Ideas & Debate

Regular audits that improve governance of parastatals

audit

A governance audit refers to the assessment of an organisation’s system of authority and accountability, including how financial and operational controls are overseen with a view to achieving organisational goals and objectives.

Governance audits are normally conducted by governance auditors, who are professionals trained and accredited by The Institute of Certified Secretaries of Kenya (ICS).

Akin to the way external auditors provide an independent assessment of the financial accounts and internal controls within a company or institution, governance auditors seek to provide an objective opinion on the adequacy and effectiveness of an organisation’s governance-related policies and practices, inclusive of how a board operates and delivers on its mandate.

Organisations subject to the latter can be made aware of possible gaps and weaknesses in their corporate governance structures and processes and, in turn, initiate corrective measures.

Admittedly, many organisations already adhere to governance codes and similar requirements.

However, once governance codes have been adopted, it is relatively common for many boards and organisations to operationalise them in a routine way or ritualistic manner without challenging them any further.

This is where governance audits can help to turbocharge an organisation’s corporate governance practices, towards the desired governance outcomes.

Governance audits provide a proactive, if not anticipatory, strategy that can help to pre-empt corporate governance issues such as deficiencies in internal controls, tackle dysfunctionality in boards, engage with the difficult problem of inadequate oversight or weak compliance with regulatory requirements, as well as spotlighting accountability and transparency gaps.

Governance audits thus unearth the difficult but necessary conversations that ought to be considered at the apex of the organisation, and also set in motion the implementation of any proposed suggestions for improvement.

Regular governance audits can also serve as a strong signal to stakeholders, supervisory agencies, and markets about an organisation’s commitment towards good governance practices.

At the same time, governance auditors have potential to act as diffusers of best corporate governance practices across different types of organisations including private or family-owned businesses, listed companies and state-owned corporations.

This presents another opportunity for enhancing best or innovative corporate governance practices nationally, subsequently reducing variances that are observable across many segments of the economy such as private-vs-public sectors, or financial-vs-non-financial sectors.

The broad scope of governance audits allows them to provide useful assessment of organisational strategy and the quality of board leadership that one might find inherently difficult to approach through conventional financial or legal audits.

Governance audits can also help to foster sustainable institutions and numerous other positive outcomes, such as attracting financial resources and improving board performance as well as firm profitability.

For instance, Kenya’s listed companies have laudably continued to embrace governance audits which in turn have been found to result in progressive improvement in corporate governance practices.

It was therefore unsurprising when a recent report by the Africa Peer Review Mechanism (APRM), entitled “Drivers of corporate governance performance in Africa: a cross-country analysis,” categorised Kenya as a “good performer’’ and rated it fourth on the continent in terms of quality of corporate governance.

However, and although Mwongozo (the Code of Governance for State Corporations) requires state-owned corporations (SOCs) to undertake annual governance audits, this requirement has yet to be fully implemented across all SOCs.

According to an ongoing assessment by the authors of this article, regarding SOCs governance practices, the implementation of governance audits in SOCs presents a promising avenue toward enhancing governance and accountability practices within Kenya’s parastatal sector.

SOCs undertaking such audits can be able to assess the extent to which they have complied with provisions of Mwongozo, subsequently bolstering board practices, the creation of value for their stakeholders (including the Government as owner and key financier), and fostering principles of accountability, responsibility, and transparency.

Not least, public sector oversight entities such as the State Corporations Advisory Committee (SCAC), can draw common themes from these audits to identify pathways for best practice diffusion across the broader parastatal sector.

Jeremiah N. Karanja [CEO, Institute of Certified Secretaries of Kenya]

Prof Teerooven Soobaroyen [University of Essex, UK]

Dr Danson Kimani [University of Essex, UK]

Mr Gilbert Kiprono [Institute of Certified Secretaries of Kenya]