Discuss about the Masters of Accounting for Corporate Governance and Stakeholder.
The main purpose of this assignment is to analyze the corporate governance policies of a company which has been facing issues and have faced scandals due to ineffective corporate governance of the business. The company which is selected for this assignment is Commonwealth Bank of Australia. In order to under adequately understand the corporate governance policies of the business it is imperative that the concept of corporate governance is fully grasped.
Corporate Governance may be defined as the various process, schemes and systems which are used by a company for effective management of the company. Effective Corporate Governance ensures that the interest of the stakeholders of the business are balanced in such a way that the company can follow both the profit principle of the business and also meet the expectations of the stakeholders (Tricker and Tricker 2015). In other words, corporate governance is set of rules which are used for control purposes of the activities of the business. An effective corporate governance policy helps business in the managing the activities and operations of the business in such a way that it ensures long term value and success for its shareholders and also other partners (Claessens and Yurtoglu 2013).
In today’s world where there is a dynamic market and the primary focus of most of the organization is generate profits and maximize the same, the role of corporate governance is essential so as to ensure that the business acts in an ethical manner and do not resort to unethical practices in order to achieve the goals of the business. In addition to this, the various scandals which have taken place in current span, it is important as ever to ensure that the business has transparency and effective corporate governance system (Tallon 2013). The finance Industry and the companies which are associated with the same have been involved in many scandals as witnessed over the years. The company which is selected for this assessment is Commonwealth Bank of Australia (CBA) for which the corporate governance policies will be evaluated in next paragraphs and also recommendations will be suggested for improving the corporate governance policies of the business.
Commonwealth Bank of Australia (CBA) is a multinational bank which is engaged in providing financial services to its clients. The services which are offered by CBA are related to retail business, institutional banking, fund management and superannuation. The bank is regarded as one of the big four banks in Australia (CommBank. 2018). CBA and other three banks constitute of large scale operations in Australia. The bank operates in several countries such as United States, United Kingdom, Asia and New Zealand.
Values of the Business
The commonwealth Bank of Australia stands out to be one of the leading banking institution in Australia and is regarded as one of the larger banks of Australia. The close competitors of CBA are National Australian Bank (NAB) and ANZ. The company is looked as one on the leading banking institution in Australia. Therefore, it is quite natural that the society will be expecting effective corporate governance from the bank
In recent years, Commonwealth bank has faced numerous issues which suggest that the bank does not have an effective corporate governance structure. The issues and various scandal in which the management of the bank have been involved are discussed below:
- The bank in 2018 was accused that the bank has lost records of information about the clients of the business. The management of the bank also admitted that the bank has lost information of about 20 million user accounts which had information such as name, addresses, account number and bank statements of the users (Starbuck 2014). This information loss had taken place between the period of 2000 to 2016. The data which were related to customers were stored in a magnetic tape which was supposedly destroyed when the data center where the same was being stored was decommissioned. However, the bank did not receive any formal certificate showing whether the data was actually destroyed or not. This was revealed recently in 2018 which was covered by the management of the bank. This data breach shows that the management of the company does not have appropriate management and therefore proper corporate governance policies needs to be implemented so as to strengthen the overall management system of the bank.
- Another scandal which is associated with CBA is Ponzi Scandal where the staff of the bank were accused to be involved in a scandal of $ 76 million. This fraud was avoided by the management of the bank for a period of period of five years until the same go out into the public. Many of the clients of the bank were affected by the scheme and the fraud (Inquiry 2016). The fraud affected the reputation of the bank adversely and several case laws were filed against the bank by the clients who had suffered losses (Tomasic 2017). This scandal was noticed by the authorities in mid of 2016 when the same got into public.
- Another scandal which the management of the bank is associated with in recent years is the money laundering scandal. The financial intelligence agency of Australia which is Australian Transaction Reports and Analysis Centre (AUSTRAC) file a legal suit against the business of CBA in the federal court of Australia (Choo 2013). The civil proceedings which was filed by the authority clearly accused CBA to be involved in money laundering activities and has also been involved in financing activities of terrorism. The scandal involved the intelligent deposit machines which was used by the bank for the purpose collecting deposits from the public. The machines were unable to report any transactions which was above $ 10,000 to AUSTRAC (Garrick, Whitten and Coggan 2013). The management of the bank was of the opinion that such a scandal was due to some faults in the programming of the machines which was used for the purpose of collection of funds from the public.
In addition to above mentioned scandals the management of the bank has also been involved in certain other plots as well in recent times. The above discussed schemes are related to the lapse in the management control which affected the business of CBA. Therefore, from the above discussion it is clear that the management of CBA needs to improve the corporate governance policies so as to ensure that any scandals can be avoided in future (Larcker and Tayan 2015).
