page contents

Single Blog Title

This is a single blog caption

Governance Accounting Transparency

//
Posted By
/
Comment0
/

GOVERNANCE, ACCOUNTING AND TRANSPARENCY

Good corporate governance (GCG) is a mandatory requirement in today’s corporate world by every stakeholder groups. Failure of giant corporate groups in last two-three decades strengthens the demand further.

Surprisingly, in some of such failures, accounting as a discipline is held liable. The way accounting is practiced or the interpretations that may give different prescriptions in similar situations are some dark areas that may open some scope for the corrupted accountants. Still, the author believes that such claim against accounting is undue and unfounded. The paper is an effort to uncover the issue and to protect it from such unfounded critics. It covers the concept of corporate governance, its legal framework, its current status and how accounting may be practiced to protect corporates from corruption by establishing governance.

Good corporate governance in a corporate set up leads to maximize the value of the shareholders legally, ethically and on a sustainable basis, while ensuring equity and transparency to every stakeholder – the company’s customers, employees, investors, vendor-partners, the government of the land and the community.

Good Corporate Governance is a must for ensuring the required values to different stakeholder groups. It enhances the performance of businesses, by creating an environment that motivates managers to maximize returns on investment, enhance operational efficiency and ensure long–term productivity growth. Consequently, such businesses attract the best talent on a global basis. It also ensures the conformance of businesses with the interests of investors and society, by creating fairness, transparency and accountability in business activities among employees, management and the board.

Also Good Corporate Governance raises the public confidence in a business and in the long run reduces the cost of capital for the businesses’ investments or investments in the business. According to various researches, many investors today cite the availability of good Corporate Governance in a business as key requirements in their making investments in corporations.

The essence of this write up is to use accounting as a means of establishing and retaining corporate governance in businesses.

Accounting is a process of compiling information for reporting the internal affairs of any entity to different stakeholders at the end of a certain interval. It is defined as the language of business and can play a vital role for ensuring and continuing with Good Corporate Governance. As a discipline, accounting practice is highly controlled by accounting standards in a global set up. As accounting becomes an international discipline and the practice of accounting is harmonized aligned with the varied needs of stakeholders, it can be used as a tool for ensuring good governance within a business setup.

Like earlier stated, the essence of the write up is mainly about the interrelationship between accounting and governance, and how accounting can be practiced in a way that corporate governance is achieved, and both accounting and corporate governance is demanded for the betterment of all the shareholders in particular and the stakeholders in general.

This document is conceptual, and has its basic foundations drawn from various sources. The linkage of governance, accounting and transparency has come to be because of the various incidents that have transpired in businesses over the last two decades, both locally and international. Such incidents include, but not limited to – ENRON, WORLDCOM, INTERCONTINENTAL BANK, CADBURY, LEVER BROTHERS, OCEANIC etc.

In recent times, the terms ‘governance’ and ‘good governance’ are being increasingly used in development literature. Bad governance is being increasingly regarded as one of the root causes of all evil within our societies. The concept of governance is not new. It is as old as human civilization. It means, ‘the process of decision-making and the process by which decisions are implemented (or not implemented)’. It originates from the need of economics (as regards corporate governance) and political science (as regards State governance) for an all-embracing concept capable of conveying diverse meanings not covered by the traditional term ‘government’.

It is the exercise of power or authority – political, economic, administrative or otherwise – to manage a country’s resources and affairs. Referring to the exercise of overall power, the term ‘governance’, in both corporate and State contexts, embraces action by executive bodies, assemblies (e.g. national parliaments) and judicial bodies (e.g. national courts and tribunals)

Thus, good governance, as a concept, is applicable to all sections of society such as the government, legislature, judiciary, the media, the private sector, the corporate sector, the co-operatives, societies registered under the Societies Registration Act, duly registered trusts, and organizations such as the trade unions and lastly the non-government organizations (NGOs). It assures that corruption is minimized, the views of minorities are taken into account and that the voices of the most vulnerable in society are heard in decision-making.

Corporate governance is primarily the responsibility of the Board as a group. The Board performs its duties with the support of management and staff, in line with members’ wishes, the constitution and the law, and ideally in partnership with stakeholders.

The decade of 1990s right up to the present day has been seen as the era of the stock-option-fattened, superman-superwoman CEOs who could do no wrong in the eyes of their admiration – heavy boards, and who were seen as demigods. Accountants found ways to circumvent accounting rules, and investment bankers invented complex financial structures to make mandatory disclosures look rosier. It is no wonder that this climate led to Enron’s spectacular collapse in 2001 and the collapse of WorldCom, Qwest and Tyco in 2002 and Oceanic Bank and Intercontinental bank in 2009. It is estimated that the scandals at Enron, WorldCom, Qwest, Tyco and others resulted in a loss of more than $7 trillion in market capital, the largest in the history of capitalism. The abuse of power is a relative issue. This is not confined in some selected companies rather different companies face this devil to different extent. The lack of corporate governance “was not a case of the odd duck or the five-legged cow, but one of widespread malfeasance”.

Excessive pay of senior management has been just one illustration of a broad failure in governance. The ratio of U.S. CEO Compensation to the pay of the average production worker jumped to 431 to one in 2004. In 1990, that ratio was 107 to one; in 1982, it was 42 to one. The aggregate compensation for top-five corporate executives was 10% of aggregate corporate earnings in 1998-2002, up fro  6% of aggregate corporate earnings during 1993-1997.

