Accounting and Good Corporate Governance

Mandatory Requirement: Good Corporate Governance

A mandatory requirement in today’s corporate world is good corporate governance. Market development is reliant on the reliability of accounting data and financial reporting. Accounting information that is prepared on the premise of transparent, high quality, and up to par international standards reduces investment costs considerably. The demand for good corporate governance has been further increased by the recent failure of large corporate groups in the last decade. Surprisingly, some of the failures of the large corporate groups have been attributed to the accounting discipline. The practice of accounting or interpretations in accounting that may give different remedies for similar scenarios are some grey areas that may open some loopholes for corrupt accountants. This research paper seeks to uncover this issue. It takes into account the concepts of corporate governance and its legal framework and how they can be implemented in accounting to establish governance.

Keywords: corporate governance, accounting

Accounting in the Function of Corporate Governance

Introduction

Good corporate governance in organizations enhances the performance of corporations. It creates an environment in which managers are motivated to increase returns on investments, improve efficiency and enhance long-term growth. Good corporate governance ensures corporations conform to set standards, the interests of investors and society. This is achieved through fairness, transparency, and accountability in all operations (Barnea & Rubin, 2010). Good corporate governance practices increase stakeholder confidence in a company. It is estimated that about 60% of investors cite good corporate governance practices in corporations as a vital factor in their investment decisions (Oman, 2001). Accounting is used in this paper as the mean for establishing and preserving corporate governance in a corporation.

Accounting: Language of Business

Accounting is a process where information is compiled in order to report on the internal affairs of an entity to stakeholders at the end of a financial year. It is a language of business that plays a crucial role in investment decisions. Financial reports are the basic ways that companies use to report on the success of the business and financial position for interested parties. Financial reports are very important and should be made according to accepted international standards. Standard accounting practices around the world equalize accounting practices and smoothens cross-border business. In this paper, accounting is viewed as a tool that can be used to ensure good governance. Therefore the basic objective of the paper concentrates on the relationship between accounting and governance, and how the accounting discipline may be practiced to achieve good corporate governance.

Methodology

This research paper is purely conceptual and relies on secondary resources such as research articles, books, published journals, and scholarly articles. The connection between good accounting practices and successful corporate governance is the main idea of the paper. Good corporate governance is discussed, followed by the interrelationship between accounting and good governance. They are then followed with the justification and concluding remarks at the end.

Good Corporate Governance and Accounting

The concept of governance describes a process of decision making and decision implementation. The concept of governance is used in corporations to minimize corruption and to take into account the view of all stakeholders in decision making (UNESCAP, 2007). Rising investor disquiet with governance practices has led to an increase in demands to raise the bar for mandatory divulgence and compliance by corporations. The NASDAQ and New York Stock exchange have devised new stringent policies for financial disclosure and audit policies. In order to have good corporate governance practices established in accounting, some hurdles need to be overcome. There is a need to sequentially move from ’soft’ to ’hard’ laws. An unethical company can evade even the most stringent of regulations. In companies, corporate governance practices may not be integrated in terms of substance (Barney & Rubin, 2010). Balancing powers of the management and the board should be put in focus as another hurdle to be addressed. The independence of the board from management has remained a key issue in addressing oversight. It is estimated that about a third of members of boards in American corporations do not have the required industry skills, knowledge, or experience to contribute effectively to oversight. Board failure is a common feature in many corporations.

The Importance of Financial Reporting

The dedication to good corporate governance in terms of accounting practices, transparency, and disclosure make a company more profitable and more attractive to both current and prospective investors. Investors always look out for such companies. A study in South Korea revealed that companies with good governance practices traded at premiums of 160% in comparison to poorly governed companies (Murthy, 2006). Financial reporting that is guided by truth and honesty represents the leading principle that is used by financial report creators. Blurring or presenting false positions leads to decisions by investors that are not consistent with the assessment of the financial report. Investors need information that is accurate and truly reflects the financial position of a company. Accounting has become increasingly globalized because companies are becoming more global as their scope and volume of trade is increasing. The need for financial reports that are consistent and internationally comparable is established by these factors. Since accounting is described as a means of ensuring good governance practices, the world should embrace uniform accounting practices. The journey towards this goal already began and this move makes it easier for companies across borders to compare performance.

Conclusion

Good corporate governance is a necessity in the business environment of today in order to ensure long-term feasibility and sustainability. Good corporate governance should be practiced religiously in all businesses. International rewards may be instituted to promote good governance practices through a ranking system of companies with the best governance practices. If companies ignore lessons from the failures of companies in the past, they will be unable to regain the public trust that is a necessity for long-term success. Companies that truly embrace good corporate governance practices will accrue enormous benefits such as improved sustainability and financial performance. Accounting will definitely lead the way in corporate governance by acting as a check and reference for decisions made by management.

References

Barnea, A, & Rubin, A. (2010), Corporate social responsibility as a conflict between shareholders, Journal of Business Ethics, Vol 97 No. 1, pp. 71-86

Oman, C. P. (2001). Corporate Governance and National Development, OECD Development Center, Technical Papers No. 180, Paris.

UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific). (2007).What is Good Governance? Poverty and Development Division. Retrieved on April 23, 2018, from http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp