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Unit 14 Accounting Finance Theories & Issues Assignment
Diploma in Business
Unit Number and Title
Unit 14 Accounting Finance Theories
This report has been prepared on the topic which relates to the corporate governance system prevalent in various countries located at different parts of world. The statement is given which states the system of corporate governance which has been implemented universally throughout the world is based on the objective that ensures that the companies in different countries establish themselves as good corporate citizens.This means accounting financial that this system shall enable them to prevent the scandals of corporate governance which have recently affected many companies worldwide. Thus by identifying and comparing the corporate governance systems in various countries, this report clearly evaluates the effect of these systems on the corporate existence and performance of companies and how these systems help in the prevention of scandals that are taking place frequently. This accounting finance theories assignment report includes a background of the system of corporate governance, comparison and contrasting of these systems in different countries, meaning of corporate citizen and evaluation of statement. This is explained in context of four countries which are United Kingdom (UK), United States of America (USA), Australia and India. The background of the system in these countries and their comparisons is included for better understanding along with evaluation of these systems in different countries.
Topic 1 - Corporate Governance system
Corporate governance system refers to as the policies and procedures, systems, rules and code which is used to provide direction to the company and determine the method by which company is controlled it majorly focuses on effectively handling the relationship of company with its stakeholders in a perfect and balanced way. The stakeholders of a company include a large group of people comprising of customers, suppliers, investors, shareholders, contractors, financial institutions, government, society and community etc. The scope of corporate governance includes areas of internal controls, management actions, corporate disclosures and performance of management in context of overall interests (Bucur, 2015). The pivotal role under the system of corporate governance is played by the Board of Directors through the management of company since they are elected by the shareholders being the owners of company and thus they represent the shareholders to safeguard their interests. The major components of corporate governance system are as follows:
- Composition of Board – This area of corporate governance system focuses on the manner in which the board of the company shall be structured so it includes both executive and non-executive directors of company. The concept of independent director and women director to be included in the Board of Directors has also been incorporated in the system of corporate governance to ensure that the decisions of Board are independent and not biased. The aim of effective structuring of Board is to ensure that there is no external or internal influence on the decisions taken by the members of Board together as a team.
- Internal audit – This concept includes the adoption of all the procedures and policies which help in checking the relevance of internal controls, ensuring the legal and regulatory compliances, monitoring and control processes and audit of transactions and records so that the accounting records, financial information and annual reports of the company are free from errors, omissions and material misstatements. The objective of internal audit is to monitor the ethical issues so that the social responsibility of the company is discharged in the best interest of company.
- Managing risks and compliances – This element of corporate governance focuses on the processes and methods that shall be undertaken by the company for management of its risks and other regulatory, legal and legislative compliances. The aim of this is to prevent the imposition of fines, penalties and compensation for the failure of discharge of legal duties and compliances by the company. In this way the legal and ethical responsibilities of the company to be performed by the managerial and executive personnel are covered in this element so that the risks and losses of the shareholders are minimised and controlled.
- Stakeholder relationship and engagement – This component of corporate governance system covers the procedures of handling the relations of company with its major stakeholders including customers, investors, suppliers, creditors, shareholders, financial institutions, government, employees and other external parties. The aim of corporate governance structure is to direct the governance practices in a way that healthy relationship with the stakeholders is established avoiding the conflict of interests.
- Executive remuneration – The objective of this element of corporate governance is to define the standards and policies for the determination and payment of remuneration to the managers and executives of the company covering the remuneration and other compensation payable to the directors with the view of establishing unfair remuneration and compensation policies against the organization as well as employees (Hermalin, 2012).
Corporate governance system in different countries
- United Kingdom :It is the Combined Code which is known as the UK Corporate Governance Code and is used as a code of conduct to set standards for best practices with regards to board leadership, effectiveness of board functions and operations, standards for remuneration of mangers and other executive personnel, accountability of the company officials and the relationship of company with their shareholders. All the companies listed in UK with Premium Listing of equity shares have to compulsorily report the manner and extent up to which they have applied the Code and its principles in its annual report and accounts under the UK Listing Rules.
- India:Corporate governance in India is the legislative requirement for the companies which are listed on a recognised Stock Exchange of the country and the shares of which are traded publicly, under Clause 49 of Listing agreement as per the provisions of Securities Exchange Board of India (SEBI). Thus every company registered under the Companies Act 1956 or Companies Act 2013 has to follow the guidelines and marketing principles prescribed under the corporate governance mechanism. It suggests the proportion for the composition of Board of company including executive and non-executive directors, requirement of minimum number of independent directors and formation of committees such as Audit Committee, Nomination and Remuneration committee, Stakeholders Relationship Committee etc., in order to effectively implement the rules and principles of corporate governance. The system aims at the sustainability of corporate bodies through efficient governance and protecting the interests of its stakeholders without affecting the economic, financial and environmental structure of the country adversely (Chung, 2010).
