The New Chief Executive Addressing the Concepts and Principles - Assignment Example

Table of Contents Introduction 2 Objective of the report 2 Corporate Governance 2 Proper Disclosures 3 Proper Monitoring & Governance 4 Proper Use of Accounting Policies 4 Fair & Transparency 5 Agency Theory 5 Stewardship Theory 6 Stakeholder Theory 7 External Audit 7 Financial Reporting 8 Code of Conduct for Auditors 8 Ethical Behavior for Auditors 9 Conclusion 9 References 10 Introduction Businesses all around the world have realized the importance of the corporate governance and being ethical in their dealings especially after the bubble burst and the recent financial crisis. This has increased the importance of corporate governance and businesses look towards using different theories and models to ensure that they are ethical and have a code of conduct to follow. This makes it important that organizations working in the US look to develop and follow a code of conduct which ensures that the firm apart from being ethical follows a code which helps in proper corporate governance. The value of corporate governance will enhance by involving external auditors but it is important that a code of conduct is provided for the external auditors and have a liability associated with it in case they don’t follow the code of practices which has been prescribed. This will help to fix responsibility and help the organization is conducting their daily operations easily. Objective of the report To identify the concepts and procedures governing corporate governance so that the applicability to business can be understood. To identify the role of external auditors and ensuring that a code of rule is developed for external auditor so that liability can be determined. Corporate Governance Corporate governance ha gained relevance in the US and all the economies around the globe due to the different benefits that business look to have due to it. The importance of corporate governance is very high in the US after the bubble burst which made the economy slide into a downturn. The bubble burst affected the US economy and made the prices of houses to go down which has increased the importance of corporate governance (Ryuhei, 2009). Corporate governance helps the business to look towards taking proper decisions so that the organizations look after the customers, employees, and community and share holders (Silva, 2004). This has made organization follow the different models and principles that governs corporate governance so that the business is able to conduct their daily affairs easily. Proper Disclosures Corporate governance policies will help the business to ensure proper disclosures of the different transactions that the firm is involved into (Mitton, 2001). This will help the customers, stakeholders, employees, customers, and others associated with the company to get a fair idea about the manner the company is performing. This will result in proper disclosure of material information which will have an effect on the decision making of investors. An example where the firm lacked proper disclosure can be seen in case of Enron where the company didn’t disclose all material information which finally led towards the collapse of Enron and the company had to file for bankruptcy (Austin, 2008). This results in denting the public confidence. Also, the strict rules in the US governing corporate governance makes it important that businesses look towards concealing all material information so that the business is able to perform efficiently. Proper Monitoring & Governance US have prescribed a code of conduct which firms operating in the US have to follow which transforms into better corporate governance. Organizations thereby have to ensure that all material information is disclosed as monitoring results in finding the minute details and if any material facts are concealed it could lead towards serious problems (Judd, 2010). Also, the importance of monitoring has improved as involvement of world bodies like WTO and other governing bodies have ensured that firms look to comply with the norms of corporate governance (Moxey & Priddy, 2008). This ensures that the promises made to the stakeholders are looked after and having a proper mechanism which ensures monitoring multiples the importance of proper corporate governance as it benefits the business over a long period of time. Proper Use of Accounting Policies Another important aspect of corporate governance is to ensure that correct accounting policies and norms used by the business. US have increased the stress on proper accounting policies as the recent financial crisis and failures of banks like Lehman Brothers have increased their concerning that direction (Econbrowser, 2009). Organizations should look forward to disclose all information regarding the method of accounting followed, the depreciation methods used and other important methods which can guide the performance and help to improve corporate governance. This is an aspect which has been laid stress upon as it ensures that the business works for the wellbeing of the stakeholders and the objective of the society is kept above the private interest. This will thereby ensure proper corporate governance and help the business is developing a framework where they perform their duties effectively. Fair & Transparency This is one of the most important aspect of corporate governance as disclosing all material information ensures that the investors are not cheated and provided with an opportunity based on which their investment decision can be taken (Grant, 2005). This would help the economy and investors could get correct information thereby adhering to corporate governance. This can be seen from the fact that the US economy requires that businesses looking for a loan have to submit audited financial statement for at least two years and the proposed balance sheet for the next three years which helps the loan provider to find out the financial strength (Poskitt, 2005). This helps to bring fairness and transparency in the dealings and disclose all relevant information. This thereby ensures that the firm is fair and follows a principle of transparency so that the business doesn’t benefit at the cost of the investors. Agency Theory This is one theory which helps the business to ensure proper corporate governance in the organization. According to this theory businesses have to look towards having agents who will work on behalf of the stakeholder and will receive an incentive for the role fulfilled by them (Nicholson, 1998). This theory also requires that the role of the executive manager and board of directors are differentiated as it will help to ensure that the external agent works on behalf of the stakeholders. Having different roles between the executive manager and board of directors will help to reduce the problems that the agents might encounter and will help him to fulfill his responsibilities easily. Also, the firm has to ensure that the