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Corporate governance: Sunk cost or rewarding investment?

Deloitte study shows companies are rewarded by the market and can realize real returns from complying with the new corporate


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Toronto, July 6, 2005 – The ongoing corporate governance requirements both in Canada and the U.S. have generated public debate in relation to the mounting costs that companies are forced to incur during the compliance and certification process. However, Deloitte demonstrates how it is possible for Canadian companies to turn the ‘sunken cost’ of compliance into real business advantage through maximizing business benefits beyond compliance. 

Based on its experience in assisting more than 800 North American companies address the new corporate governance and CEO/CFO certification requirements, Deloitte has found that compliance need not be a lost cost.  Instead, Canadian companies embracing corporate governance will ultimately be rewarded by the market. Compliance can also act as a springboard to realize significant business advantages including improved revenues, better safeguarding of assets and improved efficiency of business operations.

“The consequences of not fully complying with corporate governance requirements span way beyond the personal liability of the CEO and CFO. Historically we see that companies’ market cap has been negatively affected by a restatement of financial results, while on the other side of the equation investors are willing to pay a premium for good governance,” says Doug Wilkinson, partner with Deloitte’s  Enterprise Risk group in Canada. “Companies need to embrace corporate compliance now given that the new disclosure control requirements are effective this year with the new internal control over financial reporting requirements starting to take hold in 2006. Canada should learn from the Sarbanes-Oxley experience in that first year compliance is a 12 to 18 month journey requiring specialized skill sets.” 

In a recent global study conducted by Deloitte in cooperation with the Economist Intelligence Unit, titled ‘In the Dark’, more than half (56%) of the 250 executives and board directors surveyed considered quality of governance among the top three corporate performance areas investors reward most heavily.

Complying with corporate governance requirements and demonstrating good governance doesn’t only affect a company’s stock price or access to capital. Embracing the spirit, and not just the letter of the law, also provides companies with significant opportunities to see a return on their investment and increase efficiency beyond regulatory compliance.

Deloitte clients have reported a number of common themes with respect to the business benefits beyond compliance that have been realized through compliance with the requirements:

  • Improved disclosures
    The 2005 requirement for CEOs and CFOs to certify their companies’ disclosure controls and procedures have caused companies to better understand, assess and formalize their procedures related to the disclosure of information externally. Many companies have reported that, historically, controls in this area have tended to be less structured and formalized. The new requirements have resulted in companies taking a “fresh” look at their disclosure controls, resulting in an improved disclosure process and greater assurances for investors regarding the accuracy, completeness and timeliness of external reporting.
  • Standardization of processes and controls
    Addressing the new certification rules has resulted in companies bringing more standardization to their processes, policies and controls across subsidiaries, divisions and locations to weed out inefficiencies and streamline their systems.  This standardization has not only improved the effectiveness of processes and controls but has yielded significant business benefits through improved efficiencies.
  • Better control over management and information systems
    Many companies reported that their compliance initiative identified weaknesses in security where access to critical systems was not as well-controlled as expected.  Companies cited the potential negative impacts on reputation that would result from security breaches and recognized the benefits that were realized through improved security.
  • Improved acquisition integration
    Many companies reported that their compliance activities uncovered areas where the integration of acquisitions had not occurred to the extent expected. Numerous areas were identified where processes and systems had not been integrated and the expected synergies not fully realized. The compliance process highlighted these issues and assisted in more quickly integrating and standardizing the processes, controls and systems. 
  • Reduced risk of loss through fraud
    The significant focus on fraud in identifying where fraud could occur and assessing existing anti-fraud programs and controls resulted in improved controls and a reduced risk of loss through fraud within compliant companies. Companies noted both the reduced risk of financial loss as well as avoiding the negative reputation impacts as benefits in this area.
  • Enhanced market confidence and reputation management
    The market is quick to judge companies on earnings results, delays in financial reporting and restatements of financial results. Many Canadian companies believe that complying with the requirements of CEO and CFO certification enhances investor confidence in the integrity of financial reporting as a result of the rigour and focus required in complying with the rules.

In conclusion, Deloitte Partner Terry Hatherell stated, “Canadian companies need to understand that effective corporate governance, and specifically addressing the requirements of CEO and CFO certification, is a long-term exercise that doesn’t end after year one. Elements of sustainability should be built in and addressed right from the start. Without question, complying with the new requirements will have a cost. The challenge, however, is for companies to capitalize on and crystallize the many business benefits available beyond pure compliance.”

About Deloitte
Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 6,100 people in 47 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu," or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.

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Jacqui d'Eon
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Deloitte
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jdeon@deloitte.ca