Over the last couple of decades, there has been an increased awareness of the importance of corporate governance. Various countries have responded to this by issuing principles-based and/or rules-based guidance and/or regulation.
According to Pass (2006) "Corporate governance is concerned with the duties and responsibilities of a company's Board of Directors in managing the company and their relationship with the shareholders of the company". "Corporate governance is the system by which companies are directed and controlled" (Sir Adrian Cadbury, The Committee on the Financial Aspects of Corporate Governance). The Boards of Directors are responsible for the company's governance. However, to take care of corporate governance structure, the shareholder appoints directors and auditors. The board of directors includes various responsibilities such as setting up company's targets, appoints leaders to achieve set targets, supervising the management and give reports to shareholder on their stewardship etc. Therefore corporate governance is exactly about what the Board of a company does and how it sets the target for the company and it can be differentiates on basis of day to day management practice by full time executives.
Get your grade
or your money back
using our Essay Writing Service!
Nowadays, the corporate governance has risen in importance and become very prominent issue. The reason which makes it prominent these days is first world- wide privatization which means how the new and private corporations should be owned and controlled. Second, pension funds and active investors influence corporate governance because of increasing portion of household saving through mutual or pension funds. The next reason for rise in corporate governance importance is mergers and takeovers. As mergers and takeovers involve newly privatized giants for example $199 billion bid of Vodafone for Mannesmann in 2000 was the largest in Europe. Forth reason is deregulation and market integration with which corporate governance protects and encourages foreign direct investment in emerging markets. And the greater integration in world capital markets and the growth in equity capital market and have also been a major factor for corporate governance issue (Becht, et al, 2005).
Last and one of the most important reasons is increasing number of business accounting scandals. However, companies like Enron, HealthSouth, and WorldCom have shaken the investor's confidence and many of them were forced by their creditors to file for chapter 11 bankruptcy protection. After such scandals major changes have taken place in corporate governance system. Firstly, completely change in the scenario of audit industry. Secondly, Arthur Andersen has gone out of business. Thirdly American president signed the Sarbanes-Oxley Act ("SOX") which is also known as corporate oversight bill as a law. This law imposes a number of corporate governance rules on all public companies with stock traded in the US (Becht, et al, 2005). The Sarbanes-Oxley Act has improved corporate governance since its commencement in 2002. Enron's and all other company's failure not only lead towards a debate over what went wrong, but also over how to revise corporate governance standards.
To deal with such corporate collapses and crisis, the issue of rule based verses principles based approaches to improve the performance of corporate governance. However, the rule based regulations are more complex than the principles based regulation. The rule based approach for governance is established by an authority through a specified set of standards and practices. On the other hand, a principles based regulation is a form of self-regulation. In addition, principles based approaches is designed for the flexibility of principles and it chooses which standards are acceptable or not acceptable. In fact, the US has adapted more rule based regulations after series of corporate scandals like Enron. While, other countries including UK has adapted principles based regulation to customize their views and to implement new practices.
The increasing adaptions of principle based regulations have some benefits over rule based regulations. Like, principles are easier to generate as opposed to a detailed set of rules. Furthermore, principle based regulation are easier to understand by both employees and clients. Moreover, the flexibility allowed was applicable to firms which were different in size, risk etc. In conclusion both the approaches have some advantages and disadvantages. Therefore, corporate governance always attracts public interest and plays a very important role in the economic health of a corporation, as well as the society and also wins the trust of every citizen in the economy.
Always on Time
Marked to Standard
Recently, UK corporate governance (formerly the Combined Code) has become very important in the UK. UK corporate governance published some of the important reports like Cadbury Committee Report (1992), Greenbury Committee Report (1995), Hampel (1998), Turnbull Report (1999), Smith Report (2003), Higgs Report (2003) etc. These reports had directly influenced the corporate governance environment. The first report was Cadbury Report: The Code of Best Practice, which led the codes, followed by the Hampel Report: Principles of Good Governance Code, which both of were combined in 1998 and established Combined Code (Pass, 2006). In 2003 the Financial Reporting Council Ltd. revised the combined code on corporate governance after the Smith and Higgs reports and for the reporting years ahead it became applicable to all listed companies after 1st November 2003.
The application of U.K. combined code has been made mandatory to all the companies in U.K. which are listed on the London Stock Exchange. It is enjoined upon them to act accordance with the listing rules. The salient features of U. K. combined code (Qfinance.com, 2011) are related to corporate governance, directors and the board, remuneration of directors, accountability and audit, and relationship with the shareholders. According to with the success or failure depends upon the company's board of Directors. The code specifies that the rules of the Chairman of the Board, who is a responsible person of the Board and the Chief Executive officer, whose main job is to run the business, must not be vested in the same person. Further the code provides details regarding the appointment of the board, improvement of their skills, election and evaluation etc. The directors should have enough sufficient remuneration to retain, attract and motivate them. According to the code every company should follow the financial reporting principle, under which the board of directors of every company should present balance sheet and explain company's financial position and its future prospects to public. The board is also responsible for maintaining the relationship with audit committee and company's auditors.
