Accounting and corporate governance

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Appendices

Introduction..............................................................................................................1

Historical Development of Accounting..................................................................1

The Development of Stewardship..........................................................................2

Corporate Governance and Financial Accounting...............................................4

The Recognition of Income and Expenditure........................................................5

Conclusion ..............................................................................................................6

References.................................................................................................................7

Introduction

.......This essay will firstly investigate the importance of realizing the historical development of accounting, then the implication and development of stewardship in accounting context and the significant role that financial accounting plays in terms of corporate governance will be discussed. Last but not least, the reasons why correctly calculate income is necessary for enterprise will be given.

Historical Development of Accounting

The best way to understand something, as Aristotle might say, is to ‘observe its beginnings and development’. Apparently, in order to entirely comprehend accounting theory, it is essential to understand the origin and historical developing process of accounting. Higson(2003) regarded that illuminate the destination of accounting especially financial accounting can benefit from the analysis of accounting objectives. There has been enormous changes during the past few decades, the research of accounting history implicate the clarification of its development and old events. Similarly, Hendriksen(1977, cited in Higson, 2003) believed that learning the historical development will result in extensive and profound knowledge in the field of accounting and its theory. Likewise, Edwards(1989, cited in Higson, 2003) hold a view that evaluate the history of accounting will help to understand and solve the issues nowadays. Moreover, since it has existed for a long period of time, accounting’s historical development are closely related to the industrial and commercial development and even have something to do with the social changes(Higson, 2003). Some scholars stick with the thought that accounting has played a significant role in promoting the development of society. On the other hand, a more compelling point of view for Higson(2003) is that accounting has created along with the social, economic and political events, namely: ‘socially constructed’, has witnessed the commerce and business become more sophisticated. Hence, understand the historical accounting development is of great significance.

The Development of Stewardship

Steward could be defined as a person employed to operate another’s business(Oxford Dictionary, n.d.), in other words, the relationship between a merchant and the person who employed and acting as an agent is stewardship. It was believed to be created early than accounts for a long period of time. In addition, its contributions to the earliest forms of accounting development is undeniable. At that time, stewardship was refer to put another’s goods under one's custody, so as to prevent the theft and fraud(Higson, 2003). Boyd(1905, cited in Higson, 2003) also provided substantial evidence to support this view. Stewardship was used to avoid theft to the royal treasury in ancient Egypt, as a consequence, the function of stewardship was officially strengthened. Higson(2003) explains that the first time accounting data was involved in management accounting and internal control for the purpose of steward, they were tightly connected with each other at the early stage. The burgeon of double entry bookkeeping also prove that accounting was used for internal control. The life of business was separated into ‘artificial accounting period’ due to permanently invested capital, however, this separation lead to financial accounting’s development. At the same time, the profit figure and accounting records were applied not only for the purpose of internal control, in other words, stewardship go forward to a financial accounting context. The relationship between accounting and stewardship has existed for thousands of years. A well-versed judgement about the consequence is required to make when the person is taking his responsibility appropriately. In the past, opportunity cost suppose to be indicated in the financial record, the owner will consider what could have been achieved and how well it could be done in certain circumstances. However, modern financial statement do not record this kind of information, but the opportunity cost will count when judging the performance of management(Collinson et al. 1993, cited in Higson, 2003). According to Higson(2003), stewardship can be divided into two parts: to judge the performance and to avoid theft or fraud. Stewardship is to do with custodianship and measure whether the steward’s performance is appropriate, did they complete the task in accordance with the landowner’s exception. From this perspective, it is essential to make a judgement by landowners and master. Noke(1981, cited in Higson, 2003) declared that the financial reporting nowadays is depict as ’accounting for stewardship’. It can be seen that the nature of stewardship has changed with the improvement of accounting, later on, it refers to both financial accounting and management accounting.

Corporate Governance and Financial Accounting

Corporate governance was described as ‘the system by which companies are directed and controlled’ by the Cadbury Report(1992, cited in Higson, 2003) which is set up in order to investigate the corporate governance in financial aspects. Tricker(1984, cited in Higson, 2003) believed that management is related to operate and control a business, in this regard, governance is to do with monitoring the progress of management. Furthermore, he generalize four principle activities of corporate governance procedure: firstly, provide a clear direction for the enterprise in the long run, the importance of devising the company’s tactical aim can not be ignored. Secondly, executive are required to provide the leadership and involved in key decision making. Moreover, the management performance of steward and the reporting to shareholders must be supervised. Last but not least, realising the responsibility in order to set a reasonable requirement for accountability. Cadbury Report (1992 cited in Higson, 2003) describes the auditor’s role as to enable shareholders to inspect to the directors’ financial statement base on the reporting system.

