Corporate Governance & Ethics - Essay Example

Corporate Governance & Ethics in Accounting Name: Course: Instructor: Date: Corporate Governance & Ethics in Accounting Introduction Corporate Governance & Ethics in Accounting involves all the practices that are directed to ensure that corporate are managed effectively. This takes the form of organizations taking conscious steps in minimizing fraud, wastages, as well as management malpractices that may bar them from reaching their objectives, or may lead them to a closure. Organizations which have loosened their nuts on issues of ethics, and acceptable corporate practices have succumbed to losses, cases, and a number of them such as Arthur Andersen came to a closure. This essay digs further into the issues of corporate governance and ethics that should be upheld by corporate in their management functions, and specifically in accounting and financial reporting. Corporate Governance & Ethics in Accounting 1.1. Corporate Governance & Ethics in Accounting & the Theories of Corporate Governance, and Ethics In the past, many corporate have been victimized through accounting malpractices. Many are the companies which can be traced back to have experience huge losses, or have come to their dead end after false financial reporting was conducted by the auditors. Cases of collusion between the external auditors and company directors, as well as intentional adjustment of figures by the auditors have caused a number of multinational organizations to lose on business, while some have been subjected to heavy financial obligations, alongside those that lose credibility and thus closing down (Bhimani, 2008, p. 140). Various theories have been advanced on corporate governance, and ethics, as scholars make the attempt to find lasting solutions to the corporate challenges including ethical challenges with regard to decision making, and financial reporting. All over the world, an increased number of corporate organizations have tried to instill the sense of governance into their corporate structure. This is because with the surge of capitalism, many corporate organizations have developed stronger corporate structures in their bid to evade succumbing to the manipulations (Canella, 2003). The fundamental theories in corporate include; 1.2. Theories of Corporate Governance & Ethics The Agency Theory This theory has its roots in economic theory was advanced by Alchian and Demsetz (1972). The theory is defined to explain the relationship that exists between the principals of corporate organizations. The principals in this case include the shareholders, the managers of the corporate, as well as the agents hired to perform other duties. The theory holds that the shareholders who are the owners of the company hire agents to do various tasks, and thus tasks can only be done professionally and wed. The theory argues that the challenges of corporate management, and ethical challenges often occurs due to the shareholders expecting agents to take up decisions on their behalf, and on their interest, however at times the agents do not make decisions in the best interest of the shareholders, and thus corporate challenges come up (Clark, 2004, p. 44). Stewardship Theory This theory is based on sociology and psychology. In the perspective of its proponents, the stewards includes company executives and managers, who are employed by the shareholders, for the purposes of protecting, and boosting up the profit margins of the corporate organizations for the shareholders. This theory stresses not on the perspective of individualism, as advanced in the Agency theory, instead it stresses on the role of top management as stewards, and thus they should be able to integrate the goals of the organization with their own goals. The theory suggests that the stewards are motivated upon helping the organization to meet its objectives, and integrating their goals as part of the organization. The stewardship perspective suggests that stewards are satisfied and motivated when organizational success is attained. The theory is said to reduce the agency costs, through giving the managers a better role of being stewards, thus safeguarding shareholder’s interests. Resource Dependency Theory This theory puts emphasis on the role of the board of directors, specifically in providing access to resources of the organization. This is opposed to the view of creating relationships between the owners of the organization and the shareholders. A number of proponents of the theory contend that the contend theory has put its focus on the role directors play in with regard to the provision of essential resources to an organization, through the connections that they develop with the external environment. This is done to minimize cost, as well as to avoid giving the managers an opportunity to engage in corporate malpractices. It is argued that this theory gives more room for ethical decisions to be made by the stakeholders (Clark, 2004, p. 48). PART 2 The purpose of having independent and external audits by various corporate organizations may vary, however we have universal reasons why most of the corporate organizations would have preference for employing external and independent auditors to audit their financial records. First, external and independent auditors are employed by corporate organizations to verify that the reported annual financial records have captured a true and fairer picture of the state of finance of the organization. The external auditors have a high degree of independence that gives them room to give an independent view of the records that have been processed by the accountants, and they are able to also certify that the records portrays a true picture with regard to the financial position of the organization (Annas. 