Corporate Governance-The Role of Board of Director in Terms of Management and Financial Accounting
What is Corporate Governance?
Generally speaking the term corporate governance (is a system) came to our understanding in 1980′s in order to clarify how businesses can be managed, and controlled via general principles. Corporate Governance is set of procedures and activities that have impacts on decisions made by board of directors and managers. (David F. L. et. al,. 2004).
Activity of board:
Boards of directors are responsible for the governance of companies. They are responsible to clarify company’s strategic intentions as well as leader shipping. Based on (Coles et. al, 2001), board of directors’ concentration is on top managers to see whether they are providing worthy values for shareholders or not. There are different specifications and characteristics for board of directors around the world. Board of directors must reveal their opinions on the connected transactions and make recommendation in the annual report. The job of board of directors is to acknowledge and oversee strategies, plans and all issues performed by executive board. Although some directors are trying to improve their ability in terms of performing tasks, others neglect and do not perform their duties appropriately. Unfortunately legal environment is not very helpful in terms of their accountability.
Number of Board members:
Numbers of directors are different based of financial and non-financial firms. It was identified that financial firms have an average larger board than manufacturing firms (Hayes et al, 2000 and Booth et al, 2002). Researchers approach toward number of boards of directors differs. Board size of 12 and 11 reported by While Vafeas (1999) and Shivdasani and Yermack (1999) respectively but all researchers believe that number of board members depends on size and scope of business. In this respect, larger boards are formed due to positive correlation of board size with firm size (Yermack, 1996; and Baker and Gompers, 2000).
Education:
Having educated managers will increase the likelihood of firms in case of implementing innovative activities and solving ambiguities (Hambrick and Mason, 1984). According to Wallace and Cooke (1990), higher the educational level, the more will be the political awareness and intellectuality and corporate accountability.
Frequency of meetings:
In terms of relationship between board meeting and effective governance, allocation of time for meetings is very important from the eyes of market, believing that more meetings in less valuable. Vafeas (1999) also mentioned that performance decreases when the number of meetings goes up. The average board of directors in large companies meets once a month and decreases for smaller companies to once every two to three months, Board’s meetings normally take one to two hours. Executive board meetings are usually longer, take normally for 3 hours and they meet more often which depends on the amount of work needed to be done.
Election of directors:
The election of directors is on the shoulder of shareholders at their annual meeting. One share one vote normally applies, although not mandatory. Cumulative voting is the default voting scheme, but companies are authorized to establish their own voting rules in the article of association.
Corporate governance and the role of board of directors in terms of Management Accounting:
In today’s world, the phenomena of management accounting and control systems have been emphasized. According to Bruns J., William J. and McKinon (1993) the procedure of collecting and submitting useful info to managers is called management accounting. It is also mentioned by Horngren et al., 2006; Drury, 1992; Kaplan et al., 2004 that information necessary for managers to make decision in order to achieve objectives for a business is the result of management accounting (MA). MA helps companies in terms of measurement, analysis and report preparation based on available information.
Controlling and Planning are considered as important parts of management accounting which facilitates and coordinates the process of decision making. Planning mainly shows itself in the budgeting process. Managers must control actual performances in order to find differences in terms of budgeted amounts. Management accounting has been used by internal managers to evaluate the firm in terms of accountability and the boards of directors are responsible planning corporate strategy, monitoring managerial performance and increasing returns to share holders because the board is accountable for shareholders for the success of financial soundness of the organization. The board may transfer powers to senior management to run day to day operation of organization but should supervise all the activities of senior management or other people in charge to see whether their activities are based on law and regulations or not. In terms of risk taking the board and management should be aware of all activities. They are responsible to establish complete and accurate written policies for the business of companies. Also implementation of management accounting by private sector can help the governments to achieve benefit a lot. At first, more industries will be capable of recognizing their financial self interest which reduces the financial pressure on government. Second, through implementing management accounting government will be more effective in terms of applying its rules and policies (Bouma, 2000). Management accounting methods and models are always under development especially after the 1997-1998 financial crises in Asia. Study conducted by Akira Nishimura, emeritus professor of Kyushu University in 2005 revealed the fact in the formative years of management accounting, the concentration was based on control through the plane standard costing, budgetary control, and other systems and the control system was based on feedback control but the disadvantage of this method was its narrow and restricted business policies comparing to today’s strategic business management. At that time the concentration was increasing the efficiency and improvement in productivity. Also another disadvantage was valuing the control of cost and expenses by middle managers rather than focusing on decision making by top managers (This systems is called traditional management accounting). After the development of mathematical management accounting and quantitative one the concept of management accounting changed. They shifted profit-based management from the tactical and feedback to strategic and made the planning-control process better. These methods helped manager to better decision making.
