Corporate Governance And Its Importance

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Corporate Governance And Its Importance

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Discuss about the Corporate Governance and its importance.

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Introduction
In view of Marc Palker (2016), who is the Principal at MPP Associates and also is the IMA Chair of the Global Board of Directors, accountants are the gatekeepers of financial reporting and governance. Through the effective communication of the corporate governance structures in the entire organization, particularly across its hierarchy levels, the organizations can easily facilitate ethical and more accurate information. When the businesses operate in a corporate umbrella, a number of business basics are presided by the results and practices of accounting. Accounting is the thing which helps the companies in tracking their income and expenditure and in establishing the correct picture of the entire financial status. Thus, the accounting helps the companies in running their operations in a smooth manner, which have legal, practical and ethical basis, and also helps in laying down the foundation stone towards the continues success and growth (Ray, 2018).
However, the blunders of the recent past, particularly the scandals which took place in HealthSouth, Enron, WorldCom and Tyco are the examples where the role of accounting is misused and the ultimate loss is to be dealt by the stakeholders. The widespread failures in the financial reporting have been the key blame holder over the feeble internal controls. The investors lost their faith and the ultimate impact was seen on the stock market plummeting (Browning & Weil, 2002). This discussion is focused on highlighting what exactly corporate governance is and the importance it holds. The role and the professional duties which have to be properly discharged by the accountants to maintain the good governance practices would also be highlighted, along with the lack of ethical behaviour of these individuals resulting in reporting failures. The discussion, before concluding, would highlight the manner in which the ethical issues impact the public interest.
Corporate governance and its importance
Corporate governance, as a term, can be defined from two perspectives, i.e., the narrow and the broad one. From the narrow perspective, corporate governance is related to the relationship present between the directors, varied stakeholders and corporate managers. When the broad perspective of corporate governance is looked at, it covers the combination of listing rules, voluntary private sector practices which allow the firm to attract capital, generate profit, meeting legal and societal expectations, perform efficiently, laws, and regulations (Gregory & Simms, 2005). As per Okeahalam and Akinboade (2003), corporate governance refers to the public and private institutions which include accepted business practices, laws and regulations, which govern the relationship between entrepreneurs and corporate managers in market economy on one hand, and the ones who invest in the resources of the companies on the other hand. It is related to the creation of a balance in between the social and economic objectives, and in between the community and individual objectives, where the use of resources is encouraged, accountability in using stewardship and powers, and aligning of the interests of the different stakeholders is undertaken.

Corporate governance is a concept which is gaining a lot of attention, due to the events which transpired in the recent history. It is a mechanism through which the stakeholders of the company are able to exercise control on the corporate managers and are also able to provide an overall direction to the company, particularly in such a manner that the interests of the stakeholders are protected (Larcker & Tayan, 2015). When such happens, the company is able to operate in a more responsible and profitable manner; the relations of the company are enhanced with the different stakeholder groups including suppliers, employees, policyholders, society at large, and most importantly, the shareholders; the company starts thinking long term; the quality of the executive and that of the non executive directors is improved, there is proper monitoring of executive management to protect the interest of the shareholders; and the informational needs of all of the stakeholders are properly fulfilled. In this setting, the role of the accountant is the maintenance of equilibrium in between the different components of the system, for making certain that the accounting and the auditing tools play the requisite governance role, and that the good governance procedure pillars are properly placed (Tricker, 2015).
Role and professional duties of accountants
When it comes to the question on what exactly is done by the accountants, the reply is that they act as the independent auditors and the tax agents. The role which is performed by the accountants is often not understood properly and is also forgotten. The significance of the role of accountants in the business scenario in context of ensuring that the quality of financial reporting is upheld cannot be emphasized enough. The accountants often take centre stage in safeguarding the financial reporting’s integrity. The quality of financial reporting is to be defended by the professional accountants at the very source, where the figures and numbers are born. The accountants play a key role in making contributions towards the overall progress and the stability in society (Jeffrey, 2011).
A competent account is deemed as an invaluable asset in the business and an inquiring mind is employed by the accountants to the work based on their knowledge of the financials of the company. They make use of their intimate understanding of the company and the skills, along with of the environment in which they operate. The accountants basically ask the challenging questions. They adopt an objective and a pragmatic approach for solving the problems. This becomes a very valuable asset for the management of any company. The accountants in the business helps in corporate strategy where the advice is provided and the businesses are helped in reducing the costs, in mitigating the risks and in improving the top line. The role of the accountants includes the one as the board directors, where they govern the organization in terms of the approval of annual budgets and the accounting to the stakeholders for the performance of the company. They also appoint the chief executive, along with determining the compensation of the management. In their role as internal auditors, they provide independent assurance to the management regarding the risk management of the company, its internal control processes and the governance in an effective manner. As the chief financial officers, they have the oversight on all matters which relate to the financial health of the company. Included in this is the creation and driving of the strategic direction of the business to create, analyse and communicate the financial information (Jui & Wong, 2013).

