Financial Accounting and Corporate Governance - Research Proposal Example

?Financial Accounting and Corporate Governance Table of Contents Table of Contents 2 Introduction 3 Research Objectives 6 Research Approach 8 Data Collection Sources 10 Sampling Method 10 Theoretical Background 11 Bibliography 16 Introduction Jacques du Plessis & Et. Al. (2010) observed in the ‘Principles of Contemporary Corporate Governance’ that “Corporate Governance refers generally to the legal and organisational framework within which, and the principles and processes by which corporations are governed. It refers in particular to the powers, accountability, and relationships of those who participate in the direction and control of a company. Chief among these participants are the board of directors and management. There are aspects of the corporate governance regime that have an impact on the relationship between shareholders and the company” (Jacques du Plessis & Et. Al., 2010). The regulators and legislators in the United States have realised that transparency is essential to inspire trust and confidence in the business. The Sarbanes-Oxley Act was passed in 2002 by the United States Congress to protect the interest of the investors by making corporate disclosures more accurate and reliable (Hoffman & Rowe, n.d.). Corporate governance helps in integrating the choices and the actions of the managers with the shareholders’ interests. Financial accounting plays an important role in this integration process. Corporate governance can be thought of in terms of the outsider’s perspective or the shareholder’s perspective. The organisation consists of a hierarchy which includes shareholders, board of directors and managers. Responsibility is delegated to the various entities in the hierarchy. Corporate governance simply involves alignment of interest of all these entities. Two kinds of agency problems arise whereby the alignment of interest may occur between managers and the board but not the shareholders and alignment between the board and the shareholders but not the managers. The financial accounting system resolves these agency problems. They provide useful information to directors and shareholders (Armstrong, 2009). Corporate governance plays an important role in promoting transparency in an organisation. There are various approaches to corporate governance which result in various theories. The objectives of the organisation are set by the owners or the directors in the agency theory. Managers have the responsibility of execution of the objectives. Structures and processes are designed to enable control of management. The theory holds that individuals are rational and egoists and thus managers cannot remain faithful to the owners. The managers can resort to diversion of corporate resources to fulfil their selfish needs unless an external control is placed on them. The owners or directors can be considered as the principle in the agency theory. The action is originated by the principle and he bears the responsibility for the action. The principle does not always execute the objective himself. He may employ an agent to act on his behalf. The managers are the agent and should behave ethically and should avoid conflict of interests. Compliance with rules is essential and a minimum threshold exists for the acceptable behaviour. According to the stockholder theory the organisation is merely a property of stockholders. Stockholders take an egoistic view. The owners channelize the members of the organisation towards the achievement of their interest. The owners expect a return from the investments they have made in the organisation. Managers have the duty to function in a manner in order that return is maximised. Strategies are implemented to ensure faithfulness on the part of the managers. The stakeholder theory focuses on all the stakeholders of the organisation. All the stakeholders function in a manner to maximise their self interests. The managers have the responsibility to balance out the conflicting interests of various stakeholders. The managers are faithful agents of all the stakeholders (Clarke, 2004). According to the Stewardship theory, the employees and the managers are the stewards of the organisation. This theory is based on the social approach and building social capital through formation of social unions. Owners need to provide a collaborative environment to the managers. Managers act as ‘caretakers’ (Frey & Cruz-Cruz, 2010). The purpose of the research paper is to analyse the corporate governance practices across a few companies known for their ethical business practices to understand what measures have been undertaken in the companies in order to ensure accountability and transparency. Research Objectives The primary research objective is to analyse the importance of corporate governance in enhancing transparency and accountability in an organisation and the role of financial accounting in ensuring proper corporate governance in organisations. The purpose of the research is to develop a conceptual understanding of corporate governance and how corporate governance is effectively implemented in organisations to ensure better financial accountability and how does it help in protecting the interests of the shareholders. The research will also involve an in-depth analysis of the impact of the corporate governance practices in the organisations and how it has helped the organisations to match up to ethical standards. The research will also analyse on whether effective corporate governance has ensured higher returns for the shareholders and can control unethical practices in the organisation. The conflict of goals that may arise in the companies among the owners, the shareholders and the managers while adopting corporate governance practices and how those conflicts are resolved will be analysed. Research Questions The key research question is how efficient financial