Corporate Accountability and Governance - Literature review Example

Team Production Theory of Corporate Governance The team production theory of corporate governance relies on the principal-agent, assuming that the corporation is a "nexus of contracts". Blair and Stouts (REFERENCE) modified version theory suffers in its conceptual approach and it undermines the hierarchical model, to produce lower transaction costs rather than the single-owner approach and associated shareholder primacy (primary?) norm. Under the principal-agent account, the shareholders possess an exclusive property right to the firms residual product and possess the incentives to monitor the performance of the team. The shareholders do not become involved in transactions. They contract specialized individuals to make the transactions on their behalf. This separates the shareholders from assuming direct responsibilities on a daily basis. The principal-agent concept is a "team production theory" as Blair and Stouts (REFERENCE) propose. Researchers and experts in corporate governance practices reject the principal-agent concept assumed by the public corporation by modifying and extending the team production theory. These are viewed useful when used with the activities performed by the team. (Albert, 2004, 45) Discussion The corporate governance and the accountability over the environment imply that corporations become good environmental citizens. A number of state and federal environmental legislations have been enacted during the past two decades holding the corporations accountable for their environmental obligations. The reporting of environmental costs and obligations has been debated within the accounting profession and authorities. According to Johnson [1, p. 118], the environmental obligations total hundreds of billions of dollars. (Berle, 2003, 51) The environmental costs and obligations are increasing as the society becomes more environmentally conscious, governmental regulations pertaining to environment issues increase, and corporations are held responsible and accountable. The corporate accountability for environmental outlays and the accounting treatment for measurement, recognition and disclosure of environmental costs and obligations, should be addressed clearly. The primary purposes of this article are to: • Examine the significance of the environmental outlays; • Discuss existing laws, regulations, and accounting standards on environmental reports; • Investigate the current accounting practices of environmental costs and obligations; and, • Make recommendations to measure, recognize, and disclose environmental costs and obligations. (Demsetz, 2005, 155) In February 1993, the Federal Deposit Insurance Corporation issued Guidelines for an Environmental Risk Program. These guidelines require banks to investigate and review the hazardous waste conditions of properties held as security by the lending institution. It expects that banks review and approve environmental risk factors to identify and evaluate potential environmental concerns associated with lending practices and related to liabilities, and hold real estate properties as collateral. (Fama, 2003, 327) The legislations authorize the federal government through the Environmental Protection Act (EPA) to examine those responsible for contamination to clean up the site or reimburse the costs of clean-up. The (ditto) (CAAA) requires that the public utility agencies enforce the companies to comply with the minimum of pollution allowances established by the guidelines. Non-compliance with the environmental legislations will hold the violating parties responsible and accountable for their actions. The EPA endorsed the concept of environmental auditing in its policy statement issued in July 1986. This emphasizes the importance of auditing to ensure that corporations comply with the environmental rules and regulations. (Johnson, 2003, 118) In Australia, the EPA of 1990 adopted an integrated pollution control (IPC) procedure in an attempt to minimize the effects of all releases and emissions of pollution on the environment. The IPC adopted two concepts, the best available techniques not entailing excessive costs and the best practicable environmental option. They encourage companies to be good environmental citizens by adopting environmental procedures and their economic impacts. (Kelly, 2000, 11) In 1991, the Australian Standards Institutions issued, “the environmental management system” to prevent environmental damage by including the use of environmental auditing. The environmental management system 7550 (BSI 7550) assists corporations to identify and asses environmental effects of existent or propose activities, accidents and potential emergency situations. (Scherer, 2006, 69) The accounting pronouncements in the United States do not provide adequate and specific guidance for recognition, measurement, and disclosure of environmental outlays. The existing accounting standards, however, address broad liabilities and loss contingencies in the financial statements. The Statement of Financial Accounting Standards (SFAS) No. 5[8] relates to environmental matters and it requires the recognition of liability when it is probable that an obligation exists and its costs can be reasonably estimated. (Shepherd, 2001, 66) The SFAS No. 5 [8], however, does not provide guidance to measure loss contingencies related to environmental outlays since it was not issued with that intention. The SFAS No. 5[8] does not provide adequate guidelines to measure, recognize, and report environmental costs and obligations, because it requires that a liability may not be recognized until after a disaster occurs. (Shleifer, 2001, 385) The Financial Accounting Standards Board Interpretation (FIN) No. 14[9], and the SFAS No. 5[8] require that an environmental outlay be recognized if it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. (Vancil, 2001, 81) Research in the area of environmental reports, indicates that the environmental obligations of corporations exceed hundreds of billions of dollars, yet the accountants have not addressed the issues to suffice the measurement, recognition, and disclosures of environmental outlays. These costs may be incurred for remediation, abatement and/or prevention under environmental