Corporate Governance and Audit in Enron, World Com, Global Crossing, Kmart, Elan, Adelphia - Assignment Example

Corporate Governance and Audit in Listed Companies Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 Introduction 3 The principle-based corporate governance in the United Kingdom 4 Conclusion 10 References 11 Introduction Due to the rising corporate scandals, accounting misreporting, disproportionate executive compensation, mismanagement and massive accounting frauds in the public sector especially relating to companies that have listed in the stock exchange markets. Large corporations have collapsed living thousands of investors and shareholders without investments and in debt and at worse with no penny to their name as billions of dollars in share value are destroyed. Among known accounting and corporate scandals in the United States of America includes the Enron, World Com, Global Crossing, Kmart, Elan, Adelphia, Altran Technologies, Comroad, and Tyco among others as cited by Ford (2008). European corporations have not been spared either. Solomon (2007) notes that these depictions indicate a wanting corporate governing systems in order to effectively and efficiently shield investors and shareholders from the risks and the effects of accounting malpractices and misconduct among corporate management. A common element witnessed among the major global corporate and accounting frauds and scandals is the significance of failure in corporate governance illustrated by the readiness of corporate managers to inflate financial status of their companies. Through exaggerating revenues and in other instances understating costs and diverting corporate funds into personal accounts or using them for personal reasons (Agrawal, et al., 1996). This has resulted in falling investor confidence in the trustworthiness and quality of present corporate governance when it comes to financial reporting. The misconduct and accounting malpractices within public companies expose deficiency in rules pertaining corporate governance and insufficiency in accounting standards (Farrar, 2008). As a new Chief Executive Officer, Mary McDonald needs to understand corporate governance governing public companies in the United Kingdom. Both the United States and Europe have rules governing corporate governance which are meant to guide corporations, accountants and auditors in executing their roles especially in regards to presenting and offering financial information to existing and potential investors and shareholders (Ford, 2008). This forms the basis of this report, which seeks to analyze the approach taken in corporate governance among public companies in the United States and in the United Kingdom. The principle-based corporate governance in the United Kingdom The type of corporate governance applied in the United Kingdom is referred to as principle based corporate governance which is different from corporate governance in the United States which is described as rule-based corporate governance as noted by Quintyn (2012). The Financial Services Authority, which is the regulatory supervisor in the UK, shifted to an inclusive principles-based approach in the year 2003. Under the principle- based approach, companies ought to reveal the extent of their compliance with the set standards and best practices and if a company infringes or contradicts the set best practice guidelines, they are supposed to explain procedures applied to meet the aim of corporate governance hence, the element of comply or explain among listed companies (Clarke, 2007). Unlike the UK’s principle based corporate governance, the rule based corporate governance adopted in the United States is geared towards compulsory adherence to legislation and requirements of stock exchange with increased focus on regulatory enforcement than voluntary acquiescence as noted by Rezaee (2007). Due to the variance in regulatory approach in UK and in the US, there are considerable variances in the corporate governance practices adopted by either. Broshoko (2006) defines corporate governance as ways and means which investors to corporations reassure themselves on obtaining return on their investments. Corporate governance can be defined as the legal and institutional structures and mechanisms through which corporations are managed and controlled and it largely focused on the correlations among the management of the corporation with the shareholders and investors of the corporations. In addition, corporate governance helps in protecting the interests of the shareholders and minimizing the agency costs accrued from separating ownership from control (Quintyn, 2012). Effective corporate governance should ensure efficient, successful and entrepreneurial management that safeguards the welfare and the interests of the shareholders and one that ensures enhanced shareholder value in the long term (Tricker, 2012). In the United Kingdom, the framework guiding corporate governance entails company legislation, the code of corporate governance and regulations, which include listing guidelines for listed companies. Quintyn (2012) indicates that to ensure that agency challenges where those in management positions who control the operations within a corporation are not able to take out private benefits of control at the expense of the shareholder values, and to safeguard against rogue managers from appropriating company resources for personal gains, effective corporate governance based on principles is required. In the United Kingdom where the CEO will be charged with the responsibility of managing, organizing, directing, supervising and making critical decisions on key financial issues of the company, principle-based corporate governance offers guidance on how to report as a listed company. The principles of which the UK’s corporate governance codes are set ensure that there is enhanced quality participation and involvement between the corporation shareholders and the corporation to help promote long-term returns on investments made by investors and the efficient application of governance accountabilities (Plessis, et al., 2010). Among the principles underlying the corporate governance codes are that corporate investors must publicly disclose their policy on ways they will carry out their responsibility as stewards, investors of the corporations must have a comprehensive policy on dealing with conflicts of interests and the policy is disclosed publicly and the investors to corporations must monitor their investee companies (Quintyn, 2012). Quintyn (2012) outline among other principles include that investors in corporations must develop clear guidelines on the time and ways they will increase their activities as a strategy of safeguarding and promoting shareholder value. The institutional investors should be ready to take collective responsibility with other investors where necessary and they should have clear policies on voting and reveal voting activity. The seventh principle in the corporate governance codes in the UK is that institutional investors must regulatory report about their stewardship activities (Quintyn, 2012). The principles are based on the elements of leadership, relationships with shareholders, effectiveness, accountability among the internal control, audit committees and external auditors and remuneration. Agatha et al. (2010) indicates that the principles for good corporate governance offers guidelines in relation to the rights of the shareholders, equitable handling of shareholders, the responsibility of stakeholders, transparency, disclosure and the role of the management. Presently, application of the principle-based corporate governance in the United Kingdom has significantly helped in developing systems and structures