Corporate Governance and Accounting Ethics - Essay Example

Corporate governance and financial reporting The purpose of this essay is to identify and analyse ment, “Corporate governance and accounting ethics are crucial factors in determining the integrity of disclosures in published financial statements”. The essay supports this statement and suggests that the principles of accounting ethics and corporate governance promote the integrity of disclosure of financial information. The essay identifies the principles of accounting ethics as contained in the code of ethics as: integrity, objectivity, professional competence and due care, professional behaviour and confidentiality. These principles ensure that the interests of stakeholders and the society at large are met through transparent, objective and honest disclosure of financial information. The principles of corporate governance include conditions for effective governance, rights of shareholders, equitable treatment of shareholders, disclosure and transparency, and role of board of directors. These principles mainly ensure that the rights and interests of shareholders and other stakeholders are met. “Corporate governance and accounting ethics are crucial factors in determining the integrity of disclosures in published financial statements” Introduction Professional accounting activities require good ethics and corporate governance. Ethics and corporate governance interact in Australian and international business community to enhance good integrity of disclosure in financial statements of various companies and organisations. Accounting ethics and corporate governance include various aspects such as professionalism, transparency, fairness, efficiency, quality and involvement (Rezaee 2012). When these aspects are combined, they result in integrity of disclosure in the accounting profession. Ethics and corporate governance are therefore effective if they adopt certain principles and apply best practices such as integrity, honesty and fairness. This report provides an analysis of the role played by accounting ethics and corporate governance in determining the integrity of disclosures in published financial statements. It explains how ethical accounting and corporate governance can be used to avoid fraudulent accounting practices and unreliable disclosures in published financial statements. This analysis utilizes past research and Australia’s accounting code of ethics to analyse corporate governance and accounting ethics as effective practices of professional accounting. It also incorporates examples into the analysis in order to enhance good understanding of the key concepts of accounting ethics and corporate governance. Main Analysis Role of Corporate Governance and Accounting Ethics Corporate governance refers to the system and process of directing and controlling business organisations (Lessambo 2014). The main role of corporate governance is to ensure that there is an effective distribution of rights and responsibilities among different members of an organisation including the board, shareholders, managers, employees and other stakeholders. Corporate governance defines the relationship between a corporation and its shareholders and the society at large. Corporate governance ensures that the actions taken by managers of the corporation are consistent with shareholders’ interests (Ahrens 2008). Corporate governance also builds trust within and outside the organisation, and ensures that the organisation confronts the challenging environment in order to implement its strategies successfully and achieve its objectives. Ethical accounting is also a crucial aspect of effective management in organisations. Ethical accounting enhances proficiency of regulatory regimes, compliance with legal requirements, and responsible corporate behaviour and operations. Ethics in accounting ensures that accountants act professionally with honesty, fairness and integrity in order to provide reliable financial information in the organisation’s financial statements (Short et al 1999). This enables the users of financial statements to obtain relevant information for effective decision making. Accountants need to follow a specific code of ethics in order to ensure that they uphold integrity and fairness in their financial reporting activities. Accounting ethics also influence decision making in organisations because they provide reliable information. Overview of Code of Ethics for Professional Accountants (CPA) APES 110 Code of Ethics for Professional Accountants (CPA) consist of several requirements and principles that should be followed by professional accountants when providing accounting services. The main principles that individuals need to comply with in the code of ethics are: integrity, objectivity, professional competence and due care, professional behaviour, and confidentiality. The conceptual framework of the code is applied by professional accountants through identification of threats, evaluation of the significances of those threats, and application of safeguards. Some of the threats identified by the code include self-interest threat, self-review threat, familiarity threat, intimidation threat and advocacy threat. Some of the safeguards that can be applied against those threats include professional, regulatory and environmental safeguards. Accounting ethics and