Measurement in Accounting, Normative Accounting Theory - Coursework Example

Accounting regulations and politics Name Course Name Instructor Date Corporate Governance - From the Inside Out Introduction/Article Overview According to the Financial Reporting Council (2014), governance is termed to be effective if internal and external drivers involved directly. To ensure that internal management in organizations run efficiently, directors and managers of these companies must play a big role to provide that. However, it is observed that these managers have little or rather no influence over the external regulatory framework Further on, the article explains that managers go further than external financial reporting and structures of corporate governance and focus more on the operational areas of business management. This is achieved by bringing about corporate governance ideas in the organizations and a culture where they focus on stakeholders as well as individual and corporate responsibility for the common interest (Financial Reporting Council, 2010). In reference to Accaglobal (2016) the agency theory as well as the agency problem. Therefore, this means that in a corporate organization, conflicts may arise regarding shareholder interests versus those of the board of directors. These issues, as a result, may lead to the need for having corporate governance codes. The article further looks at the concept of traditional stewardship that acts as a basis for proper corporate governance within an external financial reporting framework. Lastly, the article looks at the differences between rules and principles by codes and how management is implemented within organizations. The article argues that when a wider and longer term view of agency theory is applied and implemented within a broad group of stakeholders, it may lead to a better team spirit. As a result, positive attitudes and a pro-stakeholder culture will be observed throughout the organization. In addition to that, significant connections between corporate governance and corporate culture and values have also been highlighted (Financial Reporting Council, 2010). Key Issues Several issues have been brought out in the article. The primary objective of an organization from the traditional perspective is to maximize profits as much as possible as well as increase the wealth of the shareholders. The degree upon which the search for wealth and profits dominates is dependent on the society’s interpretation of agency theory. The significant focus is on the people responsible for dispatching responsibility, accountability and the structure of relationships as well as conflicts that may arise between principals and their agents (Financial Reporting Council, 2010). Secondly, the degree to which board of director’s act to satisfy shareholder interests in the aim of maximizing wealth is dependent on several perspectives of the corporate social responsibility. In this case, the shareholders are the principals whereas the directors play the role of agents in achieving company goals (Financial Reporting Council, 2010). Thirdly, by the stewardship concept, it is agreed upon that managers should ensure that the rights of stakeholders and shareholders in connection with the company are protected by company directors who are also known as stewards or agents. Due to the conflicting nature of the stakeholders’ interests, stewards should be accountable in balancing these needs. According to the pristine capitalist view of stewardship, stakeholder rights and wealth maximization are of critical significance in a company. However, it is evident that corporate failures and banking crisis may lead to neglecting owners, stakeholders and even public needs (Accaglobal, 2016). Moreover, partnership in a business increases wealth in the global economy as well as long term income to the organization. Corporate groups with shareholders encourage more people to invest because it poses a lower risk. Considering some investors have no experience in business, it becomes necessary to have a board of directors to differentiate ownership and control to safeguard stakeholder interests. However, it has been observed that the role of agents in organizations would not work effectively without intervention (Financial Reporting Council, 2010). Companies have a legal requirement to be audited regarding financial affairs periodically. The Financial Reporting Council (2010) states that managers have the responsibility to ensure reliable financial reports are presented to stakeholders to enable them to make necessary company decisions on the qualitative characteristics of published reports. The Directors should also ensure that integrity is maintained between auditors and managers. Another critical issue includes corporate governance which consists of external corporate governance with mandatory and voluntary codes as well as internal corporate governance which deals with implementation of sound management in an organization. Corporate governance framework plays a role in offering structures for organizations. However, these structures can only be useful if there is a climate of compliance recognizing managerial responsibilities as well as rights of stakeholders and shareholders. There needs to be transparency, scepticism and objectivity to achieve effective corporate governance (Accaglobal, 2016). Using the principle-based approach in company’s means that compliance more often than not is challenging for businesses in particular situations or rather unusual circumstances. On the other hand, rule-based approach occurs where full compliance is a necessity for the law. Therefore, any failures could lead to the provision of sanctions. This approach is termed to be more efficient that the former because it does not necessarily rely on the integrity of the board of directors to explain issues objectively (Accaglobal, 2016). To achieve effective corporate governance and at the same time safeguard stakeholder interest, those working for these stakeholders must be acutely aware of the consequences of their decisions and behavior. Therefore, directors should build a climate of responsibility, accountability and transparency in their organization. People at all levels of the organization should be treated with respect and the impact of all decisions geared towards stakeholder interest (Financial Reporting Council, 2014). Financial Theories about Key Issues Normative accounting theory describes the process of accounting and how it should be done rather than relying on observation. It relies on specific ways to arrive at one correct accounting opinion. In this case, a formula is used to find out income which is based on value rather than cost. The article explains that qualified employees with integrity should be used to ensure effectiveness (Financial Reporting Council, 2014). Agency theory explains the relationship between agents who are company directors and those principals who include shareholders and stakeholders. It is directly involved in dealing with the problems that may arise as a result of conflicts based on this relationship. The article states that there have to be coded to assist in addressing issues that may occur as a consequence of this stakeholder board of director’s conflict (Financial Reporting Council, 2014). The main purpose of financial accounting theory and reporting is to make sure that information regarding accounting information mainly in the form of financial statements should be in a position