The lamentable failures with the world of commerce over the past few years, eg Enron, Marconi and WorldCom, lead me to conclude that effective corporate governance is merely a phrase to be trotted out to the media; rather than, as it should be, a way of life in some organisations. Additionally, the fundamentals of what constitutes good corporate governance and effective management appear to have been overlooked by individuals (such as investors and analysts) and organisations (such auditors); when they are reviewing an organisation’s performance.
Therefore, based on many years of practical experience around the world, in the spirit of sharing best practice (teaching my grandmother to suck eggs maybe?); I have put together a basic checklist of questions that one should ask, and receive a satisfactory response to, when making a judgement as to the effectiveness of an organisation’s management. This is not designed to be a fully comprehensive, “covers all situations”, questionnaire.
However, the list should cover the key areas relevant to most organisations; be they companies, charities, political/military/scientific/educational bodies. The checklist should be tailored to fit the specific circumstances; naturally, depending on the answers received, more probing questions can/should be asked.
In my opinion, this checklist would be of benefit to a variety of individuals and organisations including, but not limited to:
Non Governmental Organisations
In fact any stakeholder or interested party.
I have divided it into a number of sections, for ease of use.
Finger on the Pulse
1 What are the objectives of the organisation?
2 Are these objectives translated into realistic, achievable plans with timeframes and measurable milestones?
3 Are the objectives and plans communicated and understood by all?
4 What are the risks and opportunities that will affect the business objectives?
5 What is Management doing to address both the risks and opportunities?
6 Are there/have there been any major EDP changes planned? If so what are they, and what is the expected cost, benefit, timeframe for installation and payback period?
7 Have there been any frauds?
8 Details of any litigation being taken out either by or against the organisation?
9 Obtain the latest organisation chart, both senior personnel and organisational. Are there clear reporting lines?
10 Have there been any major investments/disinvestments previously or planned?
11 Ensure that there is an audit committee, and that it is independent of the Board.
12 Does the internal audit function report to the audit committee? If not, why not?
13 Review third party and (where applicable) internal audit reports.
1 Review the latest results and compare to budget. Ensure that management receive regular (at least monthly) summaries of results (what gets measured gets done!).
2 Are the relevant key performance indicators on target eg RONA, Debtor days (DSO), cash flow?
4 Can management explain clearly, any material deviance from budget?
5 Are there adequate corrective actions in place to arrest negative deviations from budget?
6 Discuss the results with the appropriate Manager.
Have regard to, for example :
- Products with low sales against budget.
- Negative margins
Ensure that explanations for any of the above are adequate and that there are suitable corrective action plans in place to address these issues. Where the explanation seems confusing, be on your guard; either the manager doesn’t understand it or it is deliberate obfuscation.
7 Are there any areas where costs are significantly above budget? Why?
8 What are the corrective action plans to address these?
9 Review the debtor and creditor days figures. If these are high, what is Management doing to improve the situation?
10 Review the levels of stocks and enquire into reasons for levels that are higher than budget.
11 Obtain the latest forecast for the year and enquire into any significant variances between that and the budget. Also review the adequacy of the corrective actions.
1 Have management performed a risk assessment? If not why not?
2 Did the risk assessment highlight control gaps? If so, is there a corrective action plan?
3 Where there is a log of corrective actions :
- Do the corrective actions have a deadline and person responsible for completing the action?
- Are the deadlines being met? If not why not?
5 Is there a team responsible for monitoring progress of the action plan? If not why not? Is the process alive?
1 Review the balance sheet for unusual dump accounts and other unusual items.
2 Select a sample of accounts eg accruals, provisions etc and ensure that they are adequately supported by documentary evidence/working papers.
3 Ensure that main sub ledgers are reconciled to the General Ledger.
4 Check a sample of debtors to ensure that credit limits are not exceeded.
5 Review adequacy/necessity for any provisions held.
6 Is there adequate data relating to currency exposure? How does the unit manage its exposure?
7 Are the main accounting functions/duties adequately segregated?
8 Does the CFO regularly monitor/review the controls and General Ledger? Is this evidenced, eg by use of a checklist?
9 Does the General Ledger agree to the monthly information submitted to the head office for consolidation?
11 Ensure that there are written procedures with regard to expense claims. Select a sample of expense claims and ensure that they follow the rules, are properly authorised and supported by documentary evidence, eg invoices. Ensure that there is no self authorisation of either expense claims or travel requisitions.
Code of Conduct
1 Does the organisation have a code of conduct? If so, has it been distributed to all members of staff?
2 Do all new employment contracts contain a reference to compliance?
3 Have there been any occasions of non compliance? Details please.
4 Have the non compliance occasions been reported to a Compliance Officer? What action has been taken?