that offer shareholders access to information in regards to information on activities and operations of the company and more importantly, offering legal regulations that outline the responsibility of the management and penalties for errant conduct (Quintyn, 2012). The fact that the CEO, Mary McDonald is disillusioned with the strict rules based approach and litigious nature of corporate governance and audit in the US, is informed by the fact that rules by their own nature are inflexible and they become irrelevant over time as situations changes. On the other hand, standards founded on principles offer the opportunity to apply judgment and is efficient in guiding conduct within the management as situation changes (Ford, 2008). Principles unlike rules are more difficult to evade which means that a principle-based approach becomes successful in enhancing a culture of compliance to corporate governing principles among stakeholders such as the external auditor (Broshoko, 2006). The principle-based approach compels the responsibility of applying corporate governance standards and codes on capital markets and its players instead of legislators and regulators, as is the case in rules-based approach. Just as players within capital markets, external auditors are bound by standards and codes that should inform their practice and ensures that information they generate is reliable and accurate to ensure shareholder value is enhanced long term. An external auditor refers to an auditing expert who carries out audits in compliance with established rules (Jones, 2011). Stakeholders such as shareholders, investors and government agencies depend on external auditors to generate fair, accurate and objective audit reports (Ford, 2008). When an external auditor discovers fraud, they are responsible for bringing it to the attention of the management and consider pulling out from engaging with the corporation if the management does not make the necessary actions as suggested by Agatha et al. (2010). This is necessarily in curbing accounting frauds and corporate crimes. External auditors just like their counterparts, the internal auditors; they are guided by certain code of standards and principles, which inform their decisions and actions as they execute their responsibilities. The principles for auditors are referred to as Generally Accepted Accounting Principles, which benchmarks and guide the conduct of accounting personnel as defined by Bragg (2011). Among these principles, include the principle of regularity, which advocates to adherence to established regulations, the principle of consistency, the principle of sincerity, which suggests that auditors should in good faith reflect the reality of the financial status of the company. Principle of permanence of methods, principle of non-compensation, principle of prudence, principle of periodicity, principle of full disclosure and the principle of the utmost good faith (Agatha, et al., 2010). It is apparent that principles play a significant role in informing best practice in corporate governance and in guiding activities in listed corporations. Rules as applied in rule-based approach of corporate governance focuses on precision, official equality, certainty, standardization, restraint, inescapability thus generating enhanced net social benefits compared to principles as echoed by Ford (2008). In addition, they promote democracy and constancy, which is crucial in aiding in allocation of resources effectively and efficiently. Rules unlike principles gives fixed repercussion for actions and therefore minimizes the biased tendencies and abuse of power by those in positions of control (Broshoko, 2006). Be it as it may, rules are not without their own limitations such as their inflexibility, they are reactive and they need regular alterations to meet changing situations (Anonymous). In addition, rules are in some instances over inclusive while in other cases they are under inclusive and thus allowing varied treatment of issues that are significantly similar. Rules are likely to hinder communication and understanding and generate procedural biasness (Grant & Guha, 2006). On the other hand, principles generate benefits that are in contrast to the limitations of rules. Principles offer decision makers the capacity to make their own independent decisions, they enhance substantive parity, they minimize arbitrariness, and they are flexible and are adaptable to changing situations over time and place. Principles encourage distributive motives, foster liability on the part of decision makers, are less costly to propagate, and permit decision makers to modify their treatment to the facts of specific situations. Be it as it may, principles are disadvantageous since they can be ransom, tentative and expensive for individuals to understand, and costly for decision makers to implement and more significantly, they can be manipulated as echoed by Broshoko (2006). Tricker (2012) suggests that principles-based corporate governance and outcome-oriented approach applied in UK offers listed companies an opportunity to function transparently since the approach discourage loophole conduct and ‘‘checklist’’ style approaches to law and instead fosters a more proficient and flexible approach to regulations. Application of principle-based systems in corporate governance will help counter the loopholes that exist within current regulatory frameworks guiding activities carried out by listed corporations as suggested by Grant & Guha (2006). The fact that the CEO comes from a background where rule-based approach of corporate governance is applied, the use of principle-based approach will offer her a reprieve and allow her flexibility to make decisions and more importantly ensure good relationships between the management of the listed company and its shareholders. Application of principle-based approach fosters the elements of integrity, fairness, transparency and competency (Rezaee, 2007). Conclusion The US has for the longest time applied the stringent rule-based approach in its corporate governance, which has not fully safeguarded the shareholder value from rogue managers who engage in misconduct. The UK on the other hand has applied the principle’s approach as the basis for best practice in corporate governance in order to draw a balance in separation of control and ownership. Neither approach has sufficiently covered all available loopholes although principle-based approach is more efficient and effective since it is much more flexible and adaptable to changing situations over time and place. As a person with the experience with rules-based approach and moving to a company where principle-based approach is used, the CEO should integrate the benefits of the two in order to ensure effective corporate governance systems that prevents risks and enhance long-term benefits for the shareholder. Since both approaches are not fully effective and fool proof against risks of manipulations, the CEO can integrate the aspects of rule-based approach that are beneficial with those that are beneficial from the principles-based approach. Thereby implementing a corporate governing system that not only effective and complies with best practice but also, a system which implements principles which are guided by standards and rules. This is because; it is impractical to exist on principles or on rules alone. They need each other to function effectively and efficiently where the limitations of either are adequately discarded. References Agatha, j., Wei, M., Askew, S. 2010. 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New York: John Wiley and Sons. Tricker, B. 2012. Corporate Governance: Principles, policies and practices. London: Oxford University Press. Read More