Regulation for Corporate Reporting - Case Study Example

CORPORATE REPORTING ESSAY Development of regulation for corporate reporting The idea of the existence of corporate reporting has been said not to be evidence proof or evidence that there will be the accumulation of the benefits that comes with corporate reporting. Rather, it is important that other key steps and approaches be taken towards the need to harnessing all the components of corporate reporting. In this wise, research has actually pointed to the fact that the regulation of corporate reporting is the key to achieving such benefits (Lang, Raedy and Wilson, 2006). Generally, a regulated corporate reporting is one that is taken from the institutional level to the political level in that it is given governmental backing in the regulation of basic rules governing finance and accounting principles (Coffee, 2007). This is normally done when the central government wants to have a better view and understanding of what the various institutions, mostly financial institutions and ministries are doing in their own rights to contribute to gross domestic product growth. Though many have said that corporate reporting could exist and be of benefit without the need of any regulation on it, there are many more that have refused to reason like this, citing a number of reasons why it is necessary for there to be a regulation of corporate reporting. Focus on people and not on data A major criticism that has gone against corporate reporting is the fact that individual institutions that have been left to manage and control corporate reporting only focus on people, the institutional structures and professions, instead of focusing on actual data collection (Kothari, Ramanna and Skinner, 2009). What this means is that control has often been on the people put in charge of corporate reporting and the mindsets, culture and agenda instead of on the actual evidence they gather in terms of data. For example, instead of ensuring that the financial data that a bank supervisory produces is authentic and empirical, focus has now shifted to whether or not the people involved in the reporting have the requisite qualifications, whether they operate according to organizational culture, and whether they have their methodologies match with corporate practice. Whiles all of these checks are done, the critical need of financial data is abandoned, thereby denying authorities of the privilege of getting the actual outcomes desired of corporate reporting. As an alternative to this crisis, development of regulation for corporate reporting is suggested so that the key role of supervision would fall out of the institutions who undertake the corporate reporting. This is like saying that it is important to get a different outfit to police the policeman (Demsetz, 1969). When political regulations set in, focus is not lost as there are sufficient manpower and logistics to monitor both the institutions and the data produced by institutions. System within a system Another problem that makes the development of regulation for corporate reporting important is that the system has been criticized to be a system within a system and not an independent system on its own. What this means is that there are often parallel reporting systems that are run in addition and at concurrent times as corporate reporting (Dye and Sunder, 2001). Once this happens, the attention needed to ensure strict monitoring and evaluation is denied. Again, it makes institutions loss focus on which areas to exactly look out for in the analysis of the success of the financial environment. The Charted Institute of Management Accountants, CIMA (2010), laments on the situation, saying that there have been the inclusion of in-house systems to corporate reporting “such as those supporting internal management information, regulated financial reporting, investor relations or voluntary sustainability reports” (p. 6). Technically, it would realized the various financial regulations outlined by the institute are subsidiary aspects of corporate reporting that should not be seen or treated as independent financial systems. Meanwhile, the current practice has been that financial and accounting institutions have taken to the practice of treating them as independent systems, thereby conflicting with the core system of corporate reporting. Once this happens, corporate reporting in its self refuses to be seen as a system. It is in light of such situations that the need for regulation has always been eminent in ensuring that the central government defines the specific aspects of corporate reporting that will fall under the major system. Personnel for Managing Regulated Corporate Reporting From the discussions above, there is every evidence that the finance minister’s decision to start considering who will be best placed to support the initial development of regulation for corporate reporting for Breakavia is a step in the right direction. This is because getting the right human resource to start up the management of the regulation will set the pace for effective regulated corporate reporting to begin in Breakavia. Already, it has been said that it is only through the regulation of corporate reporting that the new government will be in a better position to carefully track all the benefits that comes with corporate reporting should it take up the decision of regulation. Again, it will make the harnessing of various