The internal auditor plays a critical role in reducing agency costs by ensuring and assuring that financial reports prepared by the firm are consistent with regulations and standards as expected by the investors (Ahlawat & Lowe 2004, p. 147). There is often a business relationship between the client and the external audit. The firm contracts the auditor to audit and attest to the firm’s accuracy of the financial statements. Corporate failures and major financial scandals like Enron and WorldCom have resulted from poor accounting system where there were information asymmetry between shareholders, investors as well as other outside parties, and the insider parties mainly the management executives and the internal auditors. There is also a business relationship between the auditor and the shareholders who rely on the financial statements prepared by the auditor. Internal audit function works closely with the management in examining internal controls, detecting fraud and advising them in the appropriate remedial measures in case of fraud detection in the system (Sengupta 1998, p. 462). In the vase of internal audit function and audit committees, these auditors are employed by the firm and are therefore paid by their firms, the interaction between the internal auditors and managers as well as the employees can be potential sources of conflict of interest, which may result in the auditors not being fundamentally objective and also compromising their independence. Internal auditors and the dominant senior managers can work together to ensure that their individual interests override those of the firm. In such cases, the financial reports issued to the investors and shareholders may look consistent with accounting standards and principles while being far from the true position of the company. Role of information in the firms’ corporate governance Information plays an important role in facilitating firms’ corporate governance. One of the important issues of corporate governance is the construction of mechanisms that help in aligning objectives of executives with those of the firm’s shareholders (Hermalin & Weisbach 2008). The firms’ board of directors often find themselves heavily tasked with the role of monitoring and advising executives. These boards comprise of internal directors who are the firm’s senior executives and outside directors. Outside directors are essential in bringing independence to the function while the internal directors help in bringing information about the firm’s activities. These directors being insiders or senior executives in the management can hide information where they detect that such information will be utilized in disciplining or taking away the executives private benefits. Information plays an important role in the selection and construction of corporate governance mechanisms that help in aligning actions of managers and senior executives with shareholders’ interests. Information also helps in reducing contracting costs and in the making of strategic decisions. Information asymmetry The internal audit function and the management generally have more information about the firm’s performance than the firm’s shareholders. This information asymmetry can be detrimental to the firm’
The information asymmetry, corporate failures in contemporary issue in accounting Name: Course: College: Tutor: Date: Part A. Accounting system and corporate failures Efficacy of a firm’s accounting and audit system in minimizing agency conflicts depends on whether the accounting principles are well applied and consistent…
In addition, the level of fraud in organizations in public sector and private are increasing, therefore, the companies with good corporate governance emphasize in value in internal control and internal auditing have less likely to be in dangerous in fraud.
In such a scenario, the overall transaction can go wrong and it is often considered as the market failure also where market is inefficient enough to offer opportunity to everyone to have perfect knowledge. (Xu, Wang, & Han, 2012) Corporations are incorporated as artificial persons with distinction between the ownership and the management of the firm.
Another school of thought believes that dividends are adverse for the average shareholder as they attract taxes and cause fiscal disadvantages. Last but not the least the third group lauds large dividends as positive signal to shareholders that all is well.
that dividends have nothing to do with firm value because there is no tax disadvantage to an investor to receiving dividends, and that firms can raise funds in capital markets for new investments without having to go through high issuance costs. Another school of thought
(These claims are sometimes called residual claims to reflect that they accrue after all costs and fixed claims have been satisfied.) In a large publicly- held corporation, the shareholders own residual claims but lack direct control over
It is a serious matter related to investors, auditors, creditors, and other stakeholders. The importance of this issue has resulted in a lot of research for the prediction of corporate failures or financial distress. Whatever maybe the size of the company and
As the author of the text puts it, a corporation refers to an organized and independent association of individuals conducting legally-permissible business activities. At the same time, governance refers to the decision-making processes and practices involved in upholding accountability and responsibility of a corporation to its stakeholders.
Information asymmetry refers to a situation in which there is imperfect knowledge. It is a big problem in financial markets. The borrower tends to have much better information about their financial status than the lender, and the lender is difficulty in knowing if the borrower will ultimately default.
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