the integrity of disclosures in published financial statements Accounting ethics determine the integrity of disclosures in published financial statements in several ways. These can be examined or analysed in terms of the fundamental principles of ethical accounting as contained in the code. The accounting profession is essentially characterized by the responsibility to act in public interest and satisfy the needs of various stakeholders. The integrity of disclosures in financial statements is determined by the ability of the application of accounting ethics principles to meet the interests and needs of various stakeholders. Because such stakeholders are also the users of financial information, accountants need to act ethically by promoting the interests of the public. This leads them to disclose relevant, true and fair financial information in the financial statements of the organisation. Professional accountants are required by the code of ethics to comply with five principles of accounting ethics: integrity, objectivity, professional competence and due care, professional behaviour and confidentiality (Arjoon 2005). Integrity requires accounting professionals to act in a straightforward and honest ways in all business and professional activities and relationships. This allows the accountants to disclose financial information in financial statements with integrity and transparency; hence promoting good disclosure and use of financial information. Another ethical principle that determines the integrity of disclosure in published financial statements is objectivity. This involves avoidance of bias, undue influence, and conflict of interest. It requires accountants to avoid activities that override professional and business judgments (Kolk 2008). Objectivity therefore enhances integrity of disclosure because it allows accountants to provide financial information that is free of bias in order to allow stakeholders to make appropriate decisions concerning the organisation. Professional competence and due care are also important ethical principles that determine the integrity of disclosure in published financial statements. Because published financial statements are intended to be used by the public, it is important for accounting professionals to use high level of competence and due care in order to meet the interest and needs of the public and other users of published financial information (Demosthenous et al 2011). Competent professional services in accounting should be based on developments of the practice and prevailing accounting regulations and professional standards. The accountants should therefore act diligently and apply all the necessary accounting principles to provide effective disclosure of published financial information. Confidentiality is therefore required as an accounting ethical practice in order to enhance good disclosure of published financial information. Professional and business relationships require confidentiality of information. Professional accountants are therefore required not to disclose information about a company to third parties without proper authority (Farrall & Rubenstein 2009). The information in published financial statements should therefore contain only information that they have professional right and duty to disclose. Professional behaviour is also another ethical principle that enables accountants to disclose financial information in published financial statement appropriately. Professional behaviour allows accountants to comply with relevant accounting laws and regulations (Arjoon 2005). They should also avoid behaviour that may discredit the accounting profession. This leads to integrity of disclosures in published financial statements. Corporate Governance and the integrity of disclosures in published financial statements There are also certain principles of corporate governance which determine the integrity of disclosure in published financial statements. One of the principles of corporate governance is provision of conditions for effective governance. This principle promotes market efficiency and transparency. It determines the responsibilities of various authorities; hence encouraging integration of stakeholders and other participants in the market (Shah 1996). Supervisors, implementers and regulators should have the necessary integrity, authority and resources to perform their duties objectively and professionally. Transparent and justified decisions should also be made by managers of corporations in order to enhance integrity of disclosure in published financial statements. Corporate governance is also concerned with the protection of shareholders’ rights such as transfer and exchange of shares, obtaining and use of relevant information, participation, and voting (Vinten 2003). Protection of the rights of shareholders therefore enhances the integrity of disclosure in public financial statements because shareholders use the information contained in the financial statements to make investment decisions and to exercise their rights as owners of the company. Equitable treatment of shareholders is also another principle of corporate governance. This allows shareholders to obtain redress for the violation of their rights. This principle protects shareholders from abuse by the manager, controlling shareholders or board of directors. In terms of accounting, accountants