accounting practices and implementation of proper corporate governance help in protecting the interests of shareholders. Another crucial research question is how transparency and accounting disclosures help in controlling corruptive practices in organisations. Research Methodology The research involves analysis of five diverse companies across different sectors and analysis of the corporate governance practices in these organisations. The research involved interviewing the various stakeholders of the organisation. The shareholders, the board of directors and the managers in these organisations were interviewed. A structured self administered survey was also used. The survey was also administered on the various stakeholders of the organisation. Research Approach A deductive research approach will be adopted for the research purpose. Hypothesis and theories will be developed which will be tested through empirical observations. A set of theories are developed which are tested on the real world to determine their validity. In the words of Saunders it is “development of a theory that is subjected to a rigorous test” (Crowther & Lancaster, 2008). The research begins with the idea that proper financial accounting and effective corporate governance in an organisation can help in protecting the interest of the shareholders. This idea will be tested through the research conducted on the five companies known for their ethical practices and sound corporate governance. The research would be qualitative in nature. Qualitative research involves studying things in their natural setup. The validity of qualitative research is improved by triangulation methods and analysis of data by a large number of independent researchers. It involves judging things in their context and is an exploratory approach. Qualitative research involves maintaining a holistic approach. The various variables interact in their natural setting (Key, 1997). The research would involve a qualitative approach and will be conducted in the form of interviews. Observations will also be made on the corporate governance practices across various companies and the ethical standards and corruptions that occur in an enterprise. Quantitative research, on the other hand, is initiated with a hypothesis and is followed by measurements to generate data that can help in deduction to reach a probable solution. Quantitative research involves repetitive measurements to validate a hypothesis. Quantitative research generates reliable data (Greenhalgh & Taylor, 1997). Objective data are used in quantitative research. A survey with the help of questionnaires would be used for the quantitative research purpose. A mix of open ended and closed ended questions would be used. A subjective research approach would be undertaken to get a clear idea on the concept of corporate governance and the practices followed in various organisations. The research to a great extent analyses the subjective experiences of various stakeholders of the organisation. The research involves analysis of the viewpoint of the stakeholders on whether they consider that corporate governance is effective in their organisation or not and what improvements in financial accounting can be brought in the organisation in their viewpoint. Data Collection Sources The research would involve analysis of data obtained from both primary and secondary sources. The primary data is collected from the first hand sources and through experiences and observations of the researcher. The primary data can be collected through surveys. The surveys are an economical and efficient method of collecting data. Both mailed surveys and online surveys may be used in this research. This is because mailed surveys may not be responded by the respondents. Interviews will also be used for collection of the primary data. The people who will be interviewed are the board of directors, the shareholders and the managers. The secondary data is available from a large number of sources. The print sources that will be used in the research are newspapers, periodicals, journals and books. The online available sources include online data related to the companies being researched (Guffey & Loewy, 2009). Sampling Method Judgmental sampling will be used for this research purpose. Since the researcher has prior knowledge about the reason for the research, the respondents that are being used and the population, therefore judgmental sampling method will be adopted. A wide selection of respondents is made in this sampling method. The sample selected is a subset of a wider sample. This method of sampling is also known as purposive sampling (Babbie, 2010). Theoretical Background According to a research paper, “Transparency, Financial Accounting Information, and Corporate Governance” by Bushman (2003), three channels have been identified through which the financial accounting information affects the value of investment and productivity. In the first channel, investors and managers use the accounting information in order to identify lucrative investment opportunities. In the second channel, the financial accounting information is used in ‘corporate control mechanism’ that involves the decision of manager in redirecting resources from bad to good projects. In the third channel, information asymmetries are reduced between the information received by various investors. An absence related to reliable as well accessible information primarily in an economy hinders the flow related to human and financial capital toward the sectors that are expected to have high amount of returns and generally away from the sectors that are expected to have poor prospects. The paper establishes the impact of the financial accounting information on economic performance and transparency (Bushman & Smith, 2003). The paper “Financial Accounting” by Teall (2008) discusses the relation between financial accounting and corporate