The basic statutory duty of the accounts is to report to the shareholders on the annual accounts of the company being prepared in a proper manner, to give a true and fair view, and on the report of director being consistent with the accounts; and also of the variance in these (ECGI, 2018). In the multifaceted role of the accountants, it is their duty towards the public to protect their interest. This is due to the fact that the accountants are given the privileged position in the society and amongst the different roles given to the accountants; the theme continues to protect the public interest. This requires maintenance of high standards but also in helping the company to act in an ethical manner. The accountants would not be able to get the name of being the protectors where the public interest is not on them. In the very basic manner, the confidence in financial data, which the accountants produce, creates the roots of public value and trust. Accountants are also faced with competing demands which makes it crucial for them to balance these demands and perform their roles ethically. By following the ethical codes of accountants, these individuals are compelled to work in a manner where their duty of protecting public interest is met (Jui & Wong, 2013).
Lack of ethical behaviour of accountants
The requirement for good corporate governance stems from the need of protecting and enhancing the value of shareholders, in meeting the obligations of the company to the employees and for securing the interests of the stakeholders present in the corporate environment. The main objective is to protect against such abuses which could result in financial crisis and corporate scandals which poses a threat to the corporate relations in the last decade. There is a lack of ethical behaviour in the accountants which results in the reporting failures (Plessis, Hargovan & Harris, 2018). There are a number of reasons for the ethical lapses in the corporate scenario by the accountants. The first one is the self interest metamorphosing in selfishness and greed, where the focus shifts towards the short terms profit maximization in place of long term. There is also the stunted moral development on part of management and corporate officials, where the key purpose of the business becomes to earn more for the shareholders, thereby legitimizing any action which is undertaken to get to that objective. There are also such instances where the individuals equate the moral behaviour with the legal one, and disregard the fact certain actions are not unlawful but immoral. At times, the push to act in an unethical manner comes from the client where the demands of client wither the individual responsibility (Osisioma, 2013).
Corporate reporting is deemed amongst the most significant functions which the companies need to take care of, and also require the adherence to higher code of ethical behaviour. This is particularly true for the public entities in which the reports of company helps in determining the decision of the shareholders in the financial instruments and financial decisions of the company. These statements help the users who are not in such a position where the entity could be required to form a report which suits the information requirements. These statements help the users in making rational credit decisions, investments and the other decisions. Even though the users of financial statements assume to be judicious in business, yet they do not have the full insight over the actual affairs of the company. This puts the reliance on financial reporting practices to make the decisions and judgments, making the role of accounts all the more important. The true and fair statements are taken as the foundation for the decisions and for promoting confidence in the financial reporting. However when unethical reporting is done, major issues are caused in the company, which even have an impact over the economy of the nation (Badshah, 2015).
The misadventures and the corporate scandals which caused the global meltdown had far reaching and dramatic implications for the profession. To show the manner in which the reporting failures are caused due to the lack of ethical behaviour of the auditors and accountants can be further illustrated through the famous examples. WorldCom is famous for its accounting failure where the company, from the outside, looked like a strong leader. However, it was later on revealed that the company had been indulged in fraudulent reporting where it stated that it had earned a profit of $3 billion, when it reality it had incurred a $0.5 billion loss. The investigations revealed misstatements of $11 billion (Scharff, 2005).