The main risks which are associated with ineffective corporate governance policy is that the business losses its reputation in the eyes of the general public and naturally the overall business environment of the business starts to decline. In addition to if corporate management is not appropriately then governmental regulations are introduced which are rigid and will be affecting the overall business of the company. The risks of such scandals also affect the financial environment of the business.
The corporate governance policies of the CBA as per the corporate governance statement focuses on the sustainability and overall development of the business. The business of CBA and all the related groups which are associated with the business operations of CBA are committed towards high ethical standard (ArAs 2016). As per the 2017 Corporate Governance report, the business has primary focus on attaining sustainability and long-term business goals following the strategic policies as formulated by the business.
The various issues which the company has faced is due to a weak corporate governance structure of the business. The various scandals which the CBA faced in recent years are analyzed below so as to understand the causes and impact of the same on the business environment of CBA.
As revealed in the previous paragraphs the business of CBA was involved in Money laundering case and also a case on financing terrorism. The company was allegedly accused that the bank had been systematically financing drug lords for the purpose of importing drugs in the country which resulted in heavy penalty charges on the bank (Levi 2013). The management of the company had to face severe regulations from the government and the government had also imposed a heavy penalty of $ 700 million to be paid by the bank. The bank was accused by AUSTRAC of failures to report significant transactions which were related to transfer, deposits and account maintenance to the officials. The fault of CBA was that significant transactions which were above $ 10,000 were not reported to the authorities even though there is an established rule that transactions which are of large nature are to be reported with a period of 10 working days so that the money which is received by the banks can be checked if the same is not from any criminal activities or terrorism. The bank had at first challenged the accusations in federal court but later admitted to the same and agreed to reach a settlement. A further investigation revealed that the bank has failed to review and monitor the transactions which was related to 778,370 bank accounts for the purpose of money laundering (George and Kavakli 2013). In addition to this, 14 specific occasions were identified by ASUTRAC where the management of CBA had failed to access the risk involved properly which was related to Intelligent Deposit Machines (IDMs) and some other instances were also identified where the management of the bank failed to file a report on suspicious transactions within time.
Issues faced by CBA
Thus, from the analysis of the above case scandal and the facts which were involved in the case, it can be clearly identified that there is a fault in the corporate governance principles of the business. The management of CBA did not follow the rules which were established by law in case of significant amount of deposits made by clients. The law is made to curb money laundering activities and financing of terrorism in the country. Therefore, it can be recognized as a breach of the social responsibility and accountability of the business and weak management system which led to the scandal in the first place. The consequence of such an action is clearly shown in the case as discussed above, the management of the bank had to incur the highest amount of civil penalty in the country which was of $ 700 million and in addition to this, rigid governmental regulations were imposed on the bank. In addition to this, the reputation of the bank also suffered heavily due to such a scandal (Zoppei 2017).
Another scandal which the CBA has been associated with is loss of data of account holders of the bank. The scandal was discovered recently and the bank has been accused of being managed improperly as it is the duty of the banks to protect important information about the clients of the business. The bank has admitted to have lost data which were bank records of 20 million people. As per the case, the data was being stored in secondary storage area and the information was being stored in magnetic tapes (McIlroy 2017). The tapes contain information about the names and addresses of the account holders, their account numbers and also their financial statements of transactions. The bank claimed that the data was destroyed as intended by the bank in 2016. However, the bank did not receive any king of certificate or confirmation which would shows whether the data was actually destroyed or not. The bank did not alert the customers even that the data on them might be compromised. This not only breached the privacy of the clients but also questioned the security which the management of the bank provided to the clients of the bank in terms of data protection. As per the reports of KPMG which conducted a forensic investigation of the case, the data which the bank had intended to be destroyed have been actually been destroyed. The report also added that the tapes which was intended to be destroyed by the bank did not contain any passwords or pin codes which can be misused, therefore there can be no incidence of frauds with the data which the management of the bank had lost.
Analysis of the Issues in Corporate Governance Policies
The above case shows that the management of the bank is faces serious consequences which is related to the reputation of the business. The scandal and loss of data showed that the bank is not reliable when it comes to keeping the information of the clients safe and the management of the bank had to bear compensations to the clients for the loss of privacy and personal information of the clients (McIlroy 2017). The management of the bank had to publicly apologize to the general public for the inconvenience and worry which was caused due to the incident. In addition to this, the business also face criticism regarding the inability of the company to keep the personal information of the clients secure. This can be identified as one of the weakness of the corporate governance policies of the bank and the management needs to consider the same in order to avoid any similar occurrence in future.
