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Increasing importance of corporate governance
Increasing importance of corporate governance
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Context and Background
One of the foremost objectives of any business is profit maximization; each and every organization wants to run a profitable and sustainable business activity alongside satisfying the needs of its customers. It wants to set a mark, and be differentiated amongst its competitors whilst increasing its market share value.
However in regards to the prospects of profit maximization, every business must ensure that it adheres to a strict code of conduct, enforce internal controls and abide by set rules and regulations. Corporate governance refers to such a system by which companies are controlled and governed by. It provides a core set of guidelines and principles towards compliance of regulations in the corporate environment with business being conducted in fairness and integrity (Thomson, L. 2009). It monitors that the transactions and overall operations of a business are carried out in an ethical manner with transparency and no ambiguity. Furthermore, it looks into the company’s management and its effectiveness, the governing committees, and relations with shareholders (FRC, 2011).
In recent times, corporate governance has gained interest due to the deceptive and misleading business practices. Businesses falsify the disclosure of their financial statements in order to improve profitability. In such transgression, many have been found victims of accounting fraud and corporate scandals. Since the bankruptcy of Enron and WorldCom, 2 of the biggest scandals in history, governing bodies all around the world have taken a major stand in development of austere standards such as the Sarbanes-Oxley Act in the US and the Corporate Governance Code in the UK (Labaton, S. 2006).
In addition, this strict enforcement has...
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...porate accounting scandals. Although the indices provide an overall rating, individual variables must be looked into. Other corporate governance mechanisms which serve as determinants are a key to measuring efficacy of the framework. Subsequently, the actions of the management and board of directors must be deeply taken into consideration as they might be prone to fraud and risk adherence in order to secure higher compensations. Segregation of duties must be ascertained in terms of the various committees on the board such as nominations, remuneration, and audit. Also into consideration should be if the corporate structure is performing collaboratively as a unit or not (Arguden, Y. 2010). Lastly, the culture and control environment should be assessed in order to give an oversight of the company’s internal operations including the code of conduct and policies within.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
Consistent accounting and financial frauds in the U.S. alerted the SEC to the imperative need for policy and corporate governance changes. The Sarbanes-Oxley Act in 2002 was enacted to encourage financial disclosures, enhance corporate responsibility, and combat fraudulent behaviour. This Act also helped create the PCAOB, which oversees the auditing practice (Stanwick & Stanwick 2009).
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Most companies’ primary goal is to maximise profit in order to remain competitive in the market. The concern usually arises in the measures and approaches companies take to achieve that goal and how it will benefit in the short-term and long-term process. (Eccles, 2011)
Ethics continues to be a hot issue in the business world. The focus on business ethics grew after several significant business scandals beginning in the millennium. These scandals prompted the government to pass new accounting regulations to increase the control and accuracy of financial reporting. A prominent piece of legislation is the Sarbanes-Oxley Act of 2002, which applies to publicly traded businesses. The basis of Sarbanes-Oxley is to increase the reliability and accuracy of financial reporting (Noreen). At the time of these scandals, many businesses and individual professions already had ethical and accounting standards in place. Subsequently, more businesses have developed ethical codes of conduct.
Sarbanes-Oxley Act was enacted following a prolonged period of corporate scandals involving large public companies from 2000 to 2002, this was to restore investors confidence in markets and close loopholes for public companies to defraud investors. This act has had a profound effect on cooperate governance in the US, it requires public companies to strengthen audit committees, perform internal controls tests, set personal liability of directors and officers for accuracy of financial statements, and strengthen disclosure. The Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 (SOX) was implemented because of all of the corporate scandals of the recent years were uncovered. SOX were put into place because it forces companies to pay more attention to internal controls. This system forces the company’s responsibilities on corporate executives and boards of directors to make sure that the companies’ internal controls are effective and reliable and less than one part of the law, companies must develop sound principles of control over financial reporting. The companies must continually develop and check sound principles of control over financial reporting and that the system is in working condition. Independent outside auditors must attest to the level of internal control. In addition, SOX also developed the “Public Company Accounting Oversight Board”, (PCAOB) which now establishes auditing standards and regulates auditor activity. Some corporate executives have complained about the expense and time that has involved in following the requirements but 60% of the investors believe that this is a good system and would not invest in a company that does not follow SOX.