laws and regulations such as CERCLA, the Superfund Act of 1980, CWA/SDWA of 1972, FIFRA, TSCA of 1976, EPCRA of 1976, RCRA of 1976, CAAA of 1990, BSI of 1991 and FDIC of 1993. These legislations primarily address four types of environmental liabilities: Soil contamination; groundwater contamination: surface water contamination; and air emissions and these should also be disclosed in their annual report. (Walsh, 2000, 421) Shortly after March 1989 when the Exxon Valdez oil spill occurred, several influential environmental organizations in the United States underwent a major effort to redirect corporate environmental priorities and ensure the corporations′ accountability regarding environmental issues. They established the Coalition for Environmentally Responsible Economies (CERES) in an attempt to persuade companies to adopt ten principles of corporate environmental responsibility. These principles are intended to minimize environmental damages and ensure that the responsibility fall into the corporate governance. These ten principles are: Protection of the biosphere; Sustainable use of natural resources; Reduction and disposal of waste; Wise use of energy; Risk reduction; Marketing of safe products and services; Damage compensation; Disclosure; Environmental directors and managers; and, Assessment and annual audit. (Walsh, 2000, 422) The corporations need to comply for a cleaner environment and maintain their status of good environmental citizens. In addition, the (ditto) SEC requires that companies file a report if pollution expenditures have a material effect on their earnings. In compliance with SEC′s regulation (ditto) (S-K) companies have to disclose the following environmental information: The material effects complying with the environmental laws and regulations on capital expenditures, earnings, and competitive position; Any environmental litigation pending or known to be contemplated by a government authority; and, Any other material and relevant environmental information. (Vancil, 2001, 82) To determine the corporations´ compliance concerning the environmental laws and the Valdez principles, 1992 annual report, 30 companies were selected and examined. Management discussed and analyzed the annual report including the financial statements and the independent auditors′ reports to determine the extent to which the information provided was in compliance with the environmental laws and principles. (Shleifer, 2001, 386) Companies explicitly mentioned in their “Management discussion and analysis” section that they intend to comply with or exceed local, state and federal standards. They, however, do not provide evidence to support their intentions to meet the legislation standards. It was found that the boards of directors of many companies voted against implementing the CERES principles. (Shepherd, 2001, 67) The studied companies reported that costs to meet the environmental standards are not fixed or determined due to the constant changes in legislation governing the environment. The majority of the studied companies mentioned in their annual report, that the resolution of pending governmental actions and the citizens′ actions would not have a material effect on their consolidated financial statements. (Scherer, 2006, 70) Over 53 per cent of the studied companies have been identified as being a potentially responsible party for the remediation of hazardous-waste sites under (ditto) (CERCLA). Yet these companies are slow in making charges against their earnings. Conclusion The team production theory of corporate governance has its pros and cons. Although this seems to be the case this researcher believes that by having an inclusive frame work it gives leeway for all parties involved to have a say to protect the environment and the corporations finances as they need to be included in their annual report. The corporations have the obligation to save the environment against contamination and pollution, however when it comes to having to disperse funds for cleaning up spillage they have not been able to evidence their input into this matter when it comes to the financial statements. Authorities have to develop plans in which they are able to enforce the legislations, rules, and regulations. By having inadequate accounting guidelines will let the corporations slip into the vacuum. The team production theory of corporate governance will work if all involved have the same frame of thought. If all are concerned with environmental issues; assume responsibilities for their consequences if they do not comply with legislation, rules, and regulations; and, assume proactive responsibilities concerning the financial liabilities when confronted with environmental issues. Having to write annual reports to satisfy those that read them is not sufficient. There has to be a responsible entity that will seek that these corporations comply with their responsibilities to maintain this world a livable environment. References Albert, M. (2004). Corporate Governance in Australia: Australian Journal of Accounting: 98: p45 Berle, A.A. (2003) The Modern Corporation and Private Property: Corporate Governance Journal: 12: p51 Demsetz, Harold. (2005). The Structure of Corporate Ownership: Causes and Consequences: Australian Journal of Economy: 12: 155 Fama, Eugene F. (2003) Australian Agency Problems and Residual Claims: Journal of Law and Economics 2: p327 Johnson, L. T. (2003). Research on Corporate Governance and Accountability in Australia: Accounting Horizons: p118-119 Kelly, C.C. (2000) Superfund: what every manager should know: Public Management: 8: p11-12 Scherer, Frederich M. (2006). Industrial Market Structure and Economic Performance: Sydney: Oxford University Press: p69-70 Shepherd, William G. (2001) Public Enterprise: Criteria and Cases: The Structure of Australian Corporate Governance and Accountability: Dordrecht: Kluwer Academic: p66-67 Shleifer, Andrei. (2006). Corporate Governance in Transition: Australian Economic Review: 41: p385-386 Vancil, Richard M. (2005) Passing the Baton: Managing the Process of Accountability: Cambridge, MA: Harvard Business School Press: p81-82 Walsh, James P. (2000). On the Efficiency of Internal and External Corporate Control Mechanisms: Australian Academy of Management Review: 15: p421-422 Read More