components of corporate reporting more forthcoming such that the practice of having a system within a system to deny some key areas and aspects of corporate reporting to be deprived will become a thing of the past. As far as the selection of human resource is concerned, it is suggested that the selection process be guided by the exact components of regulated corporate reporting that the country wants to achieve. Generally, there are two clear-cut options available for the country and these are mandatory disclosure and regulation of accounting standards, which shall be discussed into detail in the subsequent section. But generally, should the country settle for mandatory disclosure as the methodology for carrying out regulation of corporate reporting then the country needs to look out for personnel with adequate knowledge in the area of public disclosure, especially of firms that seek access to public securities market. This is because public securities market would be the major financial fetching point for the government if selection of mandatory public disclosure is selected. In the case of regulation of accounting standard setting, much of the focus would have to be on personnel with better accounting experience and background who have command over the generally accepted accounting principles (GAAP). This is because the regulation of accounting standard setting demands a lot of application of the basic principles spelt out by the GAAP (Kothari, Ramanna and Skinner, 2009). 2. Why Corporate Governance is critical for Breakavia As a new nation, Breakavia already has many ambitions including the ambition to join the community of nations through the European Union. But for this to be possible, there are a number of ways that the country must prove its self ready to take up challenging national responsibility including financial management. The corporate governance component of corporate reporting is a very important system for the successful running of Breakavia as a newly founded nation. This is because of the multi-diverse nature of corporate reporting in allowing various forms of presentation and disclosures to be made. Already, Breakavia may be considered as a fiscally volatile country, having no previous experience with fiscal manipulation. As a new nation, the country has no previous experiences with financial systems and regiments that worked best or failed. The country is also not advantaged to various aspects and forms of financial management and monitoring that produced results. It is against this backdrop that a financial regulatory system such as the use of corporate reporting be put in place to ensure that there is closer monitoring of all forms of financial spending and proceeds that are made (Ball, Kothari and Robin, 2000). In light of this, corporate reporting as outlined in this report shall comprise and encompass aspects of financial and accounting such as integrated reporting, corporate governance, financial reporting, executive remuneration, corporate responsibility and narrative reporting (Financial Accounting Standards Board, 2006). Together, these will form the fundamental basis on which corporate reporting is going to be practiced in Breakavia and it is expected that these forms of components should hold the key for ensuring a bright financial future for Breakavia, guaranteeing that the rich natural and human resource at the disposal of the country are well taken care of. Public fund and Corporate Governance Corporate reporting is a financial management system that sets the line between information withholding and information reporting (Easterbrook and Fischel, 1984). Though much of the attention is given to financial information that is not the only aspect of governance that corporate reporting pays attention to. In terms of information disclosure and information reporting, it will be noted that in a typical governmental set up such as Breakavia, there are several monetary in-flow and out-flow dynamics (Bushman, Piotroski and Smith A, 2004). Some of these monetary in-flow and outflow dynamics may involve large sums of money while others may involve only some few sum of money. In some of the monetary in-flow and out-flow dynamics also, the rate of public attention and monitoring are higher, while in some cases, public interest is lower. Depending on the general characteristics surrounding a particular monetary dynamic event, authorities may decide whether or not it will be necessary to have records of that monetary event reported or withheld. In all in all, it is important to appreciate that corporate reporting does not limit its self to the reporting of financial information alone but that even in cases where there is withholding, there are rules and regulations that are prepared to guide the turn of events. Indeed, all of these come under corporate reporting to ensure that the absence of reporting of information does not give room for national funds to be used by private individual for private purposes. A unique feature of corporate reporting is that it allows for dynamic manipulation of the existing regulations. For example in the United States, patient insurance payments were regulated under withholding. However, “the amended Patient Protection Act imposes new information reporting requirements pertaining to reporting of payments greater than $600 to all providers/vendors, corporate and non-corporate, of goods and services to the IRS” (The APNetwork, 