It is obvious that corporate governance has bring ample benefits, such as reducing the risk, enhancing performance and reveal the transparency and social responsibility(CIMA, 1999, cited in Higson, 2003). Accounting to Whittington(1993, cited in Higson, 2003), financial reporting is essential for commendably perform of corporate governance. This, however, is not always the case, especially when the cost of supervision is excessively high or the users do not utilize the data as the effectiveness of corporate governance showing in the financial reporting information was not an adequate condition. Apart from this, Dewing and Russell(2000, cited in Higson, 2003) compared the efficiency of corporate governance to the progress of code setting and amending. In the light of this, although corporate governance procedures’s effectiveness has cause concerns, taken the context of corporate governance as a whole, it is still significant to consider the application of financial reporting .

The Recognition of Income and Expenditure

There is a widely accepted concise explanation of income made by Sterling(1970, cited in Higson, 2003) ‘the difference between wealth at two points in time plus consumption’. Yamey(1962, cited in Higson, 2003) has mentioned that businessmen who closely control and operate his own enterprise showing little interest in calculation of the company's assets and profits, this is closely related with the comparatively unpopular of calculating profit until the nineteenth century.

Although the development of accounting is relatively slow in the thirteenth century, with the business transactions the increase in the number. People realise that accounting record can no longer simply rely on some informal notes and memory. Finally in 1340, a new systematic method was recorded using for the first time(Higson, 2003). However, regularly balancing the ledger was widely accepted until the 17th century, even though this is not a perfect balanced ledger. There is no regular calculation of the profit till then( Littleton 1933, cited in Higson, 2003). Noke(1981, cited in Higson, 2003) has noticed that an opportunity cost approach was officially accepted in a similar period of time. Opportunity cost is concerning what should have been done so as to evaluate the efficiency of arable husbandry. Although the profit calculation method seems to be controversial and problematic, profit figure for any enterprise is significant since it determines the dividends that could be allocate to shareholders. Moreover, shareholders do not directly running the business, under such circumstances, the periodic profit figure which suggest the corporation’s profitability is crucial to all the shareholders. Apart from this, the growing complexity of business make the shareholders increasingly rely on the financial statement (Yamey, 1962, cited in Higson, 2003). According to Riahi-Belkaoui (2000, cited in Higson, 2003), another reason for calculating the profit is for tax purpose. The Revenue Act of 1913 realise the accounting procedure and clarify the taxable income(which is base on the cash receipts and payments)for the first time.

Fraud was comparatively common In the 1840s, hence, the legal requirement for auditing the business accounts rise in response to the proper time and conditions. Later on, in the nineteenth century, the social and economic development directly result in the growth in the company's scale and the number of shareholders, implying the shareholders gain their power in management and operations.

Conclusion

To sum up, ........

References

Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Boyd, E. (1905) ‘Ancient System of Accounting’, in R. Brown (ed.), ‘A History of Accounting and Accountants’. Edinburgh: T.C.& E.C. Jack. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Cadbury Report(1992) ‘Report of the Committee on the Financial Aspects of Corporate Governance’. London: Gee and Co. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Chartered Institute Management Accountants (CIMA)(1999) ’Corporate Governance: History, Practice and Future’, London: CIMA. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Collinson, D.J., Grinyer, J.R. Russell, A (1993) ‘Management’s Economic Decisions and Financial Reporting’, London: ICAEW. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Dewing, I.P. and Russell, P.O.(2000) ‘Cadbury and Beyond: Perceptions on Establishing a Permanent Body for Corporate Governance Regulation’, The British Accounting Review. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Edwards, J.R.(1989) ‘A History of Financial Accounting’, London: Routledge. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Hendriksen, E.S.(1977) ‘Accounting Theory’ 3rd edition. Homewood, IL: Richard D. Irwin, Inc. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Littleton, A.C. (1933) ‘Accounting Evolution to 1900’, New York: American Institute Publishing Co. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Noke, C.(1981) ‘Accounting for Bailiffship in Thirteenth Century England’, Accounting and Business Research. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Oxford Dictionary (n.d.) ‘Definition of steward in English’ [online] Retrieved from Oxford University Press on 27 March 2014 http://www.oxforddictionaries.com/definition/english/steward?q=Stewardship#steward__25

Sterling, R.R. (1970) ‘Theory of the Measurement of Enterprise Income’, Houston, TX: Scholars Book Co. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Tricker, R.I. (1984) ‘Corporate Governance: Practices, Procedures and Power in British Companies and Their Boards Directors’, Aldershot: Gower. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Whittington, G. (1993) ‘Corporate Governance and the Regulation of Financial Reporting’, Accounting and Business Research. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Riahi-Belkaoui, A (2000) ‘Accounting Theory’, 4th Edition. London: Business Press Thomson Learning. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

Yamey, B.S. (1962) ‘Some Topic in the History of Financial Accounting in England 1500-1900’, in T.W. Baxter and S. Davidson, ‘Studies in Accounting Theory’, 2nd Edition. London: Sweet & Maxwell Ltd. Cited in Andrew Higson(2003) ‘Corporate Financial Reporting: Theory and Practice’, Published London : Sage Publications.

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