Corporate financial and ethical misconduct is been documented in the media across many types of business and government over the years (Palmer, 2013; Wickham & O'Donohue, 2012). Most corporations have a Code of Ethics as a guideline for employees
Bibliography: Turnbull, S. (1997). Corporate governance: its scope, concerns and theories. Corporate Governance: An International Review, 5 (4), pp. 180--205.
The end of 2001 and the start of 2002 saw the end of a period of magnified share prices and booming businesses. All speculations of misrepresentation came to light and those firms which once seem unconquerable were now filing for bankruptcy. Within this essay, I shall discuss the corporate governance mechanisms and failures which led to the Enron scandal resulting in global corporate governance reforms being encouraged.
A spate of shattering corporate collapses, particularly among large listed companies despite their annual reports and accounts have raised numerous issues in corporate governance. The corporate meteoric rise and fall was associated with serious deficiencies in its corporate governance, including weaknesses in internal control, financial reporting, audit quality, board’s scrutiny of management. The collapse of a number of businesses have several important lessons on the role of corporate governance in preventing corporate collapse with the subject of increasing regulatory measure. Considering this, on 30 June 2010, a revised version of corporate governance principles and recommendations with 2010 amendments was issued to provide guidance to companies & investors on best practice of corporate governance and to increase the transparency of a listed company. These principles are not strictly binding “hybrid regulation” but generally entail some form of sanction if they are not followed the approach of the ASX is an ‘if not, why not’ approach where companies are asked to (1) detail whether they comply with each best practice recommendation and (2) explain why they do not comply if this is the case.
Solomon, J (2013). Corporate Governance and Accountability. 4th ed. Sussex: John Wiley & Sons Ltd. p.7, p9, p10, p15, p58, p60, p253.
This paper discusses the role of ethics in corporate governance. I seek to show the application of moral and ethical principles in corporate governance. Ethics is a topic that has generated a lot of interest in the last decade especially after high profile scandals. The failures of prominent companies such as WorldCom, Enron, Merrill lynch and Martha Stewart portrays the lack of corporate ethics. The failure of such business has seen an increased pressure to incorporate ethics in corporate governance. The result of corporate scandals has been eroding investor and public confidence. The entire economic system has experienced some form of stress from loss of capital, a falling stock market and business failures.
The office of the Director of Corporate Enforcement (ODCE, 2015), Ireland defines Corporate Governance as “the system, principles and process by which organisations are directed and controlled. The principles underlying corporate governance are based on conducting the business with integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions and complying with all the laws of the land”. It is the system for protecting and advancing the shareholder’s interest by setting strategic direction for the firm and achieving them by electing and monitoring the capable management (Solomon, 2010). It is the process of protecting the stakes of various parties that have their interest attached with a company (Fernando, 2009). Corporate governance is the procedure through which the management of the company is achieving the goals of various stake holders (Becht, Macro, Patrick and Alisa,
Corporate governance is the set of guidelines that determines the control and organization of a particular company. The company’s board of directors is in charge of approving and reviewing changes to this set of formally established guidelines. Companies have to keep in mind the interests of multiple stakeholders, parties who have an interest in the company. Some of these stakeholders include customers, shareholders, management, and suppliers. Corporate governance’s focus is concentrated on the rights and obligations of three stakeholder groups in particular: the board of directors, management, and shareholders. Corporate governance determines how power is split between these three stakeholders. A company’s board of directors is the main stakeholder that influences the corporate governance of a company (Corporate Governance).