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Finance and accounting: Governance, Accountability and Audit - Essay Example

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Finance and accounting: Governance, Accountability and Audit

The characteristic of corporate governance in the United Kingdom is based on ‘comply or explain’ approach i.e. either organisations’ need to comply with the existing code or need to explain new code to government authorities. The compliance with the board related recommendations of the UK Code of Corporate Governance is expected to minimise the agency problems and to enhance the performance of organisations. Agency relationship is an agreement under which the principal appoints the agent in order to perform certain services. As a part of agency relationship, principal renders certain decision-making power to the agent. In agency relationship, problem arises regarding how to encourage the agent to perform in the best benefits of the principal (Biswas & Bhuiyan, 2008). Since industrial revolution, large organisations have continued to bring considerable changes in financing, ownership and administration forms. New technologies are continuously modernised, demanding huge investment in the industry. In order to supply money for this huge investment, people from diverse segments of society are looming in different industries with their savings. As a consequence, many sole proprietorship businesses are turning into joint stock businesses. In such type of businesses, the risk bearing activities of proprietorship and managerial activities are performed by diverse parties. These parties often have conflicting nature of interests. For instance, the interest of shareholders is to enhance the equity of organisation, without considering the value of debt. On the other hand, interest of creditors is to enhance the probability of organisations to repay debt, which often hinders organisations to undertake risky projects. On the other hand, interest of managers is to increase their individual return rather than the return of external investors. This return of managers can differ owing to the incorporation and influence of strategies which justify paying them higher salaries to ascertain diversion of resources for individual advantages. Even the different shareholders of an organisation have diverse interests. The large shareholders have interest to control the organisation and they desire to maximise their returns at the cost of smaller shareholders. These differences in interest at times can cause principal-agent problem between owners and managers. In agency relationship, managers bear the whole cost of failing to pursue their individual objectives, but capture only a fraction of the advantages (Biswas & Bhuiyan, 2008). Control mechanisms are vital to minimise the divergence of agents’ interests from principals’ interests. Corporate governance is possibly the broadest control instrument used for effective deployment of business resources. Corporate governance acts as a network between different parties of agent relationship for enhancing their value in the organisation. The UK Code of Corporate Governance offers certain recommendations for the board with respect to leadership, efficiency, responsibility, compensation and relationship with shareholders in order to minimise the agency problems (Financial Reporting Council, 2012). Although the recommendations for board are intended to minimise agency problem in an organisation, these recommendations are not perfect for numerous reasons. For example, ...Show more

Summary

Governance, Accountability and Audit Table of Contents Question 1 3 Question 2 7 Question 3 12 Question 4 16 References 20 Question 1 Corporate governance is considered as the set of mechanisms which assists in protecting the interests of shareholders. Corporate governance also facilitates in enhancing the economic perspective with regard to an organisation…
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