Focusing on the role of auditors and accountants played in this blunder, there was a lack of independence and also of the awareness of Board. The chairman of the audit committee, Max Bobbitt was Ebbers’ loyal. The members of the audit commit chose to ignore the fraudulent misstatements from 1999 to 2001. The committee, as per the estimates, oversaw $30 billion revenue generating company, which even after meeting for 3-6 hours annually did not raise any issue (Ashraf, 2011). There was a virtual non existence of accounting controls. The committee did not pay heed to the policies, internal controls or the audit programme of the company. Even when Arthur Andersen had defined the company as a maximum risk client, and had told the audit committee regarding the misapplication of the GAAP in case of some of the investments, nothing was done by the committee, which ultimately led to a clean and unqualified opinion being given by Arthur Andersen (Zekany, Braun, & Warder, 2004). It is important that the committees fulfil their duties by overseeing the internal control structure of the company, and making certain that the company followed the laws, standards and the regulations (Romney & Steinbart, 2008).
There are a number of other corporate accounting scandals which explains the manner in which the lack of ethical behaviour amongst the auditors and accountants result in reporting failures. The waste management scandal of 1998 in which $1.7 billion were reported in fake earnings is an example. This had the company falsely increasing the time length of depreciation for the assets. The Enron scandal of 2001 is another example, where huge debts were kept off balance sheet and this resulted in the shareholders losing $74 billion, employees losing their job, and investors losing their retirement accounts. The Tyco scandal of 2002 saw stealing of %150 million and inflation of company income by $500 million. Another famous scandal which had a key role of the auditors of the company was Lehman Brothers scandal of 2008. And the recent one in Satyam where the revenue was falsely boosted by $1.5 billion is another scandal where the accountants failed to uphold their professional standards (Accounting Degree, 2018).
Enhancing public interest: ethical issues
Leung and Cooper (2005) have highlighted that there are three ethical issues which play a crucial role in maintenance of ethical standards, i.e., the proposal of clients to evade tax, the proposal of the clients to manipulate the financial statements, and the presentation of the financial information in the manner that the users are not deceived. These are the key in enhancing the public interest when it comes to the financial reporting. Though, these issues have technicality in them as they are related to the matters of accounting and financial statement. These issues are deemed as ethical issues due to the conflict which the accountants are faced with in choosing between the needs of the clients and in protecting the public interest. The professional accountants are under an obligation to fulfil the wishes of their clients irrespective of their personal feelings. However, where ethics are not adopted when the accountants are faced with such ethical issues, the faith of the public in the work of professional accountants would be lost. Further, this would make way for the blunders like WorldCom and Enron. As a result of providing their services to the business community and the general public, the professional accountants are required to conduct their business in a manner which can be best deemed as ethical. This is the reason why the codes have been developed, so that the members can deal with such issues.
The greatest concerns of the professionals are in terms of the proposal of the client to evade tax and to manipulate the financial statements. This is the reason why in Australia, the majority of professional accounting bodies adopt Code of Ethics for Professional Accountants, which have been developed by the APESB, i.e., the Accounting Professional and Ethical Standards Board. These help the accountants in protecting from the different ethical dilemmas. Where these ethics are not followed and the work is done by the accountants for personal gain, in the long run, the professionals would be the ultimate losers. This makes it crucial to uphold the standards where the public is assured that the ethical decision would be undertaken; and where the proposals are made by the clients for evading tax, the same would not be followed. These become crucial also for the public to have faith on the financial reporting and to trust the reports created by the professionals. Not doing the same results in incidents like WorldCom and Enron (Bazley, Hancock & Robinson, 2014).

