From PricewaterhouseCoopers:
Governance means more than compliance
Much of the recent debate about governance has been fuelled by the loss of trust in financial institutions and other companies. Following a wave of corporate scandals around the world, a burst of new regulation has been enacted, mandating accountability and good governance as means of shoring up confidence in the integrity of institutions.
It is natural that companies have responded to these developments by focusing on keeping pace with regulators' demands. When PwC and the Economist Intelligence Unit (EIU) asked more than 200 executives in global financial institutions where they were planning to allocate their governance-related investments during the next 12 months, the number one answer was the Compliance function.4
But good governance is about much more than compliance and the prevention, detection and resolution of fraud. It is also about addressing poor information flows, communication failures and inadequate understanding of risk. A properly governed company has high-quality management at all levels, makes the best use of its assets and intellectual capital and understands and manages its risks on an enterprisewide basis. Good governance, looked at from all its angles and communicated ably to all stakeholders, is a source of strategic advantage.
Governance is a particularly sensitive issue in the highly regulated financial services industry—a fact highlighted in the examples that follow.
Bringing a fresh perspective to National Australia BankIn January 2004, PwC Australia was appointed to investigate and report on unauthorised foreign currency options trading at Australia's largest financial services company: National Australia Bank. The events under investigation had resulted in losses amounting to AUD360 million (USD250 million).
The investigation has been acknowledged as an outstanding example of forensic accounting and widely recognised for its best-practice approach to risk management, governance and corporate reporting.
The PwC team worked closely with the Australian prudential regulator—the Australian Prudential Regulation Authority—as part of its investigation. The subsequent report, which National Australia Bank publicly released on 12 March 2004, identified a range of process and control issues and cultural factors that had contributed to the unauthorised foreign exchange options trading.
In August 2004, CFO magazine named PwC Australia Audit Firm of the Year, partly because of its investigation and report.
Preparing for deregulation in ChinaChina's economic development continues apace, placing inevitable strains on the structures that underpin its economy, including the banking sector. Entry to the World Trade Organisation requires deregulation, which will add to the pressures by exposing China's banks to more open competition than ever before.
Many Chinese banks have until recently operated with corporate governance and risk management policies that evolved from a planned economy and consequently differed from those expected in the international business arena. The Chinese authorities are determined to address this issue to ensure that the banking system keeps pace with the country's rapid evolution into a major player in global business.
PwC China has been at the forefront in working with banks in China to reform their governance standards and systems, whether as auditor or advisor. The firm is auditor of the Bank of China Group (BOC), which has embarked on a programme intended to achieve best practice in financial reporting and corporate governance. In August 2004 BOC officially established a joint-stock holding company: Bank of China Group Limited. This is a critical step in the reform process that will facilitate change to the corporate governance structure and amongst other things, will enable BOC to engage in a range of capital markets initiatives. And the Chinese firm also acted as special advisor to the Industrial and Commercial Bank of China as it undertook an enterprisewide review of its risk management and governance structures and processes.
Another Chinese bank that has made significant advances in corporate governance and financial reporting is the Bank of Communications (BoCom), China's fifth-largest bank and the first shareholding bank in the country. Ultimately, BoCom intends to transform itself into a commercial bank adhering to international best practices. A critical element in that transformation has been the development of a risk management framework and a management accounting system for equipping the bank to deal with the rapidly changing commercial environment. The Chinese firm is currently auditing the financial statements of BoCom prepared in accordance with International Financial Reporting Standards (IFRS.)
In addition to helping established banks, the firm audits one of the newer arrivals in the Chinese banking sector. China Minsheng Bank is the first private bank in China and was also the first Chinese bank to present IFRS financial statements. Its rapid growth has been accompanied by strong emphasis on governance and transparency, which should assist the bank in its planned listing in Hong Kong.
To guide these and other banks through the challenging process of restructuring, we have developed the China Bank Reform Roadmap, which outlines the operational restructuring, financial reengineering and financial reporting changes needed to prepare banks for the new environment, including policies and procedures that will create true transparency.
See Report in pdf format.
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