The Implementation Of Appropriate Internal Control Procedures Business Essay

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The purpose of this paper is to overview the benefits to shareholders from the implementation of internal controls and procedures regarding corporate governance within organisations. iI is imperative that corporate governance practices of large companies are enhanced by assurance that appropriate monitoring occurs and procedures are in place. This study aims to address the importance of implementing a sound corporate governance practice and the positive benefits for the shareholders.

The paper proceeds as follows. First, we address the fundamental question regarding

what corporate governance is, along with types of internal controls, the benefits to shareholders, in particular those of large scale organisations and conclude the findings.

Findings:

The paper finds that organisations with a sound corporate governance policy provide far more benefits for shareholders than organisations with poor or no corporate governance policy whatsoever.

Research limitations:

The study focuses only on large organisations on an international scale that have either incorporated corporate governance in their business operations or have no corporate governance policy.

Main Paper:

In today's society, it has become more prevalent that organisations must effectively introduce and implement appropriate management and internal control mechanisms to ensure future sustainability. It has become evident in the varied organisations which have collapsed that little, if any, corporate governance policies where implemented. In recent times discussions on corporate governance has focused on the dealings between managers, directors and all associated parties within the organisation. Corporate governance is concerned with the way in which corporations are governed, in particular focusing on the relationship between the management of a company and its shareholders. Therefore, shareholders do benefit from the implementation of internal control procedures and furthermore, all stakeholders of the organisation will in turn benefit from the organisations continued monitoring of corporate governance.

It is well noted that corporate governance is a vital part of the corporate structure. However good corporate governance should provide appropriate incentives for the board of directors to pursue objectives in the best interest of the organisation and shareholders, along with facilitating effective monitoring, thereby enabling the firm to utilise resources more efficiently. The use of

internal controls increases the role of corporate governance and provides organisation with better relationships among their stakeholders.

Corporate governance is perceived in different ways by various organisations. The Cadbury Report (1992), defines corporate governance as ''the system by which companies are directed and controlled.'' 'A set of relationships between a company's management, its board, its shareholders and other stakeholders it is concerned with'. When an organisation has decided to implement a specific corporate governance policy, the use of internal controls help to achieve a successful and controllable outcome.

Internal controls are a process by which an organisation implements authority management, structure and information systems to help the organisation accomplish specific goals and objectives. Internal controls are primarily used throughout the whole business to help align objectives of the business, safeguard assets, avoid and detect fraud and error, encourage good management, allow action to be taken against undesirable performance, minimize exposure to risks and ensure proper financial reporting. Some methods of internal controls include but are not limited to; monitoring by the board of directors, internal auditing, balance of power, and remuneration and monitoring by large shareholders.

Internal mechanisms and controls are designed to reduce the inefficiencies that arise from human behavior such as morals, ethics and greed. Therefore, the use of internal control procedures are implemented by a company's board of directors and management to provide reasonable assurance of the firm achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. The Board of Directors have the

authority to hire, fire and compensate top management and protect investment capital thus, for an organisation to implement effective and efficient internal controls, they must have good upper management to ensure corporate governance is properly executed. This in turn benefits shareholders and all stakeholders concerned with the company.

It is especially vital that corporations adapt social responsibility when designing their internal controls to their organisational objectives, operations and practices. Firms need to incorporate social responsibility to ensure that ethical and moral decisions are implemented, as well as to maintain long-term firm sustainability and keep good relationships with stakeholders. Organisations need to identify various external factors when making self-regulating decisions; these include factors such as the economy, environment, and society.

Corporate governance allows an organisation to ensure it is an active participant in the compliance of ethical standards, legislations, international customs and moral obligations. Internationally and domestically, the media and society are constantly discussing various ideas and issues relating to socially innovative and socially responsible commerce. Whilst, more often than not, the media revolves around irresponsible corporations and their immoral practices such, as Halliburton, (known for questionable book keeping and dishonest billing practices) and Chevron for committing violations in environmental issues and human rights (The 10 Most Irresponsible Brands nd).

Consequently, it seems easier to obtain information regarding negligent companies as the media frequently discusses and questions company practices and motives, although there are various companies who strive to make ethically and moral decisions.

One of the world's super oil companies is an American multinational energy corporation, the Chevron Corporation. They are active in over 180 countries worldwide, with their Head Office situated in San Ramon California. The corporation is engaged in every facet of the oil, gas, and geothermal energy business, including exploration and production; refining, marketing and transport; chemicals manufacturing and sales; and power generation. The Gorgon Project developed by Chevron is one of the world's largest natural gas projects and the largest single resource natural gas project in Australia's history as discussed on the Chevron website (2009). In September 23 2011, the Sydney Morning Herald reported 'Visa rorting allegations surround $43 Billion Gorgon project' (Styles 2011). The article identifies illegal work practices employed by Chevron whilst working in Australia. This article will help highlight the principal that companies need to be socially responsible to their stakeholders. Companies that have introduced good corporate governance practices have been found to perform better in the areas of operations, shareholder performance, financial performance, growth, compliance, integrity and ethics than those less compliant.

