The Cost of Poor Corporate Governance – January 2023

Many organisations now refer to Environmental, Social and Governance (ESG) issues but while climate change and biodiversity represent huge risks for industries, they are very difficult to mitigate without good corporate governance.

Governance involves making decisions in a way that serves the full range of an organisation’s stakeholders, albeit employees, business partners, shareholders, customers, the local community, the governments, suppliers and financial lenders.  It is hard to express how fundamental corporate governance is for a business and its stakeholders. A recent example of what can happen when governance fails comes from the world of cryptocurrency.

FTX was one of the world’s largest crypto exchanges, allowing customers to trade digital currencies.  At the beginning of November 2022, leaked documents showed some concerning links between the finances of FTX and a hedge fund run by the same individual, and that FTX held a significant portion of its assets in its own crypto token, FTT.  These documents may have prompted customers to place withdrawals for about 6 billion dollars, but FTX lacked sufficient liquidity to honour these withdrawals.  FTX filed for bankruptcy soon afterwards, owing approximately 3 billion dollars to its top 50 creditors. 

Investigations have begun into the likely misuse of customer funds at FTX, which some have alleged is the biggest Ponzi scheme in the history of business.  Questions have been asked about how a company so large could have so few corporate controls and such inadequate corporate governance.  There have already been claims that FTX had compromised systems integrity, faulty regulatory oversight, no centralised control of the cash it handled, inaccurate bookkeeping, an inaccurate list of bank accounts and account signatories, and an inaccurate register of its assets with government authorities.  More weakness and failures are likely to be revealed during the forensic investigation of FTX.  Thousands of customers will never have their money returned.

While good governance looks different depending on a company’s size, location and industry, issues such as the experience and diversity of the directors, the board’s composition, the appointment of non-executive directors, board remuneration, company reward schemes, and companies’ structures are important.  So are the roles of the internal auditors and external auditors.  An unmodified external audit opinion will give some degree of assurance with respect to the financial statements.  Directors’ statements and announcements about ESG related issues may facilitate greater evaluation and accountability.  However, there is still a strong case for greater company transparency about ESG issues.  For too long reporting about these issues has been voluntary instead of mandatory.  It is time they were an integral part of any annual audit of a company by a third party.

Audit Team

Finance and Accounting Department