are required to treat all shareholders equally by providing relevant information that serves the same purpose to all shareholders without bias. This principle therefore promotes the integrity of disclosure in public financial information. Corporate governance also recognizes the roles of stakeholders as stipulated by law or through mutual agreements (Du et al 2010). This increases the participation of various stakeholders in financial reporting of the organisation so that the interests of all stakeholders are considered when disclosing financial information of the organisation. Stakeholders should be given a good access to public financial statements and free communication. The role of the board should also be considered as essential corporate governance principle that determines the integrity of disclosure in public financial statements. For example, the board of directors monitors the effectiveness of the company’s management and governance practices (Redmond & College of Law 2004). This includes monitoring the effectiveness of financial statement disclosures. The board ensures that there is integrity in accounting and financial reporting of the organisation. It also ensures that control systems within the organisation are effective. As a result, integrity of disclosure in public financial statements is enhanced through monitoring and evaluation by the board of directors. Another principle of corporate governance is disclosure and transparency. This requires the organisation to present significant financial information in due time. The information that should be disclosed includes operational and financial results of the organisation, board’s remuneration policy, and risk factors (Brueckner & Ross 2011). This information is presented transparently in order to promote integrity of disclosure in public financial statements of the organisation. Conclusion In summary, it is clear that corporate governance and ethical accounting play crucial roles in determining the integrity of disclosures in public financial statements. In terms of ethics, there are five ethical principles that guide the accounting practices of organisations in order to enhance integrity of disclosures. Such principles include integrity, professional competence and due care, confidentiality, objectivity, and professional behaviour. These ethical principles play an important role in determining integrity of disclosures in public financial statements. For instance, integrity enhances honesty in business relationships which in turn leads to disclosure of relevant financial information to the appropriate users. These ethical principles ensure that the interests of various stakeholders of the organisation are met. The principles of corporate governance also determine the integrity of disclosure in public financial statements. Such principles include: conditions for effective governance, rights of shareholders, equitable treatment of shareholders, disclosure and transparency, and role of board of directors. These principles mainly ensure that the rights and interests of shareholders and other stakeholders are met. As the governing board attempts to provide equitable treatment to shareholders, integrity of disclosure in public financial statements is enhanced. References list Ahrens, T. 2008, “The hidden ethics of corporate governance and the practical uses of corporate governance codes: a commentary on Bhimani”, Journal of Management & Governance, Vol. 12, No. 2, pp. 149-152. Arjoon, S. 2005, “Corporate Governance: An Ethical Perspective”, Journal of Business Ethics, Vol. 61, No. 4, pp. 343-352. Brueckner, M., & Ross, D. 2011, Under corporate skies: A struggle between people, place, and profit, Fremantle Press, Fremantle, W.A. Demosthenous, M., Psaros, J., Henderson, S., Peirson, G., Herbohn, K., Harris, K., Goldwasser, V. and Pearson Australia 2011, Governance, sustainability and ethics. Pearson Australia, Frenchs Forest, N.S.W. Du, P. J.J., Hargovan, A., & Bagaric, M. 2010, Principles of Contemporary Corporate Governance, Cambridge University Press, Leiden. Farrall, J.M., & Rubenstein, K. 2009, Sanctions, accountability and governance in a globalised world, Cambridge University Press, Cambridge. Kolk, A. 2008, “Sustainability, accountability and corporate governance: exploring multinationals reporting practices”, Business Strategy and the Environment, Vol. 17, No. 1, pp.1-15. Lessambo, F.I. 2014, The international corporate governance system: Audit roles and board oversight, Palgrave Macmillan, Basingstoke, Hampshire. Redmond, P., & College of Law (Sydney, N.S.W.). 2004, Corporate governance: A review of ASX principles and some key practical issues. The Continuing Professional Education Dept., College of Law, St. Leonards, N.S.W. Rezaee, Z. 2012, “Corporate governance and ethics education: Viewpoints from accounting academicians and practitioners”, Advances in Accounting Education: Teaching and Curriculum Innovations, Vol. 13, pp. 127-158. Shah, A.K. 1996, “Corporate Governance and Business Ethics”, Business Ethics: a European Review, vol. 5, No. 4, pp. 225-233. Short, H., Keasey, K., Wright, M. and Hull, A. 1999, “Corporate governance: from accountability to enterprise”, Accounting and Business Research, Vol. 29, No. 4, pp. 337-352. Vinten, G 2003, Corporate governance - corporate mandate. Bradford: Emerald Group Pub. Read More