Corporate governance and the role of board of directors in terms of Financial Accounting:
Financial accounting is a tool for managers and external users such as those who hold shares of a company as well as, creditors, and government. It provides data according to the results of its operations and the financial status of the business. Analysis of Financial statements informs outsiders about the necessary information to make investment decision therefore, accuracy of mentioned statements are very important. Companies’ profitability, ability to pay current liabilities and to sell inventory and collect receivables, ability to pay long-term debt and analysis of stock as an investment reveals such information (ratio analysis). Members of boards of directors are responsible for checking the accuracy and implementation of strategies and further decisions when necessary. Scientific investigations revealed the fact that corruption occurs in many companies and it is a real threat for continuation of businesses. Many definitions are available for corruption but the most appropriate one is the abuse of public power by private benefit (Tanzi, 1998). It can be said that corruption is an activity with which interests of a business or entity can be threatened. The mentioned activity can be done by any individual in the business like director, employees and alike. With regard to the definition of corruption mentioned above, Mensah, Aboagye, Addo, & Buatsi, 2003 said that having no governance systems provide an environment for corruption to grow therefore; corporate governance cannot be ignored by businesses. It defines regulations and mechanism to make the activity of firm transparent and accountable. Directors and managers in firms are those who determine the corporate culture therefore, their decision should be made ethically. It has been seen that managers try to misconduct information in financial reports when their companies face with difficulties. Sometimes they hire external consultant to help them in this case. So the necessity of having external auditors in order to prevent fraudulent reporting is undeniable. In this case external auditors, internal control systems and other independent strategies to system can be helpful to make information revealed by managers transparent and reliable (Rezaee, 2005).
All the companies must use Generally Accepted Accounting Principles (GAAP) to record their accounts based on standards as well as Financial Accounting Standards Board (FASB) to enable external auditors check the accuracy of businesses in terms of accountability and sustainability because the use of accounting information can be made implicit or explicit.
Management Accounting Vs. Financial Accounting:
Research has proved the fact that both financial and management accounting provides necessary data for users to make decision. The important issue is that for which user the data is provided? Financial accounting provides data to those who are considered as an external individual or body to a company such as creditors, stockholders while Managerial accounting concentrates on users who are inside a company regardless of their level of management as well as internal decision making for planning and controlling purposes. Managerial accounting focuses on future while financial accounting reveals the past information and focuses on segments of products of a company therefore, it is extremely crucial for board of directors to consider both in order to analyze trend of company. Disclosure quality and financial reporting are other tools to assess the corporate governance of a firm (Mitton, 2002). La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1997, 1998, 2000a, henceforth LLSV argue that from the eyes of corporate governance, several standards exist in accounting which help to make verifiable contracts. A term called financial transparency helps outsiders to be assured of not being exposed to illegal and fraudulent activities performed by companies.
Discussion:
Although majority believe that rules and regulations revealed by the government help firms to run their businesses better, some believe that rules play a role of barrier in case of having a more profitable. They sometimes try to falsify information given to outsiders who want to make investment decision. Is it ethical?
Further investigations clarified that more study is needed in terms of analyzing the behavior of managers and directors in this regard and to find a better and more applicable methods for implementation of the policies.
Conclusion:
To sum up, the role of board of directors is very crucial in firms due to the fact that all the rules and regulations should be implemented under their supervision for the purpose of achieving required standards and qualifications and minimizing fraudulent as well as corruption of managers and in charged people. Information based on clarified standards revealed by the firm help outsiders to make better investment decisions. Not only that but also it helps the board itself for internal audits, checking accuracy of accounts for any fraudulent as well as helping them to find the potentials for further decision makings.
Reference:
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Alireza ZIAEI MOAYYED is an MBA student with specialization in Global Marketing:
If you are interested in more of his article writing and knowledge sharing activities please visit his web page at www.globalmarketinginsight.wordpress.com
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