governance. Financial accounting enables the external stakeholders to take crucial decisions by providing them useful financial information. Corporate governance deals primarily with the manner in which the company is managed, the accountability of the board and that of the management. The paper deals with concepts related to corporate governance, agency problems and corporate control. The paper establishes a clear idea on the concept of corporate governance. The article “A Survey of Corporate Governance” by Shleifer (1997) describes the basic purpose of corporate governance in organisations and how it can ensure that shareholders get proper return on their investment. There is conflict regarding bad or good corporate governance mechanisms. The paper discusses on replacement of Anglo-Saxon systems with the corporate governance systems of Japan and Germany. The paper tries to present different views on the effectiveness of the existing corporate governance practices (Schleifer & Vishny, 1997). According to Porta’s (2000) “Investor Protection and Corporate Governance”, the differences that exist between various companies in terms of ownership concentration, dividend policies and access to finance by the companies is due to the differences that exist in terms of investor protection. The paper involves a legal approach in understanding corporate governance across various companies. This approach is considered as expected continuation related to the field that has developed over a period of 40 years. The paper establishes the factors that determine how well the investors are protected (Porta & Et. Al., 2000). A research paper published by Hills Governance Center (2005), “Towards Improved Corporate Governance: A Handbook on Developing Anti-Corruption Programs”, discusses on how improvements can be brought about in the field of corporate governance. The paper discusses on how bad governance can be avoided in the private sector and how corruptive practices can be dealt with. The paper highlights the corruption that occur in various organisations and what measures could have prevented them (Hills Governance Center, 2005). References Armstrong, C. S., 2009. Agency Conflicts between Managers, Boards, and Shareholders: Governance. The Role of Information and Financial Reporting in Corporate Governance and Contracting. [Online] Available at: http://mitsloan.mit.edu/jae/pdf/Session_II_Armstrong_Guay_Weber.pdf [Accessed February 3, 2011]. Babbie, E. R., 2010. The Practice of Social Research. Cengage Learning. Bushman, R. M. & Smith, A. J., 2003. Introduction. Transparency, Financial Accounting Information, and Corporate Governance. [Online] Available at: http://public.kenan-flagler.unc.edu/faculty/bushmanr/202rbus.pdf [Accessed February 3, 2011]. Clarke, T., 2004. Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. Routledge. Crowther, D. & Lancaster, G., 2008. Research Methods: A Concise Introduction to Research in Management and Business Consultancy. Butterworth-Heinemann. Frey, W. & Cruz-Cruz, J. A., 2010. Approaches to Corporate Governance. Different Approaches to Corporate Governance. [Online] Available at: http://cnx.org/content/m17367/latest/ [Accessed February 3, 2011]. Greenhalgh, T. & Taylor, R., 1997. What Is Qualitative Research? How to Read a Paper: Papers That Go Beyond Numbers (Qualitative Research). [Online] Available at: http://ed.isu.edu/SSPE/reading%20qualitative%20researdh.pdf [Accessed February 3, 2011]. Guffey, M. E. & Loewy, D., 2009. Essentials of Business Communication. Cengage Learning. Hoffman, W. F. & Rowe, M., No Date. Abstract. Internal Ethical Communication and Transparency: The Role of the Corporate Ethics Officer. [Online] Available at: http://www.bentley.edu/cbe/documents/internal-ethical-communication-transparency%5B1%5D.pdf [Accessed February 3, 2011]. Hills Governance Center, 2005. Foreword. Towards Improved Corporate Governance: A Handbook on Developing Anti-Corruption Programs. [Online] Available at: http://www.rvrcvstarr.aim.edu/Library%20CV%20Starr/Center%20Publications/Towards%20Improved%20Corporate%20Governance.pdf [Accessed February 3, 2011]. Jacques du Plessis, J. & Et. Al., 2010. Principles of Contemporary Corporate Governance. Cambridge University Press. Key, J. P., 1997. Characteristics. Qualitative Research. [Online] Available at: http://www.okstate.edu/ag/agedcm4h/academic/aged5980a/5980/newpage21.htm [Accessed February 3, 2011]. Porta, R. L. & Et. Al., 2000. Investor Protection and Corporate Governance. Journal of Financial Economies. Schleifer, A. & Vishny, R. W., 1997. Abstract. A Survey of Corporate Governance. [Online] Available at: http://www.jstor.org/pss/2329497 [Accessed February 3, 2011]. Teall, J. L., 2008. Accounting and Corporate Governance. Financial Accounting. [Online] Available at: http://www.rpi.edu/~tealj2/acct01.pdf [Accessed February 3, 2011]. Bibliography Calder, A., 2008. Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Publishers. Colley, J. L., 2003. Corporate Governance. McGraw-Hill Professional. Colley, J. L., 2005. What is Corporate Governance? McGraw-Hill Professional. Knell, A., 2006. Corporate Governance: How to Add Value to Your Company: A Practical Implementation Guide. Butterworth-Heinemann. Learmount, S., 2002. Corporate Governance: What Can Be Learned From Japan? Oxford University Press. Libby, R. & Et. Al., 2010. Financial Accounting. McGraw-Hill Companies, Inc. Millstein, I. M., 1998. Corporate Governance: Improving Competitiveness And Access To Capital In Global Markets: A Report To The OECD. OECD Publishing. Monks, R. A. G. & Minow, N., 2008. Corporate Governance. John Wiley and Sons. Stickney, C. P. & Et. Al., 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. Tricker, R. I. & Tricker, B., 2009. Corporate Governance: Principles, Policies and Practices. Oxford University Press. Weygandt, J. J. & Et. Al., 2009. Financial Accounting. John Wiley and Sons. Read More