Title - Accountants, Ethical Issues and the Corporate Governance Context
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In the current scenario of the business environment, there are many challenges that are being faced by the business organization irrespective of their legal forms, businesses and other factors and so the fact that there arises a need to having a well-designed corporate governance structure which is adopted by the accountants and the auditors along with the management helps in reducing business failure.
Purpose of Paper:
The purpose of the paper is the analysis of the various aspects of the fact that transparency and accountability by professionals that are responsible for preparation and auditing the financials namely accountants and the auditors are required to follow all the aspects of corporate governance so that they can function in an ethical manner. In this paper, there have been identification made for the types of issues having ethical grounds are being encountered during course of operation and how those events affects the perception of the accountants and the auditors. It is to be noted that the auditor should not get influenced by the client and should be independent while discharging his duties.
Overview of paper:
The paper is basically the analysis of the fact that mere focusing on the client's influence without taking into consideration the probability and the ethical aspects results in failure of the organization badly. This is because of the fact that accountants and the auditors are the moral agents of the stakeholders (Schweiker, 1993). The paper have outlined the meaning of corporate governance along with its importance that focuses on management of corporates, the role and duties of the accountants is being examined so as to obtain maintenance of good practices, the fact that how the organization is effected through lack of ethics of auditor and accountant have been examined. Additionally, the major issues in terms of ethics being tax evasion done by clients, manipulation of the financial statements and the presentation of the financial statements properly have examined and discussed in this paper. This has been done so as to establish the fact that the stakeholders uses the financial statements for their decision making and in any case if there is manipulation by unfair means then it puts the company in a situation where there is a reporting failure.
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Q1 - Define Corporate Governance and critically discuss its importance to corporate management.
CORPORATE GOVERNANCE AND ITS IMPORTANCE TO CORPORATE MANGEMENT:
Corporate Governance can be defined as a set of systems, principles and process with the help of which a company can be governed easily. In it, there are guidelines being provided that should be adopted for controlling or directing a company and its management so that they are able to meet their goals and objectives in such a way that it is value adding for the company along with its stakeholders in long run (Lisa Mary Thomson, 2009). The management of a company acts behalf of the company and also as a trustee of all the stakeholders of the company viz. shareholders, board of directors, management, employees, creditors, society and the regulators. There are some underlying principles which forms the basis of corporate governance which are discussed as below:
- Integrity and Fairness: Corporate Governance requires the management to conduct the business with complete integrity and fairness which will further increase the trust of the stakeholders on the company.
- Transparency: The management of the company are required to conduct business with transparency in respect of all the transactions
- Disclosures: All the relevant and the necessary disclosures and decisions made with respect to business operation should be disclosed by the management as per the corporate governance
- Complying with laws and regulations: The management is required to have compliance with all the relevant laws and regulation of the business environment
- Accountability and Responsibility: As per the principle of corporate governance, there is requirement of being accountable and responsible in terms of all the business transactions towards the stakeholders
- Conducting Business Ethically: The most important principle of corporate governance is the fact that the business conducted by the management should be ethical in all the grounds. There should be clear distinction being made by the top level managers between what are personal and corporate funds while managing the company.
The importance of the Corporate Governance on the Corporate Management are many since there is great association of the level of confidence with the company in case of existence of good corporate governance structure. The importance of the Corporate Governance to the Corporate Management are discussed as below:
- Success and Growth: When a good corporate governance structure is in place then it ensures the success and the economic growth of the corporate.
- Maintenance of Investor's Confidence: A good structure of corporate governance always maintain strong investor's confidence resulting in the rise of capital efficiently and effectively
- Cost of Capital: The cost of capital is reduced when the corporate management follows the principles of corporate governance
- Impact on Share Price: The share price are impacted in a positive manner when there is efficient corporate governance within the management
- Minimization of Risks: A good corporate governance when being followed by the management results in the minimization of the wastages, corruption, risks and mismanagement.
- Inducement to the Owners: The corporate governance helps in providing proper inducement to the owners along with the managers to have all those objectives achieved that are in the best interests of the shareholders as well as the organization.
- Formation of Brand: Since when corporate governance is being followed by the management, the organization starts gaining from its advantage and there develops a brand leading to development.
- Management in best interest: Where the Corporate Governance is being followed with all its principles then the management is being done is a manner which is best for all.
The fact that the corporate management is being entrusted by all when it adopts the principles of corporate governance cannot be denied.
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Q2 - Define the role and professional duties of accountants in maintaining good corporate governance practices.
