Corporate governance and management © 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd. 1

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. 2

Directors Requirements of the Companies act 2006 Executive Directors 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 Accountability Transparency Probity Long-term sustainability © 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd. 3

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 Problems of calculation 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 “...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. 8

Management accounts 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. 9

Accounting for Contracts 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 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. 10

Some examples © 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd. 11

Some examples © 2013 Andrew Ross and Peter Williams. Published 2013 by John Wiley & Sons, Ltd. 12