- Australia:The corporate governance mechanism in Australia is the tool which drives the performance of companies listed and operating in the country. It is the legislative requirement for the companies listed ion Australian Stock Exchange and is regulated by the Australian Securities and Investment Commission (ASIC). A Corporate Governance Council has been established by the ASX which reviews the regulatory guidance of corporate governance along with ASIC through speeches at events, publication of reports, regulatory guides, information sheets and articles in external publications. This system helps the companies and its managerial persons and officials in managing the risks and checking the duly compliances by the compliance officers.
- United States of America (USA):In USA, the system of corporate governance is composed of and based upon the principles which relate to the maximization of wealth of shareholders of companies rather than providing guidance on the fu8nctions and actions to be undertaken by the Board for the protection of interests of all the stakeholders of company. The statues and legislations which regulate the principles of corporate governance are Sarbanes-Oxley Act 2002, Securities and Exchange Commission and guidelines and policies framed and imposed by the Stock Exchanges of the country such as NASDAQ, New York Stock Exchange (NSYE) etc. The basic idea is that the organizations shall be managed in accordance with a legislative and regulatory framework so that the investors are likely to invest their stake in the company. On this basis the valuation of the company’s growth and performance potential in terms of profitability will be measured. The emphasis of shareholders ions more since USA is a capitalistic country and thus the other stakeholders are not much engaged and are not likely to interfere. On the other hand the money of the investors and shareholders is being `involved and is at stake therefore they have the right to make selection of personnel to manage their company and its operations (Crane, 2016). Thus the US model of corporate governance separates ownership from governance which is much similar to the Indian model as discussed above.
Financial Reporting Council (FRC) through UK Corporate Governance Code under UK Listing Rules
Securities and Exchange Board of India (SEBI) under Clause 49 of Listing agreement and Stock Exchanges such as National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
Australian Securities and investment commission (ASIC)
Securities Exchange Commission (SEC) and other stock exchanges such as NASDAQ and NYSE.
Defining set of standards to follow best practices
Separating ownership from governance
Follow of regulatory guidelines and principles for management
Wealth maximization of shareholders
UK Listing rules
Clause 49 of Listing Agreement
Provisions of Corporate Governance Council and ASX
Sarbanes Oxley Act, 2002
Area or scope
Company accounts, annual reports, risk management, stakeholder relationship
Board composition, formation of committees and effective governance
Company operations, governance, risk management and compliances
Shareholders wealth maximization and effective performance
Corporate citizen and corporate governance
Corporate citizenship is a concept which ensures that the corporate bodies established in a country complies with their duty to be the part of country as a bonfire citizen. Citizen is a person who lives in a country or has a place of establishment in a country which defines his residential status with that country. Corporate bodies are the business establishments formed by a group of persons to achieve a common goal of earning long term profits and wealth maximization through conducting a business or providing services to consumers. As the corporate bodies have a place of establishment of their business in a specific country, therefore they are regarded as the corporate citizens of a country. This gives rise to the concept of corporate citizenship which specifies that every corporate citizen shall perform its duty towards the country to which it belongs with regards to environment protection, accountability towards the stakeholders and general public. Health and safety of every citizen, social responsibility and protection of rights and interests of individuals and others through avoiding the use of unfair and illegal practices. Thus, corporate citizenship involves social responsibility of businesses and meeting of ethical and legal requireemnts. The global corporate citizenship is based on four pillars which include value of business, its protection, creation and evaluation (Lin, 2010).
Corporate governance is linked with the concept of corporate citizenship in a way that they both focus on building public trust and manage the risks of businesses imposed by internal and external factors through effective governance structure which aims at achieveing the objectives by fulfilling the social and ethical responsibility. The aims of bioth these concepts coincide with each other including achieving good governance by doing minimum harm to others and ensuring compliance of legal and ethical issues with the overall obkective of fulfilling the social responsibility and corporate accountability as a part of society and communitry of the country. In this way the compliance of duties and responsibilities, being a responsible citizen of country of establishment through protecting the interests of other citizens as well aligning the corporate objectives with social responsibility (Sheehan, 2013).
