Corporate governance is a set system of practices or guidelines that direct and control the running of a company. It includes balancing the interest of the various stakeholders in a company such as customers, stockholders, and the board of directors, the management and community (Lin, 2011). Some of the mechanisms used in corporate governance include close monitoring of practices, policies, and decisions made by either corporation, their stakeholders or their agents.
Principles of Corporate Governance
Corporate governance is guided by six principles. Firstly, for there to be effective corporate governance, the framework should be one that promotes fair and transparent markets. Participants in the market should be able to rely on that framework when they establish private legal relations. The framework should also support the efficient allocation of resources and ensure it abides by the rule of law. For instance, if a need arises for new regulations, they should be formulated in a way that makes implementing them efficient for all parties involved (OECD, 2015).
Secondly, the framework designed for corporate governance should protect the shareholder’s rights and ensure they exercise those rights. All shareholders should be treated equally even the foreign and minority shareholders. Shareholder’s participation in matters of corporate governance such as the election of board members should be well facilitated. Also, they are entitled to get relevant, accurate information related to the corporation on a regular and timely basis as well as share in the profits made by the corporation.
The third principle that governs corporate governance is related to stock markets, institutional investors and other intermediaries. The framework for corporate governance should create comprehensive incentives in the entire investment chain and enable stock markets to perform well hence contributing to effective corporate governance. However, for the framework to be effective, institutional investors should be ready and willing to exercise their ownership functions in the companies in which they are investors. The framework for corporate governance should stress on agents that give guidance related to investor’s decisions to reduce and reveal any conflicts of interest that may invalidate the honesty of their advice (OECD, 2015).
The next principle guiding corporate governance is recognition of the function of stakeholders in corporate governance. There should be recognition of the privileges of stakeholders founded by legal means or through agreements. The framework set out should also encourage active involvement of stakeholders in corporate matters with an aim to create jobs and wealth. The fifth principles show that an effective corporate governance structure should guarantee that all materials related to the corporation such as information on finances, ownership and performance are disclosed in a timely and accurate matters to all parties concerned (OECD, 2015).
The last principle is concerned with the duties charged to the board. The structure of corporate governance should be one that ensures monitoring of the management by the board, tactical guidance of the organization and the accountability of the board to the other shareholders. Board committees and management of any corporations plays a major role in corporate governance (Adams, 2008). They are expected to review and implement corporate strategies, risk policies and annual budgets for the company. Board members are charged with the responsibility of overseeing key acquisitions as well as the disclosure process. It is also within their duty to make sure that the integrity of the corporations accounting and financial reporting system is not compromised.
Role of an Accountant
The board, board committees, and management of any company play a significant role in corporate governance. These groups are charged with the responsibility to ensure all things relating to the smooth running of the company (Finegold, 2007). Through the function of accounting, companies can follow up on their expenditures and income and establish an overview of their financial status. As an accountant, I have the responsibility to provide support to these groups in the following areas:
Accounting is used on a practical level as a tool for corporate governing. Corporations can make effective decisions about investments, operations, and developments through accurate and honest accounting. For instance, accounting may show that foreign investment was half as profitable and twice as costly as previously estimated. Using the information, corporate decision makers such as managers, the board, and board committee can be able to make new plans and take corrective measures to avoid losses. Hence, accountants relate to these groups of decision makers by ensuring that they take up plans that yield good results and get rid of ventures that hinder the success of the corporation.
Corporations are held accountable to the public in many different ways. Therefore, through teaming up with the management and boards of companies, accountants can help companies fulfill their obligations such as payment of taxes. The public makes investments decision based on accounting statements. Therefore, accounting is important to corporate governance as it ensures that the value of the company’s investments is represented honestly and accurately. Through accounting, customers can vocalize demands hence pushing the management to consider their need during decision making. Accounting records also help in revealing corporate policies which impact on the public’s view of the corporation.
Corporations are also liable to shareholders who are co-owners of the company. A shareholder is not only in the form of an individual owning at least one share of the company. But also in the form of a company or institution holding at least one share in the company. It is a legal requirement for businesses to provide shareholders with accurate and exhaustive financial information. The information provided is utilized by the corporation`s shareholders to make informed financial decisions (Brennan, 2008). For instance, whenever shareholders feel that their money is not being put to proper use, they have the right to withdraw their money or propose a new policy that they believe will be effective. Such accountability is beneficial as the shareholders of any company are entailed to profit when the company does well in its operations. It also comes with a full potential to lose when the company does poorly.
Cash Flow Management
Apart from the role of accounting in long-term planning within a corporation, it also helps in making of short-term plans. Through accounting, managers can plan on money utilization, decide what projects to prioritize and take necessary financial action if necessary. Hence, accounting enables managers to see what is available for spending and where it should be spent. Decisions regarding supplies, labor, and equipment, are also made guided by accounting figures. Corporations, through the accountants, can make records of their short-term financial resources and manage their credit lines hence avoiding unwarranted debts.
Accountants are often used as advisors to corporate decision makers such as the management and board committees. Since they have financial knowledge, accountants can participate in corporate governance by advising the management on what ventures to go into and which ones to avoid. For instance, before a company decides to begin production of a new good or service or expand its operations to other areas, it is important for the management to consult the accountant for financial advice. It will help in ensuring that the company does not end up engaging in a business that will only make losses.