ROLE AND PROFESSIONAL DUTIES OF ACCOUNTANTS IN MANTAINING GOOD CORPORATE GOVERNANCE PRACTICES:
The fact that is very clear is that the Corporate Governance and accounting operates side by side walking hand in hand. This is because functioning of one is not possible without the other. The factor that have become very important in enabling companies for their maintenance of strong financial position is the corporate governance. After the analysis of failure events where corporate governance have failed, the fact that has been assessed was that the failure was due to fault in the accounts department. The good corporate governance of an organization is being taken care by the accounting department of that organization. From the perspective of an accountant, the corporate governance and its scope is very wide, the critical task being the activities undertaken to ensure the transparency and accountability of the financial transactions. The one who is responsible for correct financial information are the accountants of the organization (Amit Agarwal, 2018). The accountants have the responsibility of providing true financial information to all the stakeholders and not just to shareholders. A company's brand can be built only when an accountant discharges its function honestly and with integrity.
The following are the role and professional duties of the accountants in maintenance of good corporate governance:
- Reporting Flow of Capital: Accountants are responsible for reporting the flow of capital in and out of various department along with monitoring the activities that are carried out by using that capital and the areas where the capital is being invested.
- Framework of accountability and Transparency: The accountant plays a vital role in bringing all the principles of corporate governance in practical use. It is therefore, required on part of the accountant to ensure that a proper framework of accountability and transparency is in place so as to meet the interests of the stakeholders.
- Planning: The accountants are the ones who plan strategies for complying with the governance. The information provided by the accountants are used by companies to plan business strategies that are practical and effective in nature.
- Management of Public Accountability: The fact that the companies are accountable to the public in many ways cannot be denied since they operate in a society and takes up money invested by the public for making business functioning. They are responsible in meeting their obligations to the public like payment of taxes. Stakeholders considers investment in the company basis on their financial status.
- Management of Shareholder Accountability: Any organization is accountable to the shareholder since they are the real owners of the company who bought shares of the company. It is therefore the responsibility of the accountant that they provide detailed and complete financial information to the shareholders of the company. Shareholders on analysis of the information make crucial decisions with respect to their investment in the company.
- Management of Cash Flow: Smooth cash flow is must within an organization to avoid interruption in the functioning of the business. It is the accountants who frame long term strategies, along with short term and day to day requirements. Maintaining of a healthy cash flow is among one of the major responsibility of the accountants.
- Financial and Management Reporting: There is a common thread that exists among all the department of an organization which is accounting. Accountants are responsible for the analysis of both financial and management reporting since both of them are important. Financial Reporting helps in the analysis of the financial position of the company whereas management reporting helps in the analysis of the effectiveness of the actions taken by the management for the welfare of the organization.
Therefore we can assess the fact that accounting and corporate governance walk side by side with hand in hand, acting as a support system in all the business functions. It is the accountant who creates a vision of the company and helps in attaining the same through adoption of principles as stated in the corporate governance.
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Q3 - Explain how the lack of ethical behaviour of accountants and auditors considered a key weakness leading to reporting failure.
LACK OF ETHICAL BEHAVIOUR OF ACCOUNTANTS AND AUDITOR- A KEY WEAKNESS LEADING TO REPORTING FAILURE:
The corporate managers and the auditors are required to possess ethical behavior can be established with the fact that the financial scandals that took place in between the years 2001 and 2002 in US and Australia leading to collapse of major companies like Enron, WorldCom and Global Crossing in USA along with HIH Insurance and OneTel in Australia. All these collapse of companies resulted in the loss of confidence of the public for making investments basis the financial reporting. The auditors were also responsible for the collapse of these companies since they too acted unethically by giving a biased view on the financial reports being prepared by the management of the company. There is a need to comply with the standards that are in place while preparing financial reports and also while giving opinion on the same. The accountants are required to follow the accounting standards while preparing the books of accounts and financial statements whereas the auditors are required to comply with the auditing standard while conducting audit of the books of accounts. Compliance with the standards ensures the transparency and the reliability of the financial reports which are used by the stakeholders in making investing decisions (Brooks, 2004). When large corporations collapses that have serious implications on the investors, employees and the public at large thereby giving rise to crisis of credibility. The major reason behind these failures being the issues in accounting and auditing implies the fact that there should be education on accounting including ethics and moral commitment. The self-interest should be kept aside and should be aligned with the interests of the public. As per the Code of Ethics of Professional Accountants it is the duty of an accountant to serve the public and the society at large popularly known as "Public Interest". This implies the fact that it is the responsibility of the professional accountants to take care of interest of all the stakeholders at large, rather than individual client, employer or themselves.
The following can be discussed as a results of cases where there is lack of ethical behavior in accountant and auditors:
- Negative impact on the independence and Objectivity: Ethics and independence goes hand in hand in the profession of accounting. Trust consist of a critical component which is achieved by making unbiased decisions and recommendations. If there is impact on the independence and objectivity of accountants and the auditors, the financial report get effected in a negative manner thereby losing their credibility.
