Financial Reporting and Governance in Commercial Corporations

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There are numerous definitions and interpretations of the concept of governance in the public sector. The UNDP states that, "Good governance is about pursuing and promoting the greatest good for the greatest number of citizens at all times while equally respecting and according due protection to those who may hold different views" (UNDP, as quoted by Dassanayake, 2002). The World Bank Governance Team web-site (2006) defines governance as the traditions and institutions by which authority in a country is exercised for the common good. This includes (i) the process by which those in authority are selected, monitored and replaced. (ii) the capacity of the government to effectively manage its resources and implement sound policies, and (iii) the respect of citizens and the state for the institutions that govern economic and social interactions among them. This definition indicates the broad scope of governance and the close relationship of it with the government for the betterment of the society as a whole.

The proposed project is motivated mainly by two factors. First, there has been a growing realization that economic growth can enrich human development, if effective policy choices are made at the national and local levels leading to a rethinking on the meaning of governance in society. Many countries in spite of their remarkable achievements in terms of economic growth in recent years are faced with the challenge of setting clear targets of good governance standards and monitoring their progress (web.worldbank.org, 2006). Members of the civil society, investors and government reformers increasingly view governance as one of the crucial factors contributing to sustainable development and favourable investment climate. This in turn has increased the demand for monitoring the quality of governance. For example, donor agencies to developing countries agree that, aid flows have a stronger impact on development in countries with good governance, and thus increasingly utilize measurable performance indicators for monitoring, evaluation and decision-making at country level (web.worldbank.org, 2006).

Second, Commercial Corporations in Sri Lanka, like in many countries, have been exposed to market forces and required to use private sector managerial strategies. In the private sector, Corporate Governance is about the ways in which top managers execute their responsibilities and authority and how they account for that authority in relation to those that have entrusted them with resources. In particular, it is concerned with the abuse of power and the need for openness in the decision making processes of the organisation (Gupta, 1994). Cadbury Report (1992) outlines three fundamental principles of corporate governance: openness, integrity and accountability. Adhering to these three principles and establishing clear structures and rules, which support them, will improve standards of management and accountability to the providers of resources. In the public sector, these 'providers' may be the electorate, taxpayer or some specific intermediary body or agency (Hepworth, 1994).

In Sri Lanka, Public Enterprises1 are mainly engaged in managing the government resources, provision of goods and services and operate in strategic sectors of the national economy, such as energy and telecommunication. The performance of these enterprises is likely to have a direct impact on the country. The actual performance level of Public Enterprises in Sri Lanka is well below the expected level (ADB, 2002). They suffer from many problems: many of them are inefficient and persistent loss-makers; financial reporting and governance practices are also poor in these organizations. In particular, disclosures are deficient and compliance with the accounting standards is weak as evidenced by delayed or failed submission of audited annual reports; issues identified by the Auditor General with regard to accounts and operations are rarely taken into consideration by these organizations; and public enterprises have not been able to attract qualified professionals to the Boards of Directors and in most cases cronyism and patronage are reported to occur in the appointment of board members and senior management (Dept. of Public Enterprises.2003; ADB. 2002).

Sri Lanka has several laws and regulations addressing various corporate governance issues. For example: Companies Act (No.17) 1982 and Sri Lanka Accounting and Auditing Standards Act (No.15) 1995. However, putting in place effective and efficient mechanisms for enforcing such laws and regulations is equally important as creating them.

Objectives

The aim of this project is to investigate the relationship between financial reporting and governance in Commercial Corporations in Sri Lanka.

The proposed study has the following objectives:

To examine the existing institutional structures dealing with accounting issues related to governance in the Commercial Corporations, e.g., legal and regulatory framework of accounting and financial reporting in Sri Lanka.

To identify the factors that influence corporate governance in Commercial Corporations in Sri Lanka.

To analyse the financial reports and other documents of selected Commercial Corporations in Sri Lanka and assess their quality in terms of transparency, reliability and comparability

To identify areas where improvements can be made in this respect.

Methodology

Since the proposed study is of an exploratory nature, case study method will be adopted to achieve the stated aim and objectives. For the purposes of this study, the concepts of governance will be examined with a focus on accounting reporting mechanisms and outputs.

One of the major concerns about corporate governance in the public sector enterprises is the measurement of performance. On this issue, the relevant variables as given in the research framework depicted in Exhibit 1 (Gillan, 2006) will be examined.

- Data Collection

The data collection will be based on both primary sources such as interviews with responsible officials, employees and other relevant parties, and secondary sources such as gazette notifications of rules and regulations, circulars, system manuals, financial statements, audit reports, management information, news papers and other relevant reports.

- Analysis

As the interviews conducted in this study will be semi-structured allowing the interviewees to express their views freely, the data collected will be interpreted and analysed on the basis of corporate governance issues in the organisations concerned.

Data collected through documents and interviews will be analysed using content analysis. Questions can be raised about the validity and reliability of content analysis.2 Since data obtained are not in a state that can be used for research purposes, they need to be coded. The process of coding can give rise to errors through incorrect coding. Further, content analysis as a technique cannot capture the context in which the documents were written. Steps will be taken to minimise the effect of these possible issues by data triangulation for example, by comparing documentary evidence against interview data.

Limitation

The scope of the study is limited to one area of governance, i.e., financial reporting. This focus has a significant relevance as certain major decisions made by various stakeholders of public sector enterprises are based on accounting figures.

Prior Studies

Because of its multifaceted nature scholars define corporate governance in different ways. For example, Gillan (2006) states that one can define corporate governance depending on his/her view of the world. Shleifer and Vishny (1997) define corporate governance as the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment while Gillan and Starks (1998) define it as the system of laws, rules, and factors that control operations of the company. Some researchers and organizations have viewed corporate governance as how it should be performed in a corporation. For instance, according to OECD (1999), corporate governance should (1) protect shareholder rights; (2) ensure equitable treatment of all shareholders, including minority and foreign shareholders; (3) recognize the rights of stakeholders as established by law, and encourage active corporation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises; (4) ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the corporation; and (5) ensure the strategic guidance of the corporation, the effective monitoring of management by the board, and the board's accountability to the corporation and the shareholders.

Even though the management of an organisation may be setting strategic aims, implementing those aims and externally reporting on activities and progress, there can still be inefficiencies unless there is a good understanding of the three principles mentioned in the Cadbury Report (1992), demonstrated by the balance of power, the establishment of proper working relationships and the division of responsibilities. These ideas related to governance contained in the Cadbury Report can also be applied to the public sector. The key safeguards for instance may include properly constituted Governing Boards or Committees; the separation of functions; the establishment of performance review, vigilant proprietors with real control and influence; clear, fair and open financial reporting and auditing systems which provide full and timely disclosure of any breakdowns (Hepworth, 1994).

The above discussion suggests that there is a pattern of relationship among the concepts and variables as shown in Exhibit 3.

Exhibit 3: Conceptual model of accounting and governance

Accounting Information Systems

Reporting Practices

Good Governance

Development

The model highlights the significance of an effective accounting information system, which generates good reporting practices, contributing to good governance and development.

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