business encounters agency cost by hiring people from outside the organisation who audits the performances, communicates with the shareholders regarding the changes and brings forward issues which might harm the shareholders (Fama, Eugene & Jensen, 1983). This will ensure that there is no conflict of interest and will help to ensure that the organization follows a principle of corporate governance. Stewardship Theory Another theory supporting corporate governance is the stakeholder theory which states that the stakeholders are able to benefit when management and agent share their role and take decision which will help to maximize the value for the stakeholder (Donaldson & Davis, 1991). This theory states that it is important to integrate the different functions of management if the business wants to benefit and ensure that they have corporate governance followed in the organization. This is an aspect which has grown in the US and organizations looking towards ensuring proper corporate governance look towards having a person who takes decision for the different section of the society and ensures that the organization is able to achieve corporate governance in the organization. Stakeholder Theory This theory of corporate governance states that businesses while taking decision should look towards taking decision which benefits the stakeholders and is in the interest of most (Hill & Jones, 1992). This thereby ensures that decision taken affects all. The shareholders being the owner needs to ensure that the management i.e. the agent acting on behalf of the principal takes decision which helps to see the well being of all and ensure that the policy of corporate governance is adhered to. This will thereby ensure that the organization look towards having a common goal and the efforts will be directed towards having a mechanism which will ensure that the business adheres to the corporate governance norms. This will help the stakeholders and will facilitate organizations working in the US as they will be able to abide by the corporate governance norms and ensures growth for the business. External Audit This is another important aspect of corporate governance as having an external auditor helps to evaluate the financial statement of the business without biasness. Having an auditor helps to identify the areas where the business have made mistakes and steps can be taken to improve those. It is important that the auditor acts in the best interest of the stakeholders and doesn’t look towards taking decision based on other parameters as it will have an effect on the financial outcome and will result in incorrect decision making. Auditors have to follow a code of conduct where they look to fulfill their duties and carry out their responsibilities without any biasness. This will ensure that the business is able to act fairly and disclose information that have relevance and affects the business decision taking process. This will thus help the business to ensure proper corporate governance and perform in the manner which is desired by the law. Financial Reporting Having auditors will help to increase the value of financial reporting as the auditors will ensure that the financial statement discloses all information which is true (Davis, 2008). This will ensure that the information disclosed helps the investors and the business looks towards providing information which will ensure proper corporate governance norm. Auditors will also ensure consistency and transparency in the financial reporting as they will ensure that the business follows a method consistently and any changes is brought to the notice of the investors. This will help to multiply the value of the financial statement and will ensure that people associated with the organization can use it for different purposes thereby ensuring proper corporate governance. Code of Conduct for Auditors Auditors performing for organization have to follow a code of conduct and ensure that they remain ethical in their doings. This is of prime importance as the code of conduct prescribed for external auditors requires that the person discloses all information that can have an impact of decision making and should not be biased as it can have an ill effect on the business prospect (Ward, 2010). This thereby helps to fix accountability and ensures that the auditors work within the stated limits that have been prescribed. Proper accounting through disclosures, reporting of transaction which has material influence and the changes that business is accounting will help to improve corporate governance. This is an aspect which auditors have to ensure as auditors come in contact with the financial information of the company and being able to identify and develop a code of conduct based on it will ensure that the auditor is able to perform the duties and ensure proper growth for the business. Ethical Behavior for Auditors Auditors have to follow a code of conduct which prescribes the do’s and don’ts for the auditors. Following those helps the auditors to be ethical and ensures that all information which can have an impact on decision making in discloses. This will thereby ensure that the business is able to provide complete justification to the corporate governance policies followed in the organization. Having proper ethical behavior will help the organization in dealing with the situation better and will benefit the business in corporate governance. Conclusion Organizations have to thereby develop and follow corporate governance polices so that they act fair. This will help to create a positive impact and will ensure that the business is able to take decision which will improve their business fundamentals. This is one of the most important aspect for business working in the US and organizations that are able to abide with the corporate governance norms are able to perform and deal with the changing business environment in a better way. References Austin, R. 2008. The credit crunch and the law. Corporation and Taxation law monograph series, US Donaldson, L. & Davis, J. 1991. Stewardship Theory or Agency Theory: CEO Governance & Shareholder Return. Australian Journal of Management, 16 (1), pp. 49-64 Davis, K. 2008. Financial Regulation: Cost, benefit and process of regulatory change. Economic Society of US, High Beam Research Econbrowser. 2009. Consequences of Lehman Brothers. Retrieved on March 14, 2012 from http://www.econbrowser.com/archives/2009/11/consequences_of_1.html Fama, Eugene & Jensen M, 1983. Agency Problems & Residual Claims. Journal of Law & Economics, 26, pp. 327-349 Grant, R. 2005. Australia’s Corporate Regulators: the ACCC, ASIC & APRA Title Research Brief No 16, Parliament of Australia Library, Australia Hill, C. & Jones, T. 1992. Stakeholder Agency Theory. Journal of Management Studies, 24 (2), pp. 191-205 Mitton, T. 2001. A cross firm analysis of corporate governance on the East Asian Financial Crisis. 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