Smith Report

Abstract: This paper examines post‐Enron developments in UK audit and corporate governance regulation. It considers the latest government‐initiated reviews into audit regulation, specifically those conducted by the Co‐ordinating Group on Audit and Accounting Issues and the DTI Review Team, and into corporate governance, specifically those undertaken by Derek Higgs and Sir Robert Smith. The paper notes that the reviews were undertaken in the context of developments initiated both before and after the collapse of Enron, including, respectively, the new system for the regulation of the UK accountancy profession as established by the Accountancy Foundation, and the US Sarbanes‐Oxley Act. The reviews have been welcomed by government and thus should play a large part in setting the agenda for the future regulation of UK audit and corporate governance. The proposals for auditing share a number of characteristics with the recommendations of a pre‐Enron empirical study which investigated the regulation of UK listed company audit, although significant distinctions remain. The proposals for corporate governance continue the ‘comply or explain’ approach and do not recommend passing its regulation from the Financial Reporting Council to another independent body of ‘stature’ such as the Financial Services Authority (FSA). It is concluded that key to successful implementation of recent proposals will be the need, for audit, to demonstrate that there is no cosy relationship between regulators and the auditing profession, especially the ‘Big Four’ firms, and, for corporate governance, a willingness to look outside the ‘one‐size‐fits‐all’ approach.

Abstract: Introduction In this chapter I will briefly explain the rationale for the market-based approach to promoting good governance and why I believe the comply-or-explain approach to be the most effective means of achieving this objective, before going on to set out what I see as the proper role for the regulator and governments in encouraging the uptake of good practice. I will then illustrate how this role works in practice using two examples from my period as chairman of the Financial Reporting Council (FRC): the revisions to the Combined Code made in 2003 following the Higgs and Smith reports on non-executive directors and audit committees respectively, and the review of the Turnbull guidance on internal controls in the wake of the US Sarbanes-Oxley Act in 2004–5. The FRC is the body designated by the Government, with the support of the business, investor and professional communities, to be responsible for corporate governance. Finally, I will consider some of the challenges to the success of the market-based approach. The market-based approach to promoting good governance To set the context for a discussion of the market-based approach to promoting good governance I can do no better than start with two quotes. The first is the opening paragraph from the 1992 Cadbury Report, which put in place the basic elements of the framework that is still used in the UK, and the second is the first principle in the Combined Code on Corporate Governance: The country's economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain's competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance. The board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed.

Abstract: IntroductionIn India, Corporate Governance (CG) has assumed importance mainly in the wake of economic liberalization, and deregulation of industry and business. An unbridled pursuit of profit paves the way for unmitigated disaster. Hence, as a guiding principle, it has been prescribed in the Upanishads to 'enjoy with restraint and renunciation'. While planning for tomorrow and grooming the future trade leaders, spiritualism and values need to be inculcated in them. The manipulations and financial fraud done by Ramalingam Raju, proved disastrous for the software giant Satyam, the investors, employees, stakeholders and above all the goodwill of the nation. Price Water Coopers, the audit firm was also involved in this fly-by-night deal and produced a doctored balancesheet to suit the dark designs of Raju. So, good CG is a necessity in the present corporate world to build the confidence of the stakeholder, employees, and interested groups of people. This paper primarily focuses on the codes of CG in emerging economies, which is a driving force for corporate performance and overall economic prosperity. Particularly, in case of India, it is most important because India is one of the fast growing economies of the world. The corporate sector in India remains changing and moving ahead as per the developments that are taking place in other counterparts and developed economies like the US, the UK and other parts of the corporate world. The infamous collapse of Enron in 2001, one of the America's largest and celebrated companies, has turned the international attention on corporate frauds and the role that a strong CG needs to play to prevent the frauds to happen (Solomon, 2007). The US enacted the Sarbanes Oxley Act (2002) in response, while the UK responded by producing the Higgs Report (2003) and Smith Report (2003). In India, the CG movement gathered momentum after the publication of the report of Confederation of Indian Industry (CII) on desirable code of CG in 1997. The amount of research carried out in CG in the context of India lacks research evidences to make effective comparisons with its counterparts as well as developed economies to strengthen the governance codes and good mechanism. It is imperative to generate research literature on this subject. Therefore, this paper tries to analyze the code of CG and its effectiveness in the context of India by using a case study method.This paper has discussed some research questions like: What is CG? What is the background of CG? What are the drivers of CG? Are CG reforms necessary? What is a good CG? and What is the compliance of best codes of governance? The paper sums up the analysis of CG practices in HDFC bank-a leading Indian private sector bank in CG practices.Corporate Governance in the World ScenarioCorporate Governance has become a buzz word in the corporate sector. It has emerged as a means of corporate excellence and driving force for attaining greater performance, maximizing the wealth of the stakeholder and corporate value. Yet, there is a little evidence that good governance can prevent further corporate failure or contribute to improved organizational effectiveness (Moxey, 2004). Several committees and commissions have been appointed to probe into various issues and to make appropriate recommendations for better CG practices. The Russian economy collapsed in 1998. Likewise, the Asian financial crisis also demonstrated that even strong economies lacking transparent control, responsible corporate boards and shareholder rights can collapse due to dilution of investors' confidence. Consequently, various countries in the world have adopted the CG reforms (Table 1). Due to the frauds and financial deficiencies involved in the corporate sector in the US and the UK, the CG practices gained more attention.Corporate Governance in the Context of IndiaThe CG problems in every country are unique and this is because of the path dependence (Bebchuk and Roe, 1999). …