- Impact on Professional Competence: The lack of ethical behavior impacts the professional competency of both the accountants as well as the auditors. It requires that the fact that with the changes in technology, laws and the best practices, professional accountant as well as the auditor is required to be update. But due to influence of the client, they are effected in a negative manner.
The fact that ethics impacts the auditors and the accountants to discharge their roles and responsibilities effectively. It increases the sensitivity of practitioners, it acts as a moral reasoning, the level of education increases thereby contributing towards the growth of the organization. Therefore, it can be established that the accountants and auditors are required to behave ethically so as to expand the business rather than collapsing.
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Q4 - The following three ethical issues identified were most often rated as being of great importance in maintaining ethical standard in accounting profession (a) client proposal of tax evasion (b) client proposal of manipulating financial statements and (c) presenting financial information in the most proper manner, so as not to deceive users. How such ethical issues can be fundamental in enhancing public interest in respect of financial reporting.
ANALYSIS OF THE IDENTIFIED ETHICAL ISSUES:
There have been three ethical issues identified for analysis of the fact that whether they are important so as to maintain ethical standard in the profession of accounting and auditing which are discussed as below:
(a) CLIENT PROPOSAL OF TAX EVASION:
Professionals have obligations that are contractual in nature so as to serve their clients. The primary duty of the professionals have been identified by many as "servicing of the client". Thus, there arises difficulty on part of the professional to serve the public interest as per the code of conduct being provided to them in situations where there exists economic incentives for prioritization of the private economic interests. Taxation being a vital source of revenue for government are being charged by them so that they can meet their agenda of serving public with many facilities like infrastructure, subsidies, etc. When the client proposes for tax evasion so as to save its funds and the professional agrees on the same merely for their mutual economic interest, then they move their step towards a situation which will sooner or later contribute towards the collapse of the organization. The tax avoidance erodes the tax bases globally, leading to threats to tax revenues, sovereignty and fairness of the tax being imposed. This thereby results in reduction in the overall revenue of government which further decreases the facilities being provided by the government to the public. There have been many cases that came into notice of multinationals that avoids billions of taxes annually as per the instruction of their board. Tax evasion is illegal as it involves intention to be "deceitful, fraudulent and corrupt". Thus, in cases where the tax evasion is successful it can later decrease the public interest in respect of the financial reporting.
(b) CLIENT PROPOSAL OF MANIPULATING FINANCIAL STATEMENTS:
Manipulation of financial statements is an ongoing problem in major corporates across the globe. Although, the regulators keep on taking steps by amending laws so that these type of corporate malfeasance can be mitigated but still many factors continue to have effect on it. Because of this manipulation the prospective investors does not completely relies on the financial statements of corporates because they cannot afford to bear the adverse implications of their investment decisions. The reasons behind manipulation of financial statements are three. One, when the corporate executive have their compensation linked with the financial performance of the company. Two, it is relatively easy to alter the numbers. Thirdly, the manipulation cannot be detected by the investors. The client proposes for the manipulation when the performance of the company is not up to mark and thus he does not wants to take risk of little or no investment. There are two approaches being undertaken for manipulation of the financial statements. First, Artificial inflation of revenue and gains or deflation of expenses so as to exaggerate current period earnings. This results in making the financial position of the company look better so that the client is able to reflect the fact that he has met his expectations. Second, it is just the opposite approach of the first where income is shown less so that it can be reflected that the financial position of the company is not up to mark. But it should be noted that the manipulation in the financial statements if identified can put the client into trouble both from the regulator's perspective and also from the perspective of the stakeholder. This act reduces public interest.
(c) PRESENTING FINANCIAL INFORMATION IN THE MOST PROPER MANNER SO AS NOT TO DECEIVE USERS:
Understandability is the concept which includes the fact that all the financial information should be presented in such a way that the users of it can easily analyze the same. Adherence to presentation of financial information in a proper manner will help the organization prevent itself from misleading financial statements. The financial information should be presented using the four principles which are Complete, Concise, Clear and Organized. All these are discussed below:
- Complete: No key information should be missed while preparing financial statements.
- Concise: The financial information should not be in excessive amount of detail. The information should be scanned and presented in such a way that they acts as highlights.
- Clear: The presentation of financial information should be easy so that the users can assess them with ease.
- Organized: The financial statements should be references properly so that all the supporting schedules can be identified easily.
The above analysis does not imply that the complex information should be avoided. It just explains the fact that all the financial information should be presented in a way which is clear.
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The principles of Corporate Governance is very important which needs to be adopted by all the professional including accountants and auditors while discharging their roles and professional duties so that there is no reporting failure. In cases where there have been lack in ethics, there have been collapse of large corporations. Thus, all those events that will make the fundamental concept of public interest weak should be avoided like, tax evasion and manipulation of financial statements. Rather, all the financial information should be presented in a proper manner helping the users of it to make decisions.
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