Financial Crisis Is The Crisis Of Liquidity Accounting Essay


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Due to the financial crisis Mrs Akwei lost her interest with bank and she claimed that crisis occurred and still occurring due to the fundamental failure of corporate governance.

We are discussing how to prevent the future financial crisis. So we can look at briefly what is the financial crisis and the corporate governance all about.

Financial crisis is the crisis of liquidity and the corporate governance is the way company can be operate. In recent year the financial crisis was happened and it was happened due to the failure of corporate governance. Here we can look at the details of the reason for financial crisis and how we can prevent future financial crisis.

The major reason for the financial crisis ware the failure of the corporate governance. Companies are not followed corporate governance exactly and other regulatory bodies.

In some major areas the corporate governance was failed. One of the main key area where corporate governance was failed was risk management and internal control, as well as directors salary. The financial institution took excessive risk in such area of economy where corporate governance was fail to provide safeguard against the risk. The main reason was companies internal control system, many companies risk management system was very week and many cases the information did not reach the top levels of management. In many cases once the board approved the strategy and its finished, they did not think to monitor its implementation.

Accounting standard and any other regulatory roles was just a process to run the company the management did not realise to put it in real life of the company.

It is also important to say that most of the company did not think about qualified board and its implication including robust risk management team. The remuneration was another factor for the financial crisis. In many cases the company getting loss but the executive director are receiving large salary including benefit.


1.3) Problem associated with performance related remuneration and the way it can be mitigated:

While deciding the remuneration of an individual it may be difficult for the remuneration committee to assess individual's performance. It should be a gap between executive director and the remuneration committee while deciding performance related remuneration. In that scheme the executive director may de-motivated if they are not able to reach the goal set by the authority.

In that scheme the executive director receive the remuneration individually based on there performance, so it may be discourage the team work.

The performance related remuneration scheme may rise the question of discrimination between the executive director and the management of the company.

It is also create a problem that the all executive director are not from the same back ground and may not doing the same task so it is difficult to judge there performance in same way.

The performance related pay such as bonus or other benefit should be a small percentage of the earning made by the company so it may be de-motivated the executive director to perform well in future.

The way it can be mitigated:

The performance related remuneration committee should be independent.

The performance related remuneration committee should have the clear view over the each individuals work and related performance. Performance related pay scheme need to be designed carefully and ensure that the designed pay scheme should motivate the executive director to perform well in future. There should be a close connection between the executive director and the management of the remuneration board.

There should be the close relationship between goal and objective of the each executive director and the company's management. Regular training and development require to motivate each executive director to perform themself.

CASE 2: Sole trader ship, Partnership and Limited liability company.

2.1:There are some difference and similarities of running a business as sole trader ship. Partnership and limited liability company.

Explaining the key difference of running a business as a sole trader ship, partnership and limited liability company.

Sole trader ship is a business running by one person. There are may be some other employee involving in daily operation. Sole trader ship is a types of business where the owner owned unlimited liability and any profit or loss made by business directly affect the owner.

The owner of the sole trader ship business is responsible for any tax payable out of income. Sole trader ship business may easy to transfer to someone else if the sole proprietor think to do that and business may end up with the death of sole proprietor.

Partnership business run by some individual. Any profit or loss made by business need to divide into each of the partner. The individual partner of the partnership business is responsible for any tax payable out of income. Partnership business may not easy to transfer to someone else because any new partner entering and leaving into the business may need to authorise by other member of partnership business.

Limited liability company is the company where owners liability is limited. May complex to set the business. There are no limitation of partnership.

Explaining the key similarities of running a business as a sole trader ship, partnership and limited liability company.

There are no double taxation problem arise in three types (sole trader ship, partnership, Limited liability company) of business entity.

Deductibility of various benefits for example, health benefit, car benefit and other benefit is limited to all three types of business entity.

All three types of business can't retain earnings , it is taxable to owner or partner in year posted.

May easy to ease of shifting funds in and out of business because draw account can be used.

2.2: There are some merits of running a business as a sole trader ship , partnership and limited liability company as follows.

Sole trader ship business is easy to set up. All profit made by business belongs to the sole owner. Decision can be made very quick and easy. May lead to better customer relationship.