Information to be provided by an accountant
The accountant of any organization is bound by the corporation act to provide yearly reports to the stakeholders. In the yearly statement, he is to provide a director’s report, which includes the remuneration report and an assessment of the company activities. There is provision for corporate governance statement together with a financial report. The financial report includes the financial statements formulated according to the accepted standards. The shareholders will also require audit reports on the financial report (Ormiston, 2013). The primary objectives of the reports presented by the accountant are reporting on the leading of the company by the executives and the management over the prior year. They teach and enlighten the shareholders- both potential and current. The reports to shareholders also gives an account of the performance under evaluation and also puts the performance in context. The objectives of the company are also explained in the reports, as well as an outline of the future directions and strategies. Fulfillment of both legal and regulatory responsibilities is highlighted in the report. These annual reports can be broken down into specific statements which serve different purposes in the role of corporate governance. They include:
Statements of financial position
These statements are commonly referred to as balance sheets which provide information on the company’s assets, liabilities as well as owner’s equity as at a particular period. Information presented in the balance sheet is used by management to determine the financial standing of the company. The same information is used by potential investors to analyze the feasibility of the company for investment. An accountant uses this information to guide the board through summarizing what the company owns and the debts it owes. Following that information, management can be able to make decisions on how to settle the company’s debts and increase its assets.
It is also referred to as the profit and loss statement or expense and revenue statement. The statement contains reports on the income, profits and expenditures of the company over a specified period (Ormiston, 2013). It is possible to understand the company’s operations through the income statement since it shows the sales and expenses incurred during a particular period. Accountants provide this information to help managers and even investors know if the company made profits or losses in the reported period. In addition, the information contained in the income statement can help the management and board committee of companies to evaluate the possible future performance of the company and assess the possibilities for generating cash flows in the future. Therefore, decisions can be made and changes implemented to ensure the corporation’s objectives are met.
It is also known as the statement of changes in equity. This statement contains information on shifts in the company’s equity in the reported period. It helps in breaking down of the changes in the interest of the owners in the corporation. This information is of particular importance in planning as it shows the total capital that belongs to the owners of the company. Through such information, decisions pertaining profit distribution can be made (what goes to shareholders and what goes to retained earnings). Also, the management can determine if it has additional shares for issuance to shareholders. If not, it has to get the owner’s approval to adjust the set share capital so that it can issue additional shares.
Cash Flow Statement
The cash flow statement is another type of information provided by accountants that contain the cash flow activities of the company; specifically, it’s financing, operating and investing activities. The primary information presented in the cash flow statement is the amount of money a company makes (Ormiston, 2013). Corporate decision makers such as the management and boards of companies require this information for efficient planning of corporate affairs. Through cash flow statements, companies get to observe the extent of inflow and outflow of cash. The management uses that information to monitor debts and avoids any unwarranted expenditures. In addition, that knowledge allows management to make informed decisions such as ensuring some degree of income from the company without having to rely on investments from outsiders.
Following the above insight, it is undeniable that accounting is an integral element in the practice of corporate governance. Corporate governance relates to the system or procedure that businesses use to guide their decisions. It acts as a basis for which corporations operate with an aim to achieve their set objectives. Since the primary function of accounting is to keep track of the financial performance of an organization, those tasks play a vital part in determining how an organization implements its corporate governance policies.
Efficient corporate governance demands that corporate-related decisions to do with issues such as foreign investments, market alliances, and market entry are made based on critical evaluation of risks and asset value. The management and other stakeholders normally have varying concerns about the performance of the company. In order to satisfy those concerns, they require information which is provided by accountants. Most of that information is presented in the form of financial statements which are evaluated by the company auditors to ensure their accuracy.
It is evident that most business operations in an organization are governed by accounting information. Such information enables corporations, through the management, to keep track of their finances hence establishing their financial status. It is, therefore, right to say that it is through the accounting function that companies are able to run on both a legal and practical level hence creating a foundation for development and success which is the main objective of corporate governance.
Accountants, therefore, need to identify the role they play in corporate governance and embrace it. They can do that by providing timely and accurate financial information to the decision makers. They should also give financial advice to the management in order to prevent bad business decisions that could lead the company to failure. I believe that if accountants work hand in hand with the management, boards and board committees of their respective companies, they can help contribute to the success of the organization.
Adams, R. H. (2008). The role of boards of directors in corporate governance: A conceptual framework and survey. National Bureau of Economic Research.
Brennan, N. M. (2008). Corporate governance, accountability and mechanisms of accountability: an overview. Accounting, Auditing & Accountability Journal, 885-906.
Finegold, D. B. (2007). Corporate boards and company performance: Review of research in light of recent reforms. Corporate Governance: an international review, 865-878.
Lin, T. C. (2011). Corporate Governance of Iconic Executives. The. Notre Dame L. Rev, 351.
OECD. (2015). G20 / OECD Principles of Corporate Governance. Paris: OECD Publishing.
Ormiston, A. &. (2013). Understanding financial statements. Pearson Education.