Download Corporate governance and management

Corporate governance and
management
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Corporate governance
• Definition:
“Corporate governance is the system by which companies are directed
and controlled. Boards of directors are responsible for the governance
of their companies”
• It includes
• the activities and actions of the board of directors of a company;
• the system of values set by the directors on behalf of the company;
• the structure, strategy, leadership and supervision necessary for
effective and
• prudent management of the business.
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Directors
• Requirements of the Companies act 2006
– Private- requires 1
– Public at least two
• Executive Directors
– Stewardship
– Day-to-day management
• Nonexecutive directors
– External awareness
– Same legal duties as exec directors
• UK corporate governance code
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Accountability
Transparency
Probity
Long-term sustainability
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Corporate governance statement
• Procurement risk
• Credit risk
• Liquidity risk
• Cash flow risk
• Creditor risk
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
Linkage between governance and contracts
– Annual accounts
• Establishment of:
– Turnover
– Profit
– Debtors
– Valuation of work in progress
– Governance statement
• Large contracts
• Application of accounting policy
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
Turnover
– Definition
• Amount stated in the annual accounts during the
accounting year exclusive of VAT.
• Need to attribute to different aspects of the business
– Problems of calculation
• Work in progress
• Short-term vs long-term contracts
• Application-certified-payment-cost
• Four unrelated figures?
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
Profit
Definition
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“...the financial benefit that is realised when revenue exceeds costs.”
Corporate profit
– Operating profit- turnover after deduction of costs and overheads
– Profit before taxation- operating profit less the cost of interest payments on loans,
etc.
– Profit after taxation- that remaining which is available for distribution to
shareholders
• Need for prudence in the expectation of future profits as contingent liabilities are
inevitable!
•
Accounts must give a true and fair view of the business at the time they are struck
– Problem of matching costs with turnover- if outcome cannot be predicted with
confidence no profit should be taken.
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
Project Profit
• Nothing is certain until the final accounts with the client have been agreed and the
significant liabilities are settled.
•
Profit at tender
– Dictated by the market, need for work, the client, the risks......
• Profit during and at the end of a contract often NOT a function of profit added at
tender stage
– Why?
– Cost of production
– Production methods
– Quicker completion
– Better discounts
– Additional revenue
– Settlement of claims
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Management accounts
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Internal representation of how the business is doing to allow for control
– Basic information
– Revenue and expenditure
– Money owed to creditors
– Money it is owed by others
Larger companies produce forecast balance sheets and make statements if the
current financial position is likely to affect forecasted turnover and profit.
Need for a system of cost/value reconciliation
– Influenced by accounting policy, SSAP9
– Need to match costs and revenue
– Long-term vs short-term contracts
– Profit
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Accounting for Contracts
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Directors responsibility
– Must report prudently
• Turnover
• Profit
• Debtors
• Work in progress
Need for a management system that reports
– Contract profit and loss
– Value of outstanding work
– Projected costs to complete
– Contract cash position
– Extent of liabilities and likelihood of recovery
– Extent of contingent liabilities and likelihood of expenditure
Work in progress
– How do we “freeze” a contract to show the position?
– How do we deal with contracts that end after the accounting year?
– Short-term contract definition
– Long-term contract definition
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Some examples
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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Some examples
© 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd.
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