Partnership business is running by some individual so it is easy to contribute possible loss of the business. The decision take by management may be true reflection of the business current situation as the business become more democratic by the partner. Easy to share the income tax liability.

Limited liability company is better for that purposes because it's liability is limited. There is no double taxation problem compare to corporation. Income and losses can be allocate more easily as well.

There are some demerits of running a business as a sole trader ship , partnership and limited liability company as follows.

Sole trader ship business run by one individual so the decision take by individual may be inappropriate for the business. If the business make loss it is affect directly to the owner . Sometimes it may be difficult to run the business due to shortage of resources.

Partnership business may have some disadvantages. The profit made by business need to divide to the individual partner and may result to reduce the profit for each individual. Decision taking process may be longer and difficult in such condition. May lead to gap between customer and the owner.

Limited liability company may complex to set the business. There are no limitation of partnership so business may be allocated by new entrance of partner

Case: 3 Audit.

3.1) Appointment and removal of external auditor:

Appointment of external auditor:

Appointment of an external auditor is systematic approach for the company. In general the board is the authority and responsible to appoint the independent external auditor. The board look at the key area of an external auditor (skills, ability to carry on duty, knowledge) subject to shareholder choice in annual general meeting.

According to division 3 of part 2m.4 of corporate act the interested candidate need to submit the proposal addressing the board criteria.

The board will choose the appropriate external auditor who need to comply with some criteria such as the auditor need to be independent with the knowledge of the auditing and may register under the corporation Act 2001; shortlisted candidate will be interviewed and successful candidate may receive the auditor engagement letter and fees.

Removal of external auditor:

The external auditor can resign himself/herself if they are not interested to do the duty due to the problem arise according to the code of ethics.

The board also can remove or re-appoint the external auditor.

3.3) key difference between internal and external audit:

In general internal audit is arranged by the company of its own purposes while external audit are arranged by the specific regulatory body or customer with the independent external auditor.

Internal audit is an ongoing process conducted by the company while the external audit is periodic or ad-hoc basis.

The main purpose of the internal audit is to verify financial record while the external audit clarify the financial data true and fair and free from misstatement.

Case 4 professional values, ethics and attitudes


The members of the audit committee should be detailed eye, honest and straight forward in details of work.

Objectivity: The member of the audit committee should not be interested into the clients business and should not involve with the conflict of interest.

Professional competence and due care:

Audit members have a continue support to maintain professional skills and idea at a level and ensure that the client receive professional service.

Confidentiality: Member should be responsible not to share any information to the third party unless the authority. Members need to respect the authority and confidentiality at all levels.

Professional behaviour: Members need to be professional at all the times and need to act with care and responsibility. Member need to avoid any action which is not supported by the code of ethics.

Main threats of objectivity and integrity:

Main threats of objectivity and the way it can be mitigated:

Self interest threat:

The self interest threat arises if the member of the audit committee or their close family member got any interest to the clients business financially as whole. For example, if member of the audit committee hold any share with the client then the self interest threat arise.

The way it can be mitigate

The member of the audit committee should be independent to the client, no share buying and selling to the client's company, no family member involving with the company.

Self review threat:

Self review threat arises if the audit member has to re-assess the work done by himself.

The way it can be mitigate

External auditor should not prepare any other report or statement apart from his/her task.

Advocacy threat:

Advocacy threat arises if the auditor try to promote the clients business. In that case the auditor may not be objective to promote the companies share in the exchange market.

The way it can be mitigate

The external auditor should not provide any advise to promote clients business.

Familiarity threat:

If the auditor have a close relationship with the client and trusting too much then this types of threats arises.

The way it can be mitigate

The external auditor should not trust or keep relationship with the client.

Intimidation threat:

Intimidation threat arises when qualified opinion given by the auditor where a qualified opinion is appropriate then client may harass for that report.

The way it can be mitigate

The auditors need to provide appropriate opinion all the times to avoid that threat.

Integrity threat:

When member of the audit committee is not honest and straightforward in details then that types of threat arises.

The way it can be mitigate

Member need to be honest and reliable to client and the audit committee to avoid that risk.


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