An effective corporate governance strategy consists of five elements such as culture, structure, systems, leadership, and strategic alignment (Monks & Minow, 2012). Across the globe, companies Endeavour to manage their corporate governance strategies in order to operate efficiently within the pillars of social welfare and total quality management. Over the years, as businesses experience challenges as a result of internal and external dynamics, the scope of corporate governance has been refined into sustainable and effective system of business management. The principles that guide the corporate governance strategy are transparency, accountability, leadership, and strong standards of governance (Gibson, 2010).
This paper presents the role of accountant in corporate governance within the board of governance, board committees, and management in an organization. Besides, the paper presents information that an accountant should provide to help guide and support the board and management. These roles and information are presented in terms of the source such as CFO and CPA from a comparative analysis perspective.
Role of Accountant in Corporate Governance
The board of governors in a company has the responsibility of managing the affairs of the organization in addition to setting the short-term and long-term objectives. The board also creates the risk management and mitigation policies besides ensuring that the organization is compliant with different regulatory obligations. Within the departments of an organization, there is a team of accountants headed by the CFO allocated the responsibility of full material disclosure as part of governance.
Companies are required to publish the financial results of business operation on a periodic basis. This can either be monthly, quarterly, semi-annually or annual. This requirement is necessary because it provides the board of a company with information that relate to the overall performance of the company (Gibson, 2010).
The key statements that are of concern to the board of governance are a statement of financial position, income statement, cash flow statement, and statement of changes in equity. These statements have two significant roles. First, they report the financial situation of a company. Secondly, they indicate how an entity has performed over a period of time. Thus, accountants are focused on the identification, estimation, and dissemination of financial and economic information of an entity to the board of governance (Monks & Minow, 2012).
The primary role of accountants in corporate governance is provision of quality financial information to the decision makers. There are a number of qualities that enable the accounting information to satisfy the needs of board of governance. The first quality is that the accounting information should be relevant (Monks & Minow, 2012). The information should be presented in a way that it is able to influence the decisions such as endorsing past events and forecasting future events.
This can be achieved through reinventing the conceptual framework of operations. The second quality is that accounting information gives a faithful representation of the financial position of the entity (Gibson, 2010). This implies that the accounting information should be complete, neutral, and free from error. In addition, accounting information provided by accountants should be comparable, verifiable, timely, and understandable (Monks & Minow, 2012).This creates uniformity, reliability, and consistency in the financial reporting to the board of governance through the CFO.
Analyzing the needs various users of accounting helps an accountant to clearly know who the information targets and the purpose of the information. The various users have different needs and the accounting information presented should adequately address the needs of the users (Ramnath, 2012). The internal users represent the people within the reporting company such as the management, board of governors, and board committees, which directly perform the duty of corporate governance in a company.
The internal users require the financial information for decision making as part of corporate governance. Accounting role to the board of governors in a company can be classified into financial accounting and managerial accounting. Financial accounting is designed to satisfy the needs of external users while managerial accounting is designed to satisfy the needs of internal users (Monks & Minow, 2012). This means that accurate and timely financial reporting is an instrumental duty that accountants must undertake to facilitate accurate decision making by the corporate governance board (Gibson, 2010).
The governance board will require financial information to enable them decide on whether the company is on track or not. This decision depends solely on the financial information provided by accountants. The board can look at the profitability of the organization over time as provided in the income statement created by the accountants. Also, they can monitor dividend payments and investment ratios of the company over time. Finally, the board can review the capital structure of the company to enable them assess the risks that the company is exposed to (Monks & Minow, 2012).
The CFO has the role of ensuring company compliance to different accounting standards on behalf of the board of governance in an organization. Several government organizations are concerned about the financial results of the company. For instance, the government agencies will be concerned about whether the company complies with various rules and regulations set up by the government (Gibson, 2010). The government agencies will also require the financial information of the company for making decisions during takeovers, acquisitions and mergers. The business combinations are often regulated by government agencies so that they do not interfere with competition in the market (Monks & Minow, 2012).
Thus, the government will require a variety of accounting information such as revenue from sales and profit earned by the insurance company in a given period. Also, the government will require information that relates to the overall financial standing of the company. The role of providing accurate accounting information is accomplished by the CFO to ensure that there is compliancy to different regulations and policies on financial standing of the company. The board depends on the CPAs working under the CFO to enforce and report on process of compliance to different regulations to the board of directors through the CFO (Ramnath, 2012).
