Comparison of the UK approach to governance with the US approach United States corporations abide by a rules-based approach to corporate governance. Most of them rely on the Sarbanes Oxley Act of 2002. …
The method is highly structured, punitive and paternal. The intention of the Act is to ascertain that the process of financial reporting is done effectively. It also seeks to reorient accountants back to ethical ways. Furthermore, the approach focuses on maintaining corporate governance at the top. A principles-based approach is the domain of the UK. The Cadbury report defines the UK’s method of corporate governance. It states that corporate governance is a mechanism for directing and controlling companies (Cadbury, 1992). This document was later followed by others like the Combined Code. In essence, all these reports seek to place corporate governance responsibilities in the hands of company boards. An institution must alter corporate governance issues in accordance with their context. Furthermore, individuals are expected to make their choices known to their shareholders. Therefore, in the rules-based approach, as practiced in the United States, parties answer to external bodies while in the principles-based approach, institutions answer to their shareholders (Tricker, 2008). While the United Kingdom places the responsibility of oversight on individual firms, the United States has an accounting oversight board which acts independently and ensures compliance. The US even has rules governing how the external auditor needs to behave. Conflict of interest is prohibited while appointment of new auditors is done under strict rules. The manner in which those audit reports are reported is also stipulated in law. Financial reporting is strictly enforced in the rules-based approach. Here, almost all parties have responsibilities under the law. Executive members must ensure accuracy and promptness of financial reports. Managers need to create internal controls for reporting while accountants must act honestly when reporting. Cases of alteration, falsification or concealment of information are all severely punished. In certain respects, punishment may be institution-wide. Here companies that do not ascribe to rules laid down by the Securities Exchange Commission will be delisted (SEC, 2003). Conversely in the United Kingdom, after a board has settled on a particular principle, it must comply with it or explain to its shareholders why it has not done so. Usually, the principles selected may emanate from the Cadbury Report, the Combined Code or general governance practice. The main reasoning behind this strategy is that corporate governance is not something to be policed. Instead, it should be done proactively by businesses. This demonstrates faith in organisations and their ability to practice these principles. The most glaring difference between these two systems is that in one punishment is clear. It is handled by specific bodies and the process by which oversight authorities come up with those punishments is well documented. These consequences also happen speedily, especially after non compliance in the US. Conversely, the effects of poor corporate governance are ambiguous in the principles-based approach. It is assumed that exposure of these unhealthy practices would damage the credibility of an organisation and hence its long term viability. Therefore, results may manifest after relatively long periods of time, and may not always be predictable. One key failure in the rules-based system is the tendency to establish very low standards of practice (McNamara & Banff, 2012). In order to ensure that members of the corporate community abide by rules in the US governance system, members have to agree on certain standards. In an effort to obtain consensus, these standards may be too low for concerned ...
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