The above analyses reveal certain common characteristics of, and major differences between the UK and US corporate governance. Firstly, Combine Code of UK is different from the US's SOX. The main difference is a principle based approach (UK) as opposed to a rule based approach to corporate governance (US). According to the code structure and requirements, there are some similarities such as provisions for board structure, models and composition of audit committees etc., UK' code looks more inter related to each other, while US corporate governance provides more wide and tighter coverage of governance issues (Liliana, et al, 2009).
The UK corporate governance "comply or explain" approach varies significantly from the SOX rule based approach. Although regulations related to SOX use the same UK corporate governance "comply or explain" approach to some instances (for example, in order to check whether a company has a "code of ethics" or its financial committee has a "financial expert"), in most other instances, US regulation tends to rely on the legislation and fines and imprisonment penalties for violating the requirements of SOX. One could notice that US is very demanding and strict in the corporate governance reporting and transparency issue. While on the opposite side UK's combine code has a more balanced view on this especially through "comply or explain" statement. In conclusion corporate governance formulated by both the systems, with strong preference for UK practice.
Professional ethics are extremely important to an accountant.
In today scenario every profession requires specialized knowledge and skills from its professionals, and from each professional it is anticipated to have some essential personal qualities (Teng, 1995). Similarly in the accounting profession, an accountant should have some of the essential personal qualities that their employer especially looking for. Due to the nature of their profession, it is extremely important for the accounting professional and accountant to be ethical in their practice. Professional accountant have to take care of public interest and also to maintain the reputation of the accounting professional.
Many people like managers and especially shareholders and investors have more faith in accountants rather than any other employee of an organization, as because accountants present a clear and correct picture of the organizations finances in front of everyone. They often have confidential and sensitive information of organization. The reinvesting activities of investors are mainly dependent on the accounts that are presented to them by accountants. So, this in effect means that the accountants are indirectly responsible for the investor's money. This great responsibility should mean that accountant should act as ethically as possible. The key reason accountants have to be ethical is that people rely on them and their expertise.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
ICAEW's Code of Ethics gives ethical guidance to accountant, accountant professionals, etc. and it's been revised from 1st January 2011. The ICAEW's code of ethics is influenced by the guidance of IFAC (the International Federation of Accountants of which ICAEW is a member.) The ICAEW code of ethics has five fundamental principles (ICAEW, 2011).
First, principle is Integrity which means professional accountant should always be straightforward and honest in all their profession. Second principle is Objectivity which means a professional accountant should not do partiality, or can't take undue advantage of their power to supersede professional or business decisions. Next principle is professional competence and due care which means professional accountant has to maintain the professional knowledge and skill at the required level to ensure that a client or employer will receive proper professional service, according to current development. Due care principle follows confidentiality principle which transfers responsibility of keeping the information confidential on the shoulders of the professional accountant which should not be made known to any third party not related to the organization unless such authority is vested in him (accountant). Also such confidential information should not be used by the professional accountant for his personal gain. Lastly professional behavior which means professional accountant should obey relevant laws and regulation for their field and avoid any action that degrades the profession (ICAEW, 2011). However, the situations in which professional accountant works may create some threats to compliance with the fundamental principles. It is impossible to describe the every situation that creates threats to compliance with the fundamental principles and specify the appropriate actions. Therefore some of the threats are as follows (ICAEW, 2011):
Self Interest Threat: When the professional accountant actions and decisions get effected in an inappropriate manner due to financial or other interest. For example accountant having a financial interest in a client. Self - review Threat: When the professional accountant tries to review his earlier decision of actions. For example, auditing financial statements prepared by the firm. Advocacy Threat: When the professional accountant compromises with the objectivity just to promote a client's or employer's position. For example promoting the client positions by dealing in its shares. Familiarity Threat: When the professional accountant takes into account a long and close relationship with a client or employer to protect his interest in client / employer. For example, an audit team member having family at the client. Intimidation: When the professional accountant acts under influence of pressure or fear to take action keeping the objective aside. For example, threats of replacement due to disagreement (ICAEW, 2011).
