Corporate Governance in Organizations
The assignment describes a case study situation where an employee of the accounting department of a medium sized company is trying to prevent a possible accounting fraud or financial reporting fraud that is apprehended to be done by the chief executive officer and non-executive directors of the company for inflating the profit figures of the company with an intention of misleading the shareholders of the company. The assignment describes the importance of the presence of strong corporate governance in an organization that is essential for fair and true representation of the financial position of an organization to the investors as well as shareholders of the company and to prevent unethical and fraudulent financial reporting. The case study here demonstrates that accurate financial reporting is a prerequisite for good corporate governance and bad governance often leads to fraudulent financial reporting (Abdullah & Valentine, 2009).
The Corporate governance in the context of an organization can be defined as the system that helps an organization to impose proper control over the different operational activities that are taking place in the organization including the process of financial reporting which an important activity of the organization. The structure of corporate governance in an organization describes that how the rights and accountabilities are being distributed by an organization among the different stake holders of the company (board of directors, managers and shareholders) and this process of distribution is of utmost importance as this defines the strength of the corporate decision making process of the organization. The presence of good corporate governance in an organization ensures cross check and cooperation among the different corporate bodies at the event of financial decision making. Good corporate governance ensures a clear distribution of accountably among all the employees of the organization covering both the bottom, middle and top level employees of the organization (Larcker & Tayan, 2015).
The presence of good corporate governance is also essential in the context of an organization for monitoring of the actions of management and directors and thereby to reduce the agency risks that may stem from the fault of staff members. Thus a good corporate governance ensures the presence of a sound decision making process in the context of an organization
According to the Agency theory a good corporate governance is essential for maintaining the coordination between the agents (hired executives who are managing the company) and the principals (owners of the company) so that the agency loss (loss of return on investment) can be minimized that arise due to conflict between the agents and the principals
In the context of the present case scenario it can be seen that the CEO and the non-executive directors who are the agents of the company are looking for fraudulent representation of financial reporting for misleading the shareholders by showing inflated profit figures to them and thus completely going against the interest of the owners of the company who are focusing on maintaining long term relationship with the share holders .Thus here the agents for maintaining short term profit goal are badly affecting the long term reputation and growth prospect of the owners (Abdullah & Valentine, 2009).
Importance of Good Corporate Governance
The Stewardship Theory defines that good corporate governance is essentially required in the context of an organization for maintaining good cooperation and supportive environment between the stewards [hired employees & managers] and the owners of the company rather than control for attaining the business goal successfully (Siebels & Knyphausen, 2012).
Considering the present case scenario it can be suggested that strong corporate governance must be present in the organization so that a supporting environment can be created where the stewards [CEO & non-executive directors] of the company should share the problem regarding profit reduction and its possible impact over the share holders with the owners rather than opting for a fraudulent option.
Finally the Stake Holder’s Theory suggest that a presence of strong corporate social responsibility is essential so that the manager should act ethically for ensuring g the ret5vurmn of all the stakeholders of the company that includes customers, suppliers, and the surrounding communities along with the share holders of the company (Jensen, 2017).
The present case study focuses upon the fact that the presence of weak corporate governance has probably led the CEO & one non executive director of a medium sized Australian company to opt for fraudulent financial reporting by presenting inflated profit figures to the investors for the purpose of retaining them with the company (Vogel, 2010).
The Australian accounting standards [that must be followed by the Australian companies for financial reporting ] are being generated by the Australian Accounting Standards Board (AASB).The AASB is an Australian Government agency which is responsible for developing and maintaining the standards of financial reporting in the different public and private companies of Australia. The AASB also plays a part in the process of developing global financial reporting standards. The functions and powers of this governmental agency are set out by the Australian Securities and Investments Commission Act 2001 (“Australian Accounting Standards Board (AASB , 2018).
The General purpose financial statements that are to be presented and fulfilled by the different Australian companies must comply with the accounting standard of AASB 101 as per section 334 of the Corporations Act 2001.
As per the AASB 101 an annual representation of a complete set of financial statements (including comparative information) is the minimum requirement of the representation of financial statements of an organization. If for any reason an entity is changing g the reporting period, then the fact must be disclosed with a note and the reasons of change of the period of reporting must be disclosed in the note.
Generally as per the accounting standard an entity should uniformly prepares financial statements for a one-year period and any deviation or change in the reporting period of the financial statements will be considered as a non-compliance of the accounting standard.
In the present case the idea of the CEO Paul and the non-executive director, Alan of manipulation of timing while presenting the financial reporting is a sheer non compliance of the accounting standard.
Secondly the CEO Paul and the non-executive director, Alan are thinking of making untrue representation of profit as well as revenue earnings where the revenue and the profit figures are being inflated (taking the previous period as base) by unethically including the profit of the “toothbrush division” whose sales revenue are going to be earned in the coming month of the October and yet to be realized and the month of October is also out of the financial reporting period (deloitte, 2017).