2010). Incorporating Corporate Governance in Corporate Reporting In the present situation that Breakavia finds its self, it is possible to easily incorporate corporate governance into corporate reporting because of the decision to regularize corporate reporting. The correlation here is that whereas regulated corporate reporting neutralizes the operational powers into a single authority, corporate governance also ensures that a similar role is played with the setting of ethical standards and best practices by which all institutions and organizations are expected to adhere to as part of formal laws (Jackson and Roe, 2008). This means that the two systems, though one is imbedded in the other, works hand in hand to achieve a common goal. In practice, there are two suggestions available for Breakavia to associate with. Mandatory Public Disclosure Firms seeking public securities markets are one of the most influential entities when it comes to the access to public funds and financial control. Key among the determinants of the financial standards of these firms has to do with the purchase of public securities. As part of the elements of corporate governance that ensure that public laws are put in place for common adherence, causing all such firms to mandatorily disclose their assets and liabilities before embarking on public securities purchases. This is because the asset and liabilities possessed by a firm or company goes a long way to determine the future and prospects of the company in such public securities markets (Admati and Pfleiderer, 2000). There are actually global events and literature to suggest that companies such as Enron who kept key in-house finance information and in some cases falsified their records ended up risking the future of their purchasers. It is against the need to avoid such events where firms and companies would have their financial reports concealed against public inspection and regulation that mandatory public disclosure is suggested. Public disclosure has however been criticized in some quarters where it has been said to distort the focus and internal attention of companies aimed at growth and development. This is because once companies are mandated to disclose their financial stand, they are reduced to a stage where their functioning and ideologies must be one that will meet public stipulations (Adrian and Shin, 2009). Regulation of Accounting Standard Setting An alternative to ensuring corporate governance through corporate reporting is by the use of regulation of accounting standard setting. In this system, the key role of corporate governance is taken from the central government into the hands of the individual institutions. This notwithstanding, some of the challenges associated with regulation by individual institutions are catered for because the institutions are made to go about their duties and activities in a manner and fashion that follows the generally accepted accounting principles (GAAP). This way, the tendency that financial institutions will pay more attention to people and structures instead of data will be eliminated because the accepted principles does not allow things to be done in such a way (International Accounting Standards Board, 2009). REFERENCE LIST Admati, A., and Pfleiderer, P. 2000. Forcing Firms to Talk: Financial Disclosure Regulation and Externalities. Review of Financial Studies 13, 479-515. Adrian, T. and Shin H.S. Liquidity and Leverage. 2009. Forthcoming in the Journal of Financial Intermediation. Ball, R., Kothari S.P., and Robin A. 2000. The Effect of International Institutional Factors on Properties of Accounting Earnings.” Journal of Accounting and Economics 29: 1-51. Bushman, R., Piotroski J. and Smith A., 2004. What Determines Corporate Transparency? Journal of Accounting Research 42, 207-252. Charted Institute of Management Accountants, CIMA, 2010. Tomorrow’s Corporate Reporting. [Online] http://www.cimaglobal.com/Documents/Thought_leadership_docs/Tomorrows-Corporate-Reporting.pdf [2nd March, 2013] Coffee, J. C., 2007, Law and the market: the impact of enforcement, University of Pennsylvania Law Review 156, 229-258. Demsetz, H. 1969. Information and Efficiency: Another Viewpoint. Journal of Law and Economics 12, April. Dye, R., Sunder, S., 2001. Why not allow the FASB and IASB standards to compete in the U.S.? Accounting Horizons 15, 257–271. Easterbrook, F., and Fischel D., 1984. Mandatory Disclosure and the Protection of Investors. Virginia Law Review 70, 669-715. Financial Accounting Standards Board. 2006. Statement of Financial Accounting Standards No. Fair Value Measurements. Norwalk, CT: FASB. International Accounting Standards Board, (IASB) 2009. Request for information, June 2009 IASB. Jackson, H. E., and Roe M. J., 2008, Private and public enforcement of securities laws: Resource based evidence, unpublished manuscript, Harvard Law School. Kothari, S.P., Ramanna K., and Skinner D. 2009. What should GAAP look like? A survey and economic analysis. Working paper University of Chicago, Harvrad and MIT. Lang, M., Raedy J., and Wilson W., 2006. Earnings Management and Cross Listing: Are Reconciled Earnings Comparable to U.S. Earnings? Journal of Accounting and Economics 42, 255-283. The APNetwork, 2010. Corporate Reporting: Prepare for New Regulations. [Online] http://www.theaccountspayablenetwork.com/html/files/Session_2_Corporate_Reporting_Prepare_for_New_Regulations.pdf [2nd March, 2013] Read More