This is where the role of corporate governance becomes more significant and takes the centre stage. The professional accountants are required to fulfil their roles in the manner where the work is done for the clients and general public and a balance is maintained. In such cases where the accountants are faced with ethical issues, there is a need to give supremacy to the needs of general public, in order to continue the faith in the accountants and their profession. This is the reason why the accountants identified the aforementioned ethical issues are the most significant one. The theme of corporate governance in terms of being honest and working with eternity is crucial for the accountants especially in such cases (Leung & Cooper, 2005).
Conclusion
Thus, based on the discussion carried in the previous segments, it can be concluded that the corporate governance is a concept which holds a lot of significance in the role played by the accountants. The accountants are required to work with integrity and in an honest manner, so that a true and fair financial position is presented. This helps in maintaining the faith of the general public in the investments they make and also in the accounting professionals. Where the incidents like Enron, Satyam, WorldCom, or Lehman Brothers take place, the faith of the people in the accountants and in their profession are lost. This ultimately has an impact over the entire economy. Thus, the role played by accountants is very crucial and there is a high need for the accountants to be ethical in their work. For this purpose, the standards formed by the leading bodies of the nation have to be followed. The reason for putting so much focus of corporate governance on the accountants stems from their role and duties in maintenance of the good governance practices. Corporate governance, along with the ethics, helps the accountants in keeping true to their profession and also towards safeguarding the interests of the different stakeholders who put their faith in the accountants. Even when the accountants are faced with ethical issues, which is quite common as per the literature, there is a need to analyse the situation and make the ethical decision, even when it involves declining the proposal of the clients for evading tax, as in the long run, it proves disastrous not only for the clients but for the accountants as well.

References
Accounting Degree. (2018). The 10 Worst Corporate Accounting Scandals of All Time. Retrieved from: https://www.accounting-degree.org/scandals/
Akinboade, A. O., & Okeahalam, C. C. (2003). A review of corporate governance in Africa: Literature, issues and challenges. In A Paper Presented at the Global Corporate Governance Forum, 15, 1-34.
Ashraf, J. (2011). The accounting fraud at WorldCom the causes, the characteristics, the consequences, and the lessons learned. HIM 1990-2015. 1107
Badshah, K. (2015). Corporate Reporting – Ethics Failure and Corrective Measures. Retrieved from: https://www.linkedin.com/pulse/corporate-reporting-ethics-failure-corrective-measures-kamran
Bazley, M., Hancock, P., & Robinson, P. (2014). Contemporary Accounting: A Strategic Approach for users. Victoria: Cengage Learning Australia.
Browning, E. S., & Jonathan, W. (2002). Burden of doubt: Stocks take a beating as accounting worries spread beyond Enron, Wall Street Journal, A1.
ECGI. (2018). Accountability and audit. Retrieved from: https://www.ecgi.org/codes/documents/hampel28.pdf
Gregory, H.J., & Simms, M.E. (2005). Corporate Governance: What it is and Why it Matters. In Cattrysse J. Reflections on Corporate Governance and the Role of the Internal Auditor. Roeselare, Belgium: Roularta Media Group.
Jeffrey, C. (2011). Research on professional responsibility and ethics in accounting. Bingley: Emerald Group Publishing.
Jui, L., & Wong, J. (2013). Roles and Importance of Professional Accountants in Business. Retrieved from: https://www.ifac.org/news-events/2013-10/roles-and-importance-professional-accountants-business
Larcker, D., & Tayan, B. (2015). Corporate governance matters: A closer look at organizational choices and their consequences. New York: Pearson Education.
Leung, P., & Cooper, B. J. (2005). Accountants, ethical issues and the corporate governance context. Australian accounting review, 15(35), 79-88.
Osisioma, B. C. (2013). Good Corporate Governance: The Role of the Accountant. Retrieved from: https://works.bepress.com/prof_ben_osisioma/10/
Palker, M. (2016). Understanding the Accountant’s Role in Corporate Governance. Retrieved from: https://www.ifac.org/global-knowledge-gateway/governance/discussion/understanding-accountant-s-role-corporate-governance
Plessis, J.J.D., Hargovan, A., & Bagaric, M. (2018). Principles of Contemporary Corporate Governance (4th ed.). Cambridge: Cambridge University Press.
Ray, L. (2018). The Role of Accounting in a Corporate Governance. Retrieved from: https://yourbusiness.azcentral.com/role-accounting-corporate-governance-16067.html
Romney, M. B., & Steinbart, P. J. (2008). Accounting information systems. Reading, Massachusetts: Addison-Wesley.
Scharff, M. M. (2005). WorldCom: A failure of moral and ethical values. Journal of Applied Management and Entrepreneurship, 10(3), 35.
Tricker, B. (2015). Corporate governance: Principles, policies, and practices (3rd ed.). Oxford: Oxford University Press, USA.
Zekany, K., Braun, L., & Warder, Z. (2004). Behind closed doors at WorldCom: 2001. Issues in Accounting Education, 19(1), 101-117.

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