CORPORATE ACCOUNTABILITY - Essay Example

There are several reasons for the crisis. But they can collectively be classified as those about the taking of systematic risks in the financial system. An effective approach to explain the causes of the 2007-2009 financial crisis is to outline the three main solutions developed in Britain to address the problem. FRC Update The Financial Reporting Council (FRC) is one of the primary agencies mandated with overseeing and development of the standards in corporate governance in the United Kingdom.

Every other year, it reviews the UK Corporate Governance Code, which is a combination of principles set in reports and codes of good corporate governance required for the organizations that are listed in the London Stock Exchange. In 2009, after the financial crisis, FRC reviewed and updated the Code so that it better addressed the variables that have led to the financial crisis. Stricter regulations has been proposed and seriously considered as corporate managements were found to have taken extreme risks by making bad operating, investing and financing decisions.

(Saunders and Allen 2010, p. 21) Particularly, the on-going development initiated by FRC since 2009 has focused on the need for disclosure, the increase in overall level of prescription and the emphasis on independent and authoritative for the chief risk officers and group risk management departments. (Picket and Pickett 2010, p. 148) The on-going update and developments within- and those initiative by the FRC underscored the fact that British policymakers saw the need to examine and update its corporate governance codes and requirements because it was identified as a major precursor of credit crunch.

For instance, before 2007, the financial system has been undertaking systematic risks because of the so-called shift in the banking model from "originate and hold" to "originate and distribute". (Saunders and Allen, p. 21) This change supposedly exposed the financial system to risks because it led to the deterioration of the credit quality and the rapid increase in consumer and corporate leverage. (p. 21) FRC’s focus on corporate responsibility, accountability, transparency, regulation and prescription were all reflective of the need to address systematic risks.

Introduction of ICB The establishment of the UK Independent Commission on Banking (ICB) also served to highlight the systematic risks responsible for the financial crisis that are sought to be avoided in the future. It was created in June 2010 and was mandated with the following purposes: reduce the systematic risk in the banking sector and explore the risk posed by banks of different size, scale and function; mitigate moral hazard in the banking system; reduce the likelihood and impact of firm failure; and, promote competition in both retail and investment banking with a view to ensure the needs of banks’ customers and clients are efficiently served.

(UK Parliament 2011, p. 95) The objectives clearly reinforce the updates undertaken by the FRC by emphasizing the need to reduce risk-taking in both the financial and corporate sectors. By September 2011, ICB is expected to come up with a report containing the recommendations in regard to how to ensure financial stability and competition in the British industry. The ICB also underscored the role of regulation by states because prior to 2007, the policy that have permeated allowed for the ratio of banks assets to their capital base to grow far too high and that