The high profile scandals and rising investor dissatisfaction with governance practices have led to demands to ‘raise the baseline’ of mandatory disclosure and compliance by businesses.  These concerns have triggered a shift away fro m “soft law” such as comply or explain requirements.

The table below gives a pictorial view of the reasons of conflict among different stakeholder groups that give rises to the crises (bad governance) and also devises some ways of getting rid of it by the accountants. Some common problems have been pointed here like agency problem, tunneling, power (ego) crisis, noncompliance, policy crisis etc.

Role of Accounting to Ensure Good Corporate Governance

 

Stakeholder

Groups

Complex

Relationship

with others

Point of Conflict

Nature of

Conflict

Remedies (Accountant’s

point of view)

Shareholders/ Owners

Shareholders Vs.

Board

Boards are highly paid as compared with their functions.

Agency Problem

May work to streamline the payment, based on the study on salaries at Board and Management level.

Shareholders Vs.

Management

Management is highly paid as compared with their functions

Shareholders Vs.

Shareholders

Controlling shareholders expropriate the firm’s assets at the expense of minority shareholders

Tunneling

May reduce the gap by appropriate disclosure, like, Minority Interest.

 

 

 

 

 

Board of

Directors

Board

Vs. Shareholders

Boards are held responsible for

sustainability but not rewarded accordingly

Reverse Agency

Problem

May work to streamline the payment on the basis of job study.

Board

Vs.

Management

Management is not capable enough to carry out the policy

as set and delegated by the Board.

Goal

Congruence

Crisis

May help management to carry out the policies timely by Strategic Planning & Budgeting.

Board

Vs.

Regulatory

Authorities

Regulatory authorities are not supportive rather slow and sometimes, disturb the activities.

National Policy

Crisis

Professional accounting bodies may help the regulatory authorities to frame supportive rules, codes and regulations

 

 

 

 

 

Management

Management

Vs.

Board

Board always wants to exercise and exert power on management that widens the gap between these two important interacting parties.

Power Crisis

May work as an intermediary to consummate the so-called power that gives rise to conflict.

Management

Vs. Shareholders

Management is held responsible for maximizing values for the owners but not paid accordingly.

Mini-agency

Problem

May resolve the problem by helping to devise authority-responsibility duty relationship in a proper way.

 

 

 

 

 

Regulatory

Authorities

Regulatory

Authorities

Vs.

Board

Conflict arises on the ground of compliance of various rules, codes, principles etc. that various regulatory authorities require.

Non-compliance

May act as a compliance expert to suggest to the Board and Management regarding the ways of complying with various requirements, as they are a part of designing such requirements.

Regulatory

Authorities

Vs.

Management

 

 

 

 

 

Customers

Customers

Vs.

Board

Customers want quality product at a cheaper price, but the Board or Management

never give respect to the ‘Voice of Customers’ that

results in massive dissatisfaction

Demand – Supply

Mismanagement

Can justify the

commitment of the Board or Management to the customers, if any, through disclosures like ‘Value

Added Statement’,

‘Boards Commitment to Customer’, to reduce the dissatisfaction to a greater extent

Customers

Vs.

Management

Agency problems arise when people in different position sacrifices the corporate wide goals to materialize the personal interest. Tunneling is a situation where majority shareholders capture minority shareholders. Non-compliances originate fro m the avoidance of different local, regional and international laws, regulations, codes, treaties or other requirements. Power or ego crisis is very common at top level management which may turn hundreds years’ achievement into zero in a day.

These are the different type of problems that corporations face and bad governance gets scope to spread over the organization. The final column of the table shows accountants’ role in situation, when different stakeholders are involved with conflicts. The only requirement to get such benefit is to have a code of conduct for accountant with defined power, authority and responsibility may be in the form of a manual.

To have GCG established through the practice of accounting, some hurdles are needed to be addressed. These are the preconditions for the good interactions between the practice of accounting and the establishment of GCG. Some of such important hurdles are stated below.

  • We need a sequential and gradual move fro m ‘soft’ to ‘hard’ laws
  • Another hurdle is the designing of compensation package for different levels of management. Senior management compensation must be based on the principles of fairness, transparency and accountability.
  • Important focus should be given on balancing power of the management and the board. Board independence fro m management continues to be affected by directors who have limited accountability to shareholders, and are ill-equipped in exercising management oversight.
  • As Accounting is intentionally referred to as a vehicle for ensuring GCG, it is believed that the world should adopt a uniform global accounting standard and that is already been done through the adoption of IFRS and Transfer Pricing.

A commitment to good corporate governance in terms of, say, well-defined shareholder rights, a solid control environment, high levels of transparency and disclosure, an empowered board of directors etc. make a company both more attractive to investors and lenders, and more profitable

A study of Russian firms concludes that a worst-to-best improvement in corporate governance predicted an astronomical 700-fold (70,000%) increase in firm value.

Another study of S&P 500 firms by Deutsche Bank showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19% over a two-year period.

A study of the 100 largest emerging market companies by Credit Lyonnais Securities Asia in 2001 showed that companies with the best corporate governance in each of a large number of emerging market countries had eight percentage points higher measures of economic value added (EVA) than firms in their country average.

In conclusion, good corporate governance is a must for today’s complex and dynamic business environment to ensure long-term sustainability. So, it should be cultivated and practiced regularly within the current structure of the business.

Leave a Reply