According to the code of ethics if there is a threat, then first the accountant will look whether that threat is significant or not. And if not, then accountant will take action to remove it or to mitigate it. Safeguards that may remove or mitigate such threats to an acceptable level fall into two type of categories. First, safeguard created by the profession, legislation or regulation. Such as education training and professional experience for entry into the profession, continuing professional development requirements, corporate governance regulation, professional standard. Second. Safeguard in the work environment. For example, involving additional professional to review the work done, rotating senior staffs, discussing ethical issues with the client governance staff, and consulting the work done with an independent party, such as professional regulatory body or another professional accountant.
According to the ICAEW (2011) code "professional accountant are expected to follow the guidance contained in the fundamental principles in all of their professional and business activities whether carried out with or without reward and in other circumstances where failing to do so would bring discredit to the profession." Therefore the accountant may apply this code not only in job related task but into their life also and on the hand accountant are required to follow the spirit as well as the letter of the guidance.
Aguilera, R.V., Williams, C.A., Conley, J.M., and Rupp, D.E. 2006, 'Corporate Governance and Social Responsibility: a comparative analysis of the UK and the US', 14(3), pp. 147-158.
Aluchna, M. 2009, 'Does good corporate governance matter? Best Practice in Poland', Management Research News, 32(2), pp. 185-198.
Arjoon, S. (2006) 'Striking a Balance Between Rules and Principles-based Approaches for Effective Governance: A Risk-based Approach', Journal of Business Ethics, 68, pp. 53-82.
Bartyzel, I. (2010) Corporate Governance and Revised Combined Code. [Online]. Available at: http://ilonabartyzel.co.uk/2010/03/03/48 (Accessed: 20 April 2011).
Becht, M., Bolton, P., and Roell, A (2005) Corporate Governance and Control. [Online]. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=343461 (Accessed: 26 March 2011).
Chhochharia, V and Grinstein, Y 2007, 'Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules', The Journal of Finance, vol. LXII( 4), pp. 1789-1825.
Corporate Governance (no date) corpgov.[Online] Available at: http://www.corpgov.net/library/definitions.html (Accessed: 15 April 2011).
Financial Report Council (2006) The Combined Code on Corporate Governance. [Online]. Available at: http://www.frc.org.uk/documents/pagemanager/frc/combined%20code%20june%202006.pdf.
Financial Report Council (2006) The UK Approach To Corporate Governance. [Online]. Available at: http://www.frc.org.uk/documents/pagemanager/frc/FRC%20The%20Uk%20Approach%20to%20Corporate%20Governance%20final.pdf.
Gibson, M.S. (2003), 'Is Corporate Governance Ineffective in Emerging Markets?', Journal of Financial and Quantitative Analysis, 38(1), pp. 231-250.
ICAEW (2011) Does corporate governance matter?. [Online]. Available at: http://www.icaew.com/en/technical/corporate-governance/overview/does-corporate-governance-matter (Accessed: 30 March 2011).
Liliana, D.C., Laurentiu, D., and Sofia, R.A (2009) A Comparative Study on Corporate Governance Framework in Us, Uk and Romania. [Online]. Available at: http://steconomice.uoradea.ro/anale/volume/2009/v3-finances-banks-and-accountancy/153.pdf.
Pass, C (2006), 'The revised Combined Code and Corporate Governance: An Empirical survey of 50 large UK Companies', Managerial Law,48(5), pp. 467- 478.
QFinance (no date) Requirement of the UK Combined Code on Corporate Governance. [Online]. Available at: http://www.qfinance.com/corporate-governance-checklists/requirements-of-the-uk-combined-code-on-corporate-governance (Accessed: 16 April 2011).
Smith, H. (2007) Principle-based regulation: In principle and in practice. [Online]. Available at: http://www.herbertsmith.com/NR/rdonlyres/1EA2E1A0-B64C-4F20-8719-7DA072C0AE28/3731/5924P %20BRBrochureD3.pdf.
Somers, M.J. (2001) 'Ethical Codes of Conduct and Organizational Context: A Study of the Relationship Between Codes of Conduct, Employees Behaviour and Organizational Values', Journal of Business Ethics, 30, pp. 185-195.
TagLaw (2010) Corporate Governance in the UK and US. [Online]. Available at: http://www.taglaw.com/index.php?option=com_content&view=article&id=498:corporate-governance-in-the-uk-a-us&catid=131:specialty-group-information-archives&Itemid=100016 (Accessed: 11 April 2011).
The Institute of Chartered Accountants in England and Wales (2011) Code of Ethics Overview [Online]. Available at: http://www.icaew.com/en/technical/ethics/icaew-code-of-ethics/overview-of-the-icaew-code-of-ethics (Accessed: 20 March 2011).
Yulei, R and Hu, S (2009) A Comparative Survey of Corporate Governance Between The UK & the US: What Lesson Should China Learn?*. [Online]. Available at: http://www.bmtfi.com/upload/product/2 009 11/2008jrhy05a8.pdf.