What is Corporate Governance?
Corporate governance refers to rules, regulations, practices, and principles on the basis of which organisations are managed and controlled. It identifies individuals who have the power and authority to make decisions in an organisation. In its truest form, corporate governance is a systematic process that enables the management and the decision-makers of an organisation to tackle the challenges associated with running the organisation. It ensures a balancing act between the interests of companies’ stakeholders, including investors, shareholders, customers, suppliers, the government, the management, and the community. Corporate governance offers a management framework for achieving a company’s business objectives, and it entails every management function, ranging from business planning and internal controls to corporate disclosure and corporate social responsibility. The most important task of corporate governance is to ensure the industry-wide rules, regulations, controls, and policies that dictate the corporate behavior of companies, are set in place. The corporate governance in organisations is usually managed by the board of directors who shoulder the responsibility of making the right calls for improved business functions.
Corporate Governance and Accounting
Corporate governance and accounting walk hand in hand; one cannot function without the other. Good corporate governance has become the deciding factor that enables companies to maintain a strong financial position in their respective markets. Most corporate governance failures in events across the globe have usually found the accounting department at fault. The accounting department is the gatekeeper of all corporate governance activities in organisations. Good corporate governance builds the faith of customers in companies, thereby leading to lower capital costs in investments. Accounting is the key enabler of good corporate governance and is considered an effective means of improving corporate governance in organisations. Accounting professionals periodically compile data to report companies’ internal activities to stakeholders. However, all accounting processes in organisations are rigorously controlled and monitored by certain global standards and regulations. The industry-wide regulations make it mandatory for companies to disclose certain information to the general public. For instance, companies in the US have to strictly follow the Sarbanes – Oxley Act (SOX) and the revised listing rules for the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) to comply with the industry regulations on financial disclosures, committee and board nominations and auditing policies. Similarly, enterprises in the UK have to follow the rules mandated by the UK Corporate Governance Code that was published by the Financial Reporting Council of the UK. Over the past few decades, several instances of corporate dishonesty have surfaced, which have led to more stringent corporate governance norms and policies. For example, in Nigeria, Cadbury Schweppes, a major global player in the confectionery and beverage markets, was fined a whopping 21.2 million naira for presenting incorrect account details between 2002 and 2005.
In cases such as these, accounting can help clear the picture for organisations by undertaking several tasks. It helps set up a clear code of conduct as per which the governance processes in organisations should be carried out. It is the role of the accountant to ensure a fraud risk management program is in place, conduct regular assessments of the company’s risk exposure and implement prevention techniques to avoid fraudulent activities and mitigate their impact, if any. The accountant should appoint an executive-level member from the management team who will be responsible for dealing and addressing the concerns related to fraud. The accountant should also identify security gaps in the organisational framework and formalise the roles and responsibilities of the board members, the audit committee and the personnel involved in fraud management and prevention.
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:
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.
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.
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.
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.
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. ‘
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.
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.