-than-estimated market price to offset the risk that the seller has outbid the stock's market price. A decrease in the true value of a stock can cause enormous loss to former shareholders. Therefore, the old shareholders must find all measures to reduce the asymmetry of information mentioned above. Companies can hire independent auditors to confirm the financial information provided. The higher the corporate risk, the more important the quality of the audit service is in reducing information asymmetry.
  • The fourth level is the information asymmetry between interested parties (State, banks, suppliers, employees, etc.) and those who own and run the company. These subjects also have a need to use highly reliable financial information. In particular, banks that lend to businesses are also in a position of information asymmetry compared to managers and owners. Owners and managers can beautify financial statements, hide business risks, in order to sign loan contracts of banks - creditors. Therefore, prudent banks often require audits to confirm that the financial statements of the borrowing enterprises are truthful and objective. Auditing helps companies to access loans from banks and credit institutions. At the same time, banks are also assured of their lending decisions. In some situations, in order to get a bank loan, the owners and managers (the Board of Directors) may collude with each other to report accounting data. Auditing through its operations discovered those serious violations.

See more: Compliance checking service on Tax Accounting

Thus, the Audit for corporate governance has an irreplaceable essential role, which is the foundation for the operation and administration of economic entities.

Expertis's audit services, in addition to providing tools, also support businesses to learn and use audit services effectively, for the right purposes, and to promote efficiency for their administration.

To learn more about Auditing for Corporate Governance, please contact Expertis.