Corporate Governance Mechanisms

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Corporate governance mechanisms

Corporate governance mechanisms


Corporate Governance is a system of interaction between shareholders and management of the company (joint stock company, corporation), including its board of directors, as well as with other stakeholders, through which shareholders' rights gets realized, a set of tools that allow shareholders to (investors) to monitor the activities of managers of the company and to solve problems with other interest groups. Corporate governance is not directly related to operations (operational management) and tactical control of the company, but recently included in the strategic management. The subject of corporate governance is to control the commission of corporate actions. The corporate governance selected in this essay is Audit Committee (Abbott, 2010, pp. 24).


The Sarbanes-Oxley Act of 2002 requires that publicly traded companies establish a competent audit committee that is independent of the board. Although non-profit organizations are not subject to most requirements of Sarbanes-Oxley, many have elected to establish an audit committee due to the oversight that one provides. In addition, California was the first state to enact legislation that requires large non-profit organizations to form an audit committee.

The responsibilities of an audit committee include selecting an auditor and accepting the results of the audit. In addition, the audit committee provides independent oversight over the accounting and financial reporting of the organization. Without a separate audit committee, the board would still have these responsibilities. The American Institute of Certified Public Accountants (AICPA) has established the AICPA Audit Committee Toolkit: Not-for-Profit Organizations to assist board members with establishing and working with an audit committee. The audit committee got mainly made up of existing board members. All members of the committee should be financially literate, and at least one should have enough expertise to understand and analyze the financial statements and evaluate the performance of the audit firm. However, if the board does not have sufficient financial literacy, and if state law permits, it may form an audit committee of nonvoting, non staff advisers rather than board members (Wragge, 2003, pp. 215).

Background of Audit committee

Most large nonprofit organizations will obtain an annual financial audit. Usually, these audits got done by CPAs. Whether or not a nonprofit organization gets required by law to have an annual audit got mainly determined by state requirements. One determining factor is the amount of public support the nonprofit organization receives. The audit tests the financial information of the organization and determines if the financial statements got prepared in accordance with generally accepted accounting principles. Once this determination got made, the CPA issues an opinion about the financial statements. An unqualified opinion letter gets issued if the CPA determines that the financial statements got prepared in accordance with GAAP. An unqualified opinion is the highest level of assurance that an audit can provide. A qualified opinion letter gets issued if the CPA has reservations about something in the financial statements, such as a minor departure from GAAP (Douglas, 2003, pp. 46).

Functions of the Audit Committee

1.Monitoring of portfolio assessment of corporate risks and the effectiveness of ...
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