When a fast-growing company seeks outsourced accounting and finance help to bring order to the chaos, they are often in an envious position: They are growing so fast that they have not had a chance, or the resources, to establish the order and corporate governance structure necessary for ensuring the reliability of their financial statements, keeping inefficiencies at bay and preparing the company for a major strategic transaction that could be on the horizon, such as an initial public offering (IPO).
What Is Meant by Private Company Corporate Governance Structure
How does the company conduct itself and how is it governed? This may be one of the top questions an investor asks when looking at a company. Depending on the private company’s corporate governance structure, someone can determine whether to view a company’s financial information as credible or not.
Corporate governance received heightened attention post-Enron as the Sarbanes-Oxley Act took shape and required that publicly traded companies strengthen their corporate governance structure and corporate governance hierarchy. In addition to companies having to strengthen their internal controls over financial reporting—and subject their internal controls to auditor testing and reviews—companies also needed to revisit how their audit committees were set up. Audit committees gained more responsibilities in the process, and U.S. stock exchanges require that companies have audit committees that are independent of management.
Corporate Governance Structure Examples
In the simplest of definitions, the rules a company follows and how it operates fall under the term corporate governance. In some views, corporate governance would apply to the board of directors, the audit committee, and how the company is organized. Who has the ultimate oversight authority? And are there special lines drawn to ensure objectivity and independence between certain roles and responsibilities? For instance, many companies have the internal audit function ultimately reporting to the audit committee, rather than management. However, most internal audit departments report administratively (rather than functionally) to the CFO, a setup that is frequently criticized by the Institute of Internal Auditors.
While U.S. companies are subject to the same rules and regulations, depending on their industry and whether they have publicly traded stock or not, companies have their own ways of doing things and their own rules and processes that have formed over time. Some of these processes become unwieldy and new efficiencies need to be introduced to make them more manageable and able to be followed. In other cases, less mature, pre-IPO companies do not always have the processes necessary to ensure proper internal controls, and the veracity of their financial information could come into question.
What Are the Main Pillars of Corporate Governance Structure?
The main pillars of corporate governance include transparency, accountability, assurance, leadership, communication and culture. As fast-growing companies prepare to go public or to appear attractive to a potential acquirer, they will need to assess and strengthen their processes to achieve financial reporting that can be relied upon. Their ability to achieve credibility in the marketplace and to meet compliance requirements expected of more mature, public companies stem from the corporate governance structure.
All of these areas have an effect on a company’s ability to be forthcoming with reliable information, on an ongoing basis. When these pillars are strong, the company’s stakeholders—including the board of directors, employees, and shareholders—can have trust in what the company is telling them. Companies with what would be considered a weak corporate governance structure have a higher risk of material misstatements.
What Does Corporate Governance Structure Involve?
The rules and processes that a company follows, and the way it is managed and organized, have a direct effect on how managers and employees behave and can influence a company’s internal controls over financial reporting.
An objective, expert perspective from SOX pros such as those at RoseRyan can help a company better understand its key internal controls and develop a tailored Sarbanes-Oxley program that is based on the way the company operates and that can be easy for the company to maintain over time.
After all, every company is different. The corporate governance structure of one company is not going to be the best fit for another company. To gain a sense of what a company is missing, how its processes and corporate governance structure could be improved, along with insights from the field and best practices, turn to corporate governance experts who can help you raise the financial integrity level within the company. By facilitating structures for corporate governance, they can help you ensure that the company is positioned on a firm foundation that will lead to continued success.