What is Corporate Governance?
Corporate governance consists of rules, regulations, practices, and principles that guide how organisations are managed and controlled. It identifies the individuals with the authority to make decisions and establishes a systematic process to address challenges in running the organisation.
Corporate governance ensures a balance between the interests of stakeholders, including investors, shareholders, customers, suppliers, the government, management, and the community. It provides a framework for achieving business objectives, covering functions from strategic planning and internal controls to corporate disclosure and corporate social responsibility.
The board of directors typically oversees corporate governance, ensuring that decisions are aligned with business objectives and regulatory requirements.
Corporate Governance and Accounting
Accounting and corporate governance are closely linked. Accounting acts as the backbone of governance, enabling transparency, accountability, and compliance with regulatory frameworks.
- Accounting ensures the accuracy of financial reporting, helping maintain stakeholder trust and reduce capital costs for the organisation.
- Accountants compile and analyse internal data to report company performance and compliance to stakeholders.
- Modern accounting leverages software tools, AI, and automated reporting systems to enhance governance and reduce human error.
Global regulations mandate strict disclosure:
- US companies follow the Sarbanes-Oxley Act (SOX) and listing rules of NYSE and NASDAQ to ensure proper auditing, board responsibilities, and financial reporting.
- UK companies comply with the UK Corporate Governance Code, issued by the Financial Reporting Council.
- Companies increasingly include ESG (Environmental, Social, and Governance) reporting as part of modern corporate governance practices.
The Role of Accountants in Corporate Governance
For an accountant, the scope of work in corporate governance is wide, and ensuring transparency and accountability in the everyday undertakings of companies is the most critical task. Accountants shoulder the responsibility of organisations in disclosing the correct information not only to the shareholders but also to the stakeholders.
Accountants play a huge role in building the trust of stakeholders in a company’s brand. In corporate governance, the role of accountants is two-old. The first is to report the flow of capital in and out of various departments and monitor the undertakings carried out with the capital and where the capital is being invested. The second is to ensure a proper framework of accountability and transparency to address the interests of stakeholders.
The role of accountants in corporate governance has been explained in details in the section below:
1. Disclosure and Transparency Management
The OECD principles of corporate governance mandate organisations to honestly disclose all information, including their financial status, performance and ownership, to stakeholders for maintaining transparency. Disclosures help improve the public understanding about a company’s structure and activities, its corporate policies and its performance.
Disclosure requirements do not usually exert any unreasonable administrative cost burden on enterprises. Moreover, companies are not expected to disclose information that may endanger their competitive position, unless the disclosure is necessary to fully inform the investment decision-makers. Accountants facilitate the timely disclosure of all material developments that arise between the regular reporting intervals.
They also support the simultaneous reporting of information to all shareholders to ensure impartial treatment. Accountants confirm high-quality standards are put in place to help stakeholders monitor the company performance, by providing increased reliability and comparability of reports and improved insights into the company performance, which, in turn, assures transparency.
2. Planning
Accountants come very handy while planning strategies for governance compliance. Companies can plan effective business strategies based on the information made available by accountants. They can decide how to function, where to invest, when to invest and how much to invest so that returns are good and stakeholders are also happy.
Accountants can help companies make effective plans regarding their growth and operations. For instance, accountants can help identify areas that are incurring more costs than returns. On the basis of this information, companies can plan growth strategies in a way that not only complies with industry regulations but also ensures good returns.
3. Public Accountability Management
Companies are accountable to the public in several ways. Organisations should meet their obligations, such as paying taxes, to the public. Based on the financial status of organisations, stakeholders consider making investments. Accountants play a major role in ensuring the data reaching stakeholders is accurate and not misrepresented.
Accountants also have to monitor processes to make sure companies are not indulging in unethical practices to present incorrect financials to the public. Accountants remind companies of the consumer demands, encouraging them to keep the public interests in consideration while formulating strategies.
4. Shareholder Accountability Management
As the name suggests, shareholders are entities who have bought at least one share of a company. Companies are directly accountable to their shareholders, as shareholders have financially invested in them and are also part owners. It is the responsibility of organisations to provide complete and detailed financial information to the shareholders.
Based on the information shared, shareholders can take further steps, such as increasing investments, disinvesting, or voting against certain undertakings that are resulting in losses. Accountants have the responsibility of carefully consolidating this financial information to present accurate figures to the shareholders.
5. Cash Flow Management
Accountants help companies not just plan long-term strategies, but they also help address short-term and everyday necessities in organisations. Maintaining a healthy cash flow is one of the major responsibilities of accountants. They draw a clear picture of how much cash a company has in-hand, which helps prioritise and take crucial financials decisions.
Based on the information sourced by accountants, companies can make decisions regarding supplies, resources and equipment in a way that doesn’t overspill their in-hand cash. Accountants also help enterprises manage their line of credit and monitor all their short-term financial resources, which assists in avoiding unnecessary debt. ‘
6. Financial Reporting and Management Reporting
Though organisations have several departments that may or may not be interdependent, all of them are bound by a common thread called accounting. Financial reporting entails the reporting of company financials to stakeholders, whereas management reporting involves internal management. Accountants have to manage both these processes and consolidate the company’s financial data to report accurate figures.
Financial reporting helps stakeholders by offering valuable insights into the company financials, whereas management reporting offers the internal management of an organisation detailed inputs and information about the state of affairs in the company. Accountants play a crucial role in helping organisations conduct both financial and management reporting.
Conclusion
Corporate governance is as much a social undertaking as a financial responsibility. Accounting walks alongside corporate governance, providing support in all its functions. Accountants help craft a vision for companies and assist in setting up proper controls, effective audit systems, proper fraud risk management solutions and accurate disclosures that comply with the international standards and best practices.
It is the responsibility of the accountant to make corporate governance the priority of enterprises, thereby ensuring the auditing and accounting tools serve the overall governance functions in companies.
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Parul is a dedicated writer and expert in the accounting industry, known for her insightful and well researched content. Her writing covers a wide range of topics, including tax regulations, financial reporting standards, and best practices for compliance. She is committed to producing content that not only informs but also empowers readers to make informed decisions.