The Agency Theory
In such a situation if the CEO Paul and the non-executive director Alan inflates the revenue as well as profit figures by including the sales of the “toothbrush division” this will be a non-compliance of the accounting standard AASB 101 as any income which is yet to be realized must be reported in the comprehensive statement of income instead of the statement of net income calculation
Finally the requirement of fair presentation and compliance with Standard Financial statements (AASB 101) requires that the financial position, financial performance and cash flows of an entity should be presented with true figures. The fair presentation of financial statements requires a trustworthy representation of the effects of transactions , events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses that are being set out in the Framework (AASB, 2015).
The above discussion clearly reveals the fact that the CEO Paul and the non-executive director are planning to make an untrue representation of the financial statements which leads to a sheer noncompliance of the accounting standard of AASB 101 and is a complete unethical act. . The agents or the management level employees[CEO Paul and the non-executive director Alan ] of the company has dared to do so as there is no system in place or say no corporate governance in place to check the fairness or trustworthiness of the financial report to be generated (Hoitash et al, 2009).
If there was strong system of cross checking of the information released in financial statement was in place, the management employees would have never been opted for a fraudulent option of presenting the untrue inflated profit figures in financial statement for maintaining the trust of the investors as well as shareholders over the company (Carcello et al.,2011).
Thus the case clearly points that a strong corporate governance system must be in place in a company for deterring the management employees from doing unethical fraudulent activities. The management employees of an organization have the decision making power within the organization and any wrong act or decision made by them can put the whole company in front of big loss (Siddiqui, 2010).
In the present case scenario it can be seen that the CEO Paul and the non-executive director Alan has decided to put inflated untrue profit figures in the financial statement by including the profit of the toothbrush division whose sale or profit yet to be realized. The two management employees are trying to do so for covering the declined profit figures from the investors as well as shareholders and keeping the faith of the investors over the profit generation efficiency of the company(Filatotchev & Nakajima, 2014).).If the real profit and sales figures are disclosed in the financial statement then there is every possibility that the investors may withdraw their financial support from the company and the company will lose a large part of share capital and there may be substantial decline in the remuneration of the management employees of the organization. Thus the whole idea of fraud and cover ups of real financial position of the company stems out of the interest of the management employees who wants to secure their position as well as remuneration and weak corporate governance of the organization where there is no facility of cross checking the fairness and truth of the information presented in financial statement(Levy, Szejnwald & De, 2010).). In such a situation it is difficult for Joshua (non management employee of the accounting department) to stop the fraudulent activity of the management employees who were making the conversation and realised that the issue can only be made open when there is some system of cross-checking the financial information that are presented in the financial statements under a strong corporate governance system that must be present within the organization (Claessens & Yurtoglu, 2013).
It is the duty of the organization to represent true and fair financial information to the investors. If CEO Paul and the non-executive director Alan manage to represent fraudulent information to the investors and to cover the decline in profit then they may be able to retain the investors in the short run but in long run when the investors will realize the truth then they may permanently leave the organization because of fraud(Lin & Hwang, 2010).).
Conclusion:
Thus a possible fraud may occur in the company due to absence of corporate governance for irrational activities and risky decision of the management employees. As an impact of this fraud the business owner may lose its goodwill and reputation. Therefore strong corporate governance is essential in a business organization for regulating financial activities in a proper manner (Erkens, Hung & Matos, 2012).
References
AASB. (2015). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf
Abdullah, H., & Valentine, B. (2009). Fundamental and ethics theories of corporate governance. Middle Eastern Finance and Economics, 4(4), 88-96.
Australian Accounting Standards Board (AASB) – Home. (2018). Retrieved from https://www.aasb.gov.au/
Carcello, J. V., Hermanson, D. R., & Ye, Z. (2011). Corporate governance research in accounting and auditing: Insights, practice implications, and future research directions. Auditing: A Journal of Practice & Theory, 30(3), 1-31.
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging markets review, 15, 1-33.
deloitte. (2017). Retrieved from https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-australian-financial-reporting-guide-december-2017-160181.pdf
Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389-411.
Filatotchev, I., & Nakajima, C. (2014). Corporate governance, responsible managerial behavior, and corporate social responsibility: Organizational efficiency versus organizational legitimacy?. Academy of Management Perspectives, 28(3), 289-306.
Hoitash, U., Hoitash, R., & Bedard, J. C. (2009). Corporate governance and internal control over financial reporting: A comparison of regulatory regimes. The accounting review, 84(3), 839-867.
Jensen, M. C. (2017). Value maximisation, stakeholder theory and the corporate objective function. In Unfolding stakeholder thinking (pp. 65-84). Routledge.
Larcker, D., & Tayan, B. (2015). Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.
Levy, D. L., Szejnwald Brown, H., & De Jong, M. (2010). The contested politics of corporate governance: The case of the global reporting initiative. Business & Society, 49(1), 88-115.
Lin, J. W., & Hwang, M. I. (2010). Audit quality, corporate governance, and earnings management: A meta?analysis. International Journal of Auditing, 14(1), 57-77.
Siddiqui, J. (2010). Development of corporate governance regulations: The case of an emerging economy. Journal of Business Ethics, 91(2), 253-274.
Siebels, J. F., & zu Knyphausen?Aufseß, D. (2012). A review of theory in family business research: The implications for corporate governance. International Journal of Management Reviews, 14(3), 280-304.
Vogel, D. (2010). The private regulation of global corporate conduct: Achievements and limitations. Business & Society, 49(1), 68-87.
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