2003) Secondly, external and independent auditors also play a big role in ascertaining that the funds that were budgeted, and set aside for particular use were spent in accordance to the objects by which they were set aside for. They are able to identify the monies that were misappropriated, as well as the accounts that cannot be verified. The prime role of the external auditors is to detect fraud, through the checks that they will carry out on the unaudited records. The third purpose of employing external and independent auditors to audit the financial records is for the purposes of increased credibility of the financial records for the financial year. Credibility of the financial records is very important for corporate organizations in business because through it, investors can be attracted, as well as it shows the clients of the commitment of management to maintain acceptable corporate practices that are recognized by law. Such audits significantly support good corporate governance, and ethical decision making. This is because there are many issues in managerial accounting which have ethical implications. This is one of the reasons why the Institute of Management Accountants has provided ethical guidance in the practice of accounting through developing Standards for Ethical Conduct for Management Accountants. Most of the issues relating to ethics, and ethical decision making in accounting, as well as in management; relates to the issues which involve objectivity, competency, confidentiality, and integrity (Shleifer, & Vishny, 1997) Without external and independent auditing practices, the corporate organizations provide an opportunity for the managers to get involved in managerial manipulation, as well as other unethical conducts in managing information, as well as resources of the corporate organizations, and this leads to the organizations making great losses, loosing reputation, or even closing down completely. Managerial unethical conduct often is committed due to the loopholes that are found within the system of management, and particularly with regard to financial reporting. The external and independent auditors are able to bring to light the errors in reporting, as well as expose out the malpractices. This plays a big role in promoting good corporate governance in organizations. Arthur Andersen’s corporate culture changed over a number of years, and this led the company to have challenges which accounted to its closure. The change of culture that took place over a period of 15 years makes Arthur Andersen to have made history as one of the organizations that gradually went to the drain through a series of changes in culture that gave room for managers to get involved in malpractices, as well as the getting involved in wrong financial reporting. The change in culture took a long period of time (15 years). This began when the managers of Arthur Andersen broke away from their unique culture that was characterized by carefulness in recruitment and selection, as evidenced through its practice of enculturing new employees, through mentoring. The shift began with the introduction of a social structure characterized by personal, social culture that was characterized by increased "familial" relationships among the Company’s stakeholders (Balasubramaniam, 1999, p. 34) Next, Arthur Anderson went through a period characterized by a relaxed approach to the tightly intergrated cultural system, which happened through the eighties to the wake of the 1990’s. Explicitly, crisis began at Arthur Andersen with the development of a culture of greed. This led to many of the directors of the company shunning away from the founding principles and values of the firm. The problems grew to making of mistakes in judgments, and particularly in financial reporting, at Erons, and finally there came a period of unraveling the truth of the inside happenings, which led the image of the company to go into drain, making many people to sell their shares. The conflicts in the public accounting system employed by Andersen worsened the situation, as the company went through a legal suit, which it lost at the district court, but the time the supreme court reversed the ruling, most of the shareholders of the company had opted out thus the company came to a closure (Williamson, 1996, p. 43). Sarbanes-Oxley Act of 2002 was passed by the Congress in the United States in the year 2002 to protect the investors from any possibility of fraudulent accounting practices that is undertaken by corporate organizations. The drafting and enactment of this act came as a result of the huge losses that many investors had lost after the closure of large multinationals in the United States such as the Enrons, which had led to thousands of people losing their investments, as well as many more thousands losing their jobs. The act was made to protect the investors from taking liability of the bad accounting practices by managers particularly with regards to the issues of false financial reporting (Alchian & Demsetz, 1999, p. 54). In the year 2002, when the Act was enacted by the then President Bush, a number of investors had already been victimized through the losses they encountered, after a number of them were compelled