Abstract
M.Comm.
Ownership and management of companies were separated for the first time in the
nineteenth century when the first limited liability companies were formed in the USA
and Britain. Professional managers, the directors, were employed as agents of a
company's shareholders.
As a result, the shareholders wanted to protect their investments against abuse of
power by the directors. The agency problem was created and hence, corporate
governance was born. The South African definition of corporate governance is "the
way in which companies are directed and controlled".
Authoritative corporate governance models were examined and the focus of this
research is on the board of directors and the process of providing assurance to
stakeholders.
The fiduciary duties of directors were identified as a duty of loyalty and a duty of care
and skill. The King Report on Corporate Governance provided additional guidance in
respect of directors' duties in the South African context and made specific
recommendations on the structure and functioning of boards of directors.
The King Report was measured against the committee's terms of reference and it was
concluded that the committee achieved its objectives as regard to the quantitative
aspects of corporate governance.
The following four qualitative aspects of corporate governance were identified as not
being adequately addressed by the King Report:
The narrow focus on internal financial and accounting controls disregarded the
critical risks attached to operational controls and compliance with laws and
regulations.
The report did not adequately resolve the fundamental issue of independence of
the external audit function where that function is remunerated by the body on
which performance is attested to.
The report created a disclosure paradigm that forced corporate governance to
become static. A best management practice paradigm was required to propel the
dynamics of the corporate governance process. This paradigni was defined as
"implementing the right business practices in the right way to ensure that no
stakeholder is disadvantaged in any way".
The report did not adequately address management's role in providing assurance.
The assurance needs of shareholders, contractual stakeholders and non-contractual
stakeholders, were identified as assurance on mainly the effectiveness of the system of
internal control to ensure the company's ability to continue as a going concern.
This assurance should be provided by external audit, internal audit and management.
All three of these have distinctively different roles in providing the assurance. Audit
committees should co-ordinate the nature, extent and focus of the assurance to ensure
that sufficient levels of assurance are provided to the board of directors and ultimately
to all stakeholders.
KPMG developed a model of combined assurance that focused on financial and
accounting controls. Control self-assessment as a management process allows boards
of directors to reliably demonstrate their assertions on internal control, including
operational and other non-financial controls, and going concern. By formalising
management's role in the corporate governance process as providing assurance on
critical business risks, this research improved on the KPMG model to create the
Variable Combined Assurance Model.