CBA was involved in another scandal which was related to bank bill swap rates and a legal suit was filed against the bank by ASIC. The management of the bank was unable to effectively monitor the businesses activities which involved interest rate-rigging in which the staffs of the business were involved. The bank was charged with an amount of $ 25 million to be paid as penalty for the misconduct identified. The federal court approved the settlement as $ 5 million was to be paid as penalty, $ 15 million to be paid to financial consumer protection funds and another $ 5 million to the costs which were incurred by ASIC. The management of bank recognition that such misconducts were only possible due to the weak corporate governance policies which was followed by the business and the policy was unable to detect any fraud or unethical practices which the employees of the business engaged in. The role of CEO and top-level management is very important as shown in the discussions which is provided above. The CEO of the bank has ignored the weakness in the corporate governance policies which has allowed the employees of the business to engage in misconducts as shown in the cases discussed above. If the CEO and top-level management had established effective control and management in business than it is quite possible that such unethical practice would not be possible in the business.
Due to the lack of ethical practices in financial sectors of Australia and due to inefficient banking structure which were unable to prevent and identify scandals, the government established the Royal Commission which was empowered to regulated the activities of banking sector and ensure that the banks follow effective code of ethics and performed diligently in the best interest of the public at large (Middleton et al 2014). The CBA alone was nor at fault but also similar other banks such as NAB and ANZ of Australia. The establishment of Royal commission ensured that all the banks and financial businesses associated with the banks follow ethical codes and work under the regulation which were established by the Royal Commission.
The risk management strategy of CBA focuses on attaining sustainability and reducing the overall risks which are associated with the business. The risks of the business are monitored and reported effectively. The monitoring and reporting for the same involves identification of risks, assessment of risk, management of the risk and assurance of the same. The business following regular review of the activities which are considered to be potentially risky and in addition to this, the management applies sensitivity analysis for the purpose of selecting an effective portfolio which can minimize the risks which are associated with the business. The risk management program which is incorporated by the management focuses on the effective implementation of corporate governance policies.
As per the annual report and corporate governance statement of the business, the business follows the strategy which involves absolute commitment on the part of the management in acting in the best interest of the public. In addition to this, the management is order to ensure that the level of risks and frauds are minimum has incorporated audit and risk management committee which has the main purpose of reviewing the activities of the business and also ensure that a general level of ethical standard is maintained in the organization.
As per the corporate Governance statement of CBA, the bank is concerned with effective implementation of the policies which will be promoting sustainability and also contribute to the needs of the needs of the long term business objectives of the banks. In addition to this, the policies of the bank keep the clients of the business at center and recognizes them as the main blood line of the business. The corporate governance strategies of the bank for the year 2017 specifies that the needs and expectations of the clients are of top priority for the bank and in order to ensure that the bank are proceeding towards the right direction, the banks engages in open communication with the clients. The open communication with the clients will ensure that any grievances of the clients are noted and corrective measures for the same are implemented as soon as possible by the business. In addition to this, the corporate governance report also establishes the fact the bank has four committees which are operating which are audit committee, sustainability committee, nomination committee and compensation committee. The overall risk management of the company is supervised by the audit committee and it is also responsible for the policies of the business regarding the accounting and operations of the business. The commitment of the management of CBA is clearly shown which is directed towards customer satisfaction and establishing effective ethical code of conducts for the business.
Due to the various scandals which the company has faced in recent years has led to a decline in the reputation of the bank drastically. In order to regain the confidence of the public, the management of the company needs to demonstrate that the business is committed to act responsibly and follow highest standards of ethics and also act in the best interest of the general public. In order to do so the following recommendations are suggested which can further strengthen the corporate governance policy of the business and also promote transparency and accountability for the same.
- The management of the company needs to establish strict internal control which can monitor the activities of the employee and ensure that they do not engage in unethical practices which can affect the reputation of the business as a whole. The business should incorporate penalties for any employee who is caught in unethical practice such a termination of contract of service or full salary deduction for a month or two. This will ensure that the employee act in an ethical manner in the business and any future scandals coming from the employee misconducts can be prevented.
- The management of the bank needs to appoint a legal team which will be ensuring that all the rules and regulations which are established by law are being followed or not. In addition to this, the business can enact regular internal check by an auditor so as to detect any fraud which might be occurring. The legal team will be able to advise the management whether any regulation need to be followed and will also be responsible for filing reports with AUSTRAC and also heed to the regulations of the Royal Commission.
- The bank should conduct a regular semiannual or month basis meeting sessions with the clients of the bank so as to identify any grievance and also for the purpose of building strong inter personal relationship with the clients. This will promote transparency and accountability in the business ands also improve the reputation of the business.
Thus from the above discussions it is clear that the management of the CBA needs to improve the corporate governance policies of the business which can be done by implementing the suggestions. In addition to this, the bank also needs to win the trust of the public which can be done by effectively demonstrating that the bank cares for the interest of the clients and is working for the growth and development of the clients. An effective corporate governance practice is always rewarded with high market valuation and thus there is benefit for the business as well.
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