by the courts to sell off their rights, while some lost reputation and thus they lost their potential clients thus succumbing to their closure. It was argued that the Act would be instrumental in ensuring that in the event that a corporate organization was proved to have engaged in false financial reporting, then the investors of the company should be secured so that they do not lose their investment factored in the corporation through purchase of shares (Clarkson, 1995). Basically, the Act was passed by the Congress in the United States for the purposes of protecting the investors from any possibility of getting involved in fraudulent accounting procedures, and processes. This was because the Act mandated strict reforms with regard to financial disclosures with to be regard to vital financial information among the corporate organizations. In other words, the Act was made with a specific purpose to prevent accounting fraud which had began to spread in the United States. It is evident that the group that is most affected in the event that false financial reporting has been reported are the shareholders, and this jeopardizes the will of the investors to put their money into business. In the bid to protect the investors from this kind of experience, the act was passed to protect this group of investors who were prone to be victimized by the malpractices of false financial reporting. The Act was to provide the basis by which truth and rust in financial reporting could realized. The attempt to restore truth and trust in financial reporting was intended to improve the confidence of the investors, and protect the investors from the worry of losing out on their investments, in the event that similar events such as the one that affected Enrons, and Arthur Andersen. The act attempted to restore truth and truth in financial reporting through the provisions of the Sarbanes-Oxley Act (Clarkson, 1995). Section 302 of the Sarbanes-Oxley Act plays a big role in an attempt to restore truth, and trust in financial reporting through giving an exclusive mandate for the senior managers of the corporate organizations to certify the accuracy of any reported financial statement. This section is instrumental also in protecting the companies from getting involved in fraudulent financial reporting activities, for the senior managers have now been given the mandate to certify the accuracy of any reported financial statement. The implication of this provision is that any reported financial report will not be admissible by the law, and thus cannot be effected for its truthfulness cannot stand the proof of the law. This further implies that such type of reporting cannot be trusted. Section 404 requires that the auditors and the managers establish internal controls, as well as methods of reporting the adequacy of the controls in financial reporting. This section has costly implication for the companies (specifically the publicly traded companies), due to the highly expensive internal costs (Maisenbach, 2006, p. 43). From the three answers, it is clear that external independent auditors play a critical role in ensuring that good corporate governance is sustained. This is because the external auditors are able to act as a control mechanism against the vice of mis-repo rting financial records. Also, it is clear that law is critical in protecting the sharehol ders from being victimized through bad reporting. Finally, the Sarbanes-Oxley Act that was passed by the congress in the year 2002 has also played a crucial law with regard to protecting the investors from false financial reporting (Maisenbach, 2006). Conclusion In conclusion, good corporate governance & ethics in Accounting plays a critical role in ensuring that the managers involved in accounting, and financial reporting make ethical decisions so that they are liable for the losses that accrue due to under or mis-reporting of financial records. From the paper, it is clear that good corporate governance will involve the managers taking responsibility to abide by the statues, as well as the acceptable standards of practice of accounting, and management of financial records. References Annas. J. (2003) “:Virtue Ethics and Social Psychology”. A Priori, Vol. 2, pp. 20 Alchian, A.A. and Demsetz, H. (1999). Production, Information Costs and Economic Organization. American Economic Review, Vol. 62, pp. 772-795. Balasubramaniam, 1999. “An International Perspective on Corporate Boards and Governance”, Malaysian Insurance Institute, London. Bhimani, A. (2008) “Making Corporate Governance Count: The Fusion of Ethics and Economic Rationality”. Journal of Management and Governance, Vol. 12, No. 2, pp. 135-147. Clark, T. (2004) “Theories of Corporate Governance”, Routledge, London. Clarkson, M. (1995). “A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance”. Academy of Management Review, Vol. 20, No. 1, pp. 92-117. Crane. A and Matten. D. (2007) “Business Ethics. Oxford University Press, London. Canella, A. (2003) “Corporate Governance: Decades of Dialogue and Data”. Academy of Management Review, Vol. 28, No. 3, pp. 371-382. Maisenbach, J. (2006) .Discourse Ethics and Principle of Universalization as a Moral Framework for Organizational Communication, Management Communication Quarterly, Vol. 20, No. 1, pp. 39-62. Shleifer, A. and Vishny, R.W. (1997) “A Survey Of Corporate Governance”. Journal of Finance, Vol. 52, No. 2, pp. 737-783 Williamson, O. (1996). The Mechanisms of Governance. Oxford University Press, Oxford. Read More