Internal Control Framework- Corporate Governance
Introduction:
More than often businesses and corporations who enjoy greater benefit both financially and operationally are the ones where all the related parties to the businesses and corporations have a sense of belonging towards each other to achieve excellence. This is done primarily through the governing principles of balancing each participant best interests. This governing principle is what is termed as “Corporate Governance”. In modern world as the complexities and necessities keep rising, the owners and other stakeholders in a corporation rely more on professional judgement of the managers in a business. Failures in such professional judgement coupled with conflict of interests result in cases like ENRON, HHI Insurance, One.TEL. This is why the concept of corporate governance has started seeking interest and studies. There may be different alternatives to define and characterise corporate governance. For an accountant it is the best balance between checks and balances and its participants accountable for financial gains, from a management’s point of view it is the best interest balancing technique amongst the external and internal environment.
“The purpose of corporate governance is to encourage the efficient use of resources and to require accountability for those resources. The aim is to balance the interests of individuals, corporations, and the community.” (Turner L & Weickgenannt A, 2009).
The governance process and the groups accountable:
A simple structure of the process as shown in the cycle below is made up of the stakeholders associated with it. Some name this relationship as the principal (owners/shareholders) to agent (managers/employees) relation others name it as the external and internal participants relationship in a distinct separate legal entity called a company.
Source: http://associatedcontent.com/article/8067957/manage_risk_and_achieve_compliance.html
Corporate governance is the relationship among various participants in determining the direction and performances of corporations. The primary participants are (1) share holders,(2) the management, and (3) the board of directors.(Robert A.G and Minow nell, 2001).
The key principle of corporate governance is the “Fiduciary duty” or in simple terms an obligation entrusted to the directors, managers and supervisors by the owners of a corporation to manage its activities and assets in the most judicious and transparent manner to add value in the form of positive returns. In New Zealand legislative requirements such as the Companies Act, Finance Act, NZX best practices code and other related legislations and cases facilitate compliance to the financial stewardship and ethical conduct of the directors and management in a corporation.
Communication is the pivoting factor binding all the related processes and people in the governance process. Good communication or reporting cultivates an environment of trust and stewardship. To continuously monitor the performance, gather feedback and evolve improvements in meeting the objectives of a corporation requires constant communication amongst all stakeholders. The different stewardship functionary’s i.e the corporate, financial, operational officers who create, follow and monitor controls in the form of well defined rules must allow for free flow of communication amongst all functionaries. This communication helps in identifying the warning signs of any wrong doers or practices and can be corrected timely.
Board of Directors are the strategic officers in a corporation who are entrusted to carry on the affairs of a company in the best interest of its owners which are the shareholder or shareholders and in the best interest of all other stakeholders. The directors are the leaders who provide professional integrity to all sections of the company both internal and external. A director with a sound financial, operational and ethical knowledge can steer a good governance process through its managers and remunerate them justifiably. The duty to maximise shareholders value and equally provide value to all its stakeholders in a going concern through carefully chosen, implemented and monitored set of strategic plans and polices brings about good corporate governance and trust.
Regulatory and best practices models provide for the foundation of corporations accountability and performance. These include audits, performance evaluations models such as key performance indicators (KPI) and other codes of conduct. As per legislative requirements, audits provide an insight into a businesses financial and operational performance as well as give a platform for improvements. The best practices breaks down the corporation’s vision into simple doable and measurable attributes. Even though the cost implications are high but the returns are far better and this is where the strategic stewards of a business can monitor and evaluate future course.
Disclosure and Transparency is the key indicator of successful ethical governance. The internal controls and compliances make it mandatory to present and discuss financial performance in a timely and transparent manner as per the accounting standards and regulations. Further on these controls and regulations make the financial information easily understandable, verifiable and accurate and any deviations can be easily targeted and monitored through a robust use of its accounting information systems such as ERP’s and IT systems.
Enterprise risk management formulates set of rules and controls to avoid risk associated in the different cycles or phases of a business and eliminate any threats. For example in revenue cycle segregation of duties and periodic reviews of financial performance reduce this risk. In expenditure process the requirements, authorisation and purchases are monitored and numbered. In the sales process the targeted numbers, customer satisfaction surveys and the inventory management reduce the risk from external and internal risk.
Ethics is the fundamental aspect of good corporate governance and it trickles top down from its directors as the leaders. An internal control framework which involves personnel and their stewardship, it is necessary to have the ethical conduct emphasised in all steps of business. The potential conflict of interest can be avoided by use of earnings management reviews, community development initiatives and through continuous enhancement of technical competence of employees and officers who are part of the control process. “Integrity, fairness, and accountability are the underlying concepts in each of the other role of corporate governance, including the descriptions for sound systems of management oversight, internal control, and financial stewardship”. (R.M. Bushman, A.J. Smith 2001)
Summary:
Corporate governance provides for a way to carry on company affairs in a systematic and transparent manner through use of legislative requirements, control processes and stewardship. Use of accounting information system in internal control framework offers management an insight into company’s performance and processes. However the most important and core aspect of corporate governance remains in the fiduciary duty of owners and agents of a corporation. This relationship is best utilised through set of rules and best practices in an environment of open communication and reporting. Good corporate governance relies on the ethical conduct and is people oriented hence leadership at the top must provide for ethical guidance for the followers. The financial stewardship in ever competing and developing world becomes all the more important to avoid risks and provide transparency through use of appropriate tools and technology. Above all any corporate failure sends a rippling effect to all sections of the society and beyond. Hence the benefits most definitely overweigh the cost arguments.
Reference:
1. Turner, L., & Weickgenannt, A.(2009). Accounting information systems: controls and processes. John wiley & sons.
2. Walker.G…[et al],(2009) Commercial applications of company law in New Zealand (3rd ed). CCH NZ, Auckland
3. Bushman, R,m.,& Smith, A,J.(2001).Journal of accounting and economics 32(2001) 237- 333
http://public.kenan-flagler.unc.edu/faculty/bushman/bushman-smith.pdf
4. Robert,A,G., & Minow,n.,(2001). Corporate governance.( 2nd ed.).T.J.international Ltd,Padstow,Cornwall.
5. Bushman,R.,Chen,Q.,Engel,E.,&Smith,A.(2004).Journal of accounting and economics 37(2004)167-201. http://public.kenan-flagler.unc.edu/faculty/bushman/bushman-jae-2004.pdf
6. Monks,A,g,r., & Minow,N.(1995).Corporate governance.Black Well Publishers Ltd. USA
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8.Monks A,G,R., & Minow,N.(2001).Corporate governance.(2nd ed.).108 Cowely Road,UK: Oxford.
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