Evaluation of statement
The given statement discusses about the aim of the universal system of corporate governance which has been implemented worldwide by different countries in different parts of the world. The aim so to fully ensure that these companies establish themselves as better corporate citizens through implementation of corporate governance mechanisms within their policies, procedures and operations so that the corporate events and scandals happening in different economies of world can be prevented since they have the potential to adversely affect the performance and reputation of these companies financially as well as operationally in the global market. This not only influences the company but also the countries of operation and economy of those countries.
Recent corporate governance scandals (2015) and their causes
- Volkswagen Emission Scandal – Under this scandal the company lied to its customers with regards to pollution controls in the vehicles due to which it was alleged of corporate fiascos and frauds. The scandal was the result of non-compliance of social and ethical responsibility to be discharged as a corporate citizen since the company violated the laws of pollution control and environment protection on one hand and lied to customers on the other hand.
- FIFA corruption scandal – Under this the FIFA officials were alleged by FBI for racketeering, fraud and other offences on the ground of charges from United States, the country where the popularity of soccer was even less than rest of the world. The officials were suspected of taking bribes in exchange of granting the rights for broadcasting the games. It not only affected the FIFA officials but also sponsors such as Coca Cola and Mc Donald’s which the largest corporations of America are.
- Toshiba Accounting Scandal – This scandal was the result of overstatement of earnings by around $2 billion during the seven years period which was more than four times of the actual estimate made in April. This was due to the corporate culture in the company under which the decisions taken by management could not be challenged.
- From the analysis of reasons of above mentioned scandals, it can be observed that the major cause of scandals is the poor governance structure and lack of adherence to social and ethical responsibility of companies under the corporate citizenship mechanism. For example the Toshiba Scandal would not have taken place if the corporate governance system would implement by the company which guides the process for decisions of management and prevents influential and biased decisions (Lewis, 2016). Thus it can be said that through effective universal corporate governance system and corporate citizenship, the corporate scandals can be prevented in the companies all over the world. Hence the given statement is correct as evident from the recent corporate scandals that evolved in the year 2015.
From the above discussion in context of the given statement about the effectiveness of corporate governance system and corporate citizenship established universally in preventing the corporate governance scandals, it can be concluded that corporate governance system is an effective tool or code of conduct which helps in determining the guidelines and principles which shall be followed by companies throughout the world to ensure that their responsibilities towards the stakeholders, society and country are accomplished and corporate accountability is undertaken. The comparison of corporate governance system in the four countries including UK, USA, India and Australia suggests that the corporate governance system of all these countries have a common goal of increasing business value and maintaining healthy stakeholder relationship through discharging social, ethical, legal and other responsibilities effectively. Also it can be concluded that the corporate governance system can be used as a universal concept to prevent the corporate frauds resulting in disasters and scandals which adversely affect a large number of people worldwide.
Bucur, I. 2015, "A new corporate governance", Manager, vol. 22, no. 1, pp. 277-281.
Chung, K.H., Elder, J. & Kim, J. 2010, "Corporate Governance and Liquidity", Journal of Financial and Quantitative Analysis, vol. 45, no. 2, pp. 265-291.
Crane, A. & Matten, D. 2016, Business ethics : managing corporate citizenship and sustainability in the age of globalization, Fourth edn, Oxford University Press, Oxford.
Daghie, D. 2011, "Corporate Governance", EIRP Proceedings, vol. 6, no. 1, pp. 66-71.
HERMALIN, B.E. & WEISBACH, M.S. 2012, "Information Disclosure and Corporate Governance", The Journal of Finance, vol. 67, no. 1, pp. 195-233.
Kusumaningtias, R., Ludigdo, U., Irianto, G. & Mulawarman, A.D. 2016, "Rethinking of Corporate Governance", Procedia - Social and Behavioral Sciences, vol. 219, pp. 455-464.
Lewis, K. 2016, "Adoption of corporate governance recommendations", Governance Directions, vol. 68, no. 6, pp. 329.
Lin, C., Lyau, N., Tsai, Y., Chen, W. & Chin, C. 2010, "Modeling Corporate Citizenship and Its Relationship with Organizational Citizenship Behaviors", Journal of Business Ethics, vol. 95, no. 3, pp. 357-372.
Ntongho, R.A. 2016, "Culture and corporate governance convergence", International Journal of Law and Management, vol. 58, no. 5, pp. 523-544.Sheehan, M. 2013, "Corporate Citizenship: Good for Business; Good for Employees", Leader to Leader, vol. 2013, no. 70, pp. 26-31.