to make financial decisions. Unfortunately, most business owners do not realize the seriousness of the financial accounting process. Without the economic, legal, political and social environment in which the company operates, financial reporting would not exist. Accounting rules should be flexible enough to change with the dynamic environment to promote effectiveness (Financial Reporting Council, 2014). According to the conceptual accounting framework, information related to accounting should be not only relevant but also reliable, consistent and comparable. Relevance in accounting refers to the quality of information that is in a position to make a difference to the person making decisions. Reliability means that the information presented should be accurate enough for the users of accounting. Having standard accounting rules and requirements enhances the quality of information. Moreover, having accepted accounting principles benefits comparability and consistency. Stable financial reports are beneficial to the investors who make a comparison of companies operating in the same industries (Financial Reporting Council, 2014). Therefore, theories in accounting operate under four assumptions which include the economic entity assumption, the going concern assumption, the monetary unit assumption and the periodicity assumption. The economic entity assumption explains that the activities of the owner of business are different from those of the firm. About this article, this hypothesis relates to the stakeholders and shareholders who are considered as the owners. Their activities and duties differ from those of the board of directors who run the business. The going concern assumption assumes that when financial statements are prepared, the person preparing understands that the company is safe from bankruptcy and dissolution problems. If the business does not perform as expected, it is evident that this assumption is not warranted. Concerning the above article, the company’s primary objective is to maximize profit. Therefore, preparation of financial goals only will not guarantee the achievement of this goal and may lead to it being bankrupt. The monetary unit assumption explains that users should denominate financial statements in a constant currency which is relevant to the business. The articles lie as one of the responsibilities that should be carried out by employees of an organization. Lastly, the periodicity assumption states that activities of business are broken into the different period with recurring financial reporting on an annual or monthly basis (Accaglobal.com, 2016). Findings Several findings have resulted from the article. First, the degree upon which the search for wealth and profits dominates is dependent on the society’s interpretation of agency theory. The significant focus is on the people responsible for dispatching responsibility, accountability and the structure of relationships as well as conflicts that may arise between principals and their agents (Financial Reporting Council, 2014). Second, to ensure that internal governance in organizations run efficiently, directors and managers of these companies must play a big role to make sure that management is effective in the corporate field through direct involvement of both internal and external drivers. In this case, managers have little or rather no influence over the external regulatory framework (Financial Reporting Council, 2014). Moreover, managers focus more on the operational areas of business management achieved by bringing about corporate governance ideas in their organizations and a culture where they focus on stakeholders as well as individual and corporate responsibility for the common interest (Accaglobal.com, 2016). Conflicts may arise regarding shareholder interests versus those of the board of directors. Thus, may lead to the need for having corporate governance codes. Traditional stewardship acts as a basis for proper corporate governance within an external financial reporting framework (Accaglobal.com, 2016) When a wider and longer term view of agency theory is applied and implemented within a broad group of stakeholders, it may lead to a better team spirit. As a result, positive attitudes and a pro-stakeholder culture will be observed throughout the organization (Financial Reporting Council, 2014). The degree to which board of director’s act to satisfy shareholder interests with the aim of maximizing wealth is dependent on several perspectives of the corporate social responsibility. In this case, the shareholders are the principals whereas the directors play the role of agents in achieving company goals (Financial Reporting Council, 2014). Managers should ensure that the rights of stakeholders and shareholders in connection with the company are protected by company directors who are also known as stewards or agents. Due to the conflicting nature of the stakeholders’ interests, stewards should be accountable in balancing these needs (Financial Reporting Council, 2010). Partnership in a business increases wealth in the global economy as well as long-term income to the organization. Corporate groups with shareholders encourage more people to invest because it poses a lower risk (Financial Reporting Council, 2010). Corporate governance consists of external corporate governance with mandatory and voluntary codes as well as internal corporate governance. It deals with implementation of sound management in an organization. Corporate governance framework plays a role in offering structures for organizations (Financial Reporting Council, 2014). Compliance more often than not is challenging for companies in particular situations or rather unusual circumstances. On the other hand, rule-based approach occurs where full compliance is a necessity for the law. Therefore, any failures could lead to the provision of sanctions (Accaglobal.com, 2016). Lastly, to achieve effective corporate governance as well as safeguard stakeholder interest, those working for these stakeholders must be acutely aware of the consequences of their decisions and behavior. Therefore, directors should build a climate of responsibility, accountability and transparency in their organization (Accaglobal.com, 2016). Conclusion A business that takes into account principles as well as follows corporate governance codes are placed in better position to protect the interests of its stakeholders and shareholders. It is more likely to satisfy the needs of the public in a long term perspective. Whether an organization takes the agency theory perspective or the stewardship perspective, corporate governance remains to be an essential framework whereby rewards, rights and responsibilities are well balanced between principals and their agents (Accaglobal.com, 2016). It is important to bring about a democratic culture of corporate culture and ethical values to support the structures of formal corporate governance structures. This reduces the risk of having dangerous behaviors such as theft in a company reoccurring. A proper business structure should understand the needs of the public, shareholders as well as stakeholders (Financial Reporting Council, 2014). References Accaglobal.com, A.(2016). Corporate governance - from the inside out | ACCA Global. Accaglobal.com. Retrieved 25 March 2016. Financial Reporting Council (2010), Revisions to the UK Corporate Governance Code UK formerly the Combined Code, FRC  Financial Reporting Council (2014), UK Corporate Governance Code, FRC Read More