Quite often, companies with a good structured corporate governance policy tend to have higher earnings per share and a great return on assets, which is a great benefit to the shareholder.

Organisations that have implemented a sound corporate governance policy are seen as far more attractive targets for mergers and acquisitions, investors are more attracted and more willing to invest with companies that are meeting its' legal requirements, have greater operational performance and efficiencies, monitor accounting transactions and ensure accuracy, lower risk of fraud or asset misappropriation and have a high level culture of integrity and ethical values.

Social responsibility and corporate governance study corporations' reactions to ethical problems, whilst taking note of the needs of their various stakeholders and the expectations of governments. This requires an understanding of the social responsibilities that a corporation has in international environments. Talamo 2011, explored corporate governance from Cadbury Corporation as concerned with "holding the balance between economic and social goals and between individual and communal goals. The aim is to align as nearly as possible the interests of individuals, corporations and society (Cadbury, 2000)".

In particular, corporate governance is increasingly concerned with the welfare of stakeholders and the interests of both shareholders and stakeholders. Thus, the substance of corporate governance has to be comprehensive and include responsible measures ensuring that business ethics and sustainable growth being of primary importance. As noted on Chevron's website 2009, the company sees corporate governance as being transparent and responsive to stockholders while managing the company for long-term success. They advised that they meet frequently with shareholders to discuss governance, financial, environmental, social and policy issues. Chevron's commitment to good governance is seen in many other ways, too. Their directors stand for election each year; 11 of our 13 directors are non-employees and independent; the board annually elects a chairperson; and have a lead independent director. Since 2008, Chevron had further added six directors to the board. Chevron also gives the right for Stockholders to call for special meetings and propose director candidates. However, Chevron's website fails to recognize stakeholders in their corporate governance statement.

Similarly, to the Chevron Ecuadorian disaster, in SMH article 2011, Chevron declined to take

responsibility of the illegal job problem surrounding the Gorgon Project in WA. They refused to comment and passed the blame to the sub-contractor, Allseas. As identified, corporate governance has a big role in ensuring practices and operations of the corporation are kept to high ethical and moral standards. Corporate governance can fail an organisation if they do not maintain good relationships with stakeholders, hence it is imperative the implement corporate governance into the corporation's principal body.

Conclusion:

In conclusion, this report has identified the importance of corporate governance within an organisation. With mounting public pressure for organisations to be honest and transparent in their business operations, it makes good business sense for a company to implement a sound corporate governance policy. It is essential for an organisation to identify the areas of operations that need improvement, and use the internal controls to help provide a solution and guidance for improvement. Evidence from research gathered confirms that organisations that have a sound corporate governance policy tend to be more efficient and profitable. By having a corporate governance policy in place, along with the use of internal control tools, this helps senior managers identify areas of improvement, therefore allowing effective implementation of policies and procedures that best suit the businesses strategies.

Furthermore, the main concern of corporate governance is focused on the relationship between the organisations directors and the shareholders. This paper has highlighted the distinctive attributes of internal control mechanisms used to ensure all business operations are in the best interest of the shareholders. Benefits of a good corporate governance structure for both the business and shareholders include; higher growth rates, larger revenues, funding, power and higher return on investments. A good corporate strategy provides the shareholder with the ability to make accurate decisions for a far more protected and far less risk associated investment.

Reference List:

The 10 most Irresponsible Brands n.d, accessed 21/11/2012, http://www.bschool.com/blog/2011/the-10-most-socially-irresponsible-big-brands/

The Chevron Website (2001-2009), accessed 28/11/2012, http://www.chevronaustralia.com/ourbusinesses/gorgon.aspx).

The Chevron Website (2001-2009), Accessed 02/12/2012, http://www.chevron.com/globalissues/businessethics/.

Market Watch Website, 2012, Accessed 03/12/2012, http://www.marketwatch.com/story/while-bp-cleans-gulf-spill-chevron-pouts-over-larger-18-billion-ecuador-disaster-says-amazon-defense-coalition-2012-03-01

Styles, A 2011, 'Visa rorting allegations surround $43 billion Gorgon Project', The Sydney Morning Herald, 23 September, accessed 25/03/2012, SMH website.

The Age website n.d, 2009, 'Gorgon project big win for Australia', The Age, 14 September, accessed 25/03/2012, The Age website.

BBC News, 2011, 'Chevron fined for Amazon pollution by Ecuador court, BBC News, 15 February, accessed 02/04/2012, BBC News website.

Starck, K, Kruckeberg, D, 2003, Ethical obligations of public relations in an era of globalisation, Journal of Communication Management, Vol 8, no 1, pp 29-40.

Steger, M, 2003, Globalization: A Very Short Introduction. Oxford University Press, Oxford.

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