Accountants also provide the role of financial analysis on behalf of managers who report to board committees and corporate governance board (Monks & Minow, 2012). The duty of analysis reviews and compares the financial position of the company in comparison with other companies in the same sector (Gibson, 2010).
The findings of these analysts often aid the board of governance in deciding on whether to adopt management strategies in the company or not based on their own assessment of risk and return of the company from the analysis provided by accountants through the CFO. Thus, the accounting analysts play a significant role of breaking down the financial data of the board into components that makes it easier for the members to understand the financial performance of the company in comparison to other companies in the same sector (Monks & Minow, 2012).
Accountants are mandated with the duty of direct reporting to the management of accompany about financial gearing and focus through the CFO. The management uses financial managerial reports generated by accountants to determine whether the objectives and goals of the company are being met (Monks & Minow, 2012). Thus, the team reviews the performance of the business on a frequent basis against the targeted performance to ascertain if there are variances in performance as reported by accountants (Ramnath, 2012).
Such analysis enables the management to come up with ways of improving performance as part of corporate governance on behalf of the board of directors. Further, the management will require the reports to enable them ascertain whether there is a need to change the direction of the company (Monks & Minow, 2012). This can be achieved by carrying out comprehensive analysis of the strength, weaknesses, opportunities and threats that the organization faces as captured in the financial managerial reports (Gibson, 2010). Such analysis evaluates the ability of the company to perform well and survive in the market. Therefore, the managerial accounting reports generated on a regular basis will serve the interest corporate governance, in terms of sustainable organizational performance (Monks & Minow, 2012).
Certified Public Accountants play a significant role in corporate governance through creation of a positive impression about the moral standing of an organization. Most importantly, the CPAs produce financial reports which are a form of communicating with the board of governance of an organization about the financial and economic condition (Monks & Minow, 2012). The stakeholders of the entity, especially the corporate governance units, depend profoundly on the annual statements to determine the position of such an organization (Ramnath, 2012). This enables them to make informed decisions with regard to their association with the company.
This creates the need for close monitoring and regulation of the Certified Public Accountants as part of strengthening corporate governance. Thus, observing the ethical standards improve the accounting professional environment and general company image, as part of strategic corporate governance duty. It makes the Certified Public Accountants act in moral manner when executing their duties. The ethical standards increase the reputation of the accounting profession (Gibson, 2010). Companies that completely embrace the ethical standards have improved reputation and better image. This improves their presence in the market hence increased returns.
Improved reputation also helps in maintaining the financial stability of the organization. The ethical standards also help companies to instill discipline among the accountants. The code of ethics can help the companies to come up with disciplinary rules (Monks & Minow, 2012). Finally, the use of a code of ethics reduces the number of litigations that a company may have at a given time. It is because the use of the ethical principles minimizes the possibility of the company being on the wrong side of the law at a given time due to incompetency or fraud committed by accountants (Ramnath, 2012). In addition, it minimizes the possibility of a company to face regulatory investigation or sanctions.
Therefore, the CPAs in an organization have the role of observing ethical standards in financial reporting to protect the image of such a company as part of corporate governance (Monks & Minow, 2012). When accountants internalize the need for ethical financial reporting, the board of governance of a company will have easy time cementing a positive reputation among customers, investors, government authority, and other stakeholders.
The CFO, who is the head of the CPAs in an organization, has the role of stakeholder engagement in terms of financial gearing of a company. Stakeholders refer to a group of people who have interest in a venture and are also able to influence outcome and are represented in the board of organizational governance. Stakeholders’ engagement helps in smooth running of the business (Gibson, 2010). There are a number of issues that the CFO has to take into account when engaging stakeholders as part of corporate governance duty. To begin with, communication to stakeholders about financial reports should be done early enough to facilitate the decision making process at the board level.
The financial performance message should me meaningful and accessible (Ramnath, 2012). This should be done throughout the entire life f the business. Secondly, stakeholder consultation needs to be planned. In addition, the consultation need to be inclusive, documented, and property communicated to ensure that the CFO is in a position to represent the financial department of the organization in governance. In addition, the CFO has the role of establishing reachable and reactive ways for the stakeholders to raise distresses and complaints about the financial standing of a business as a member of the management committee (Monks & Minow, 2012).
This role is accomplished by the CFO through reporting frequently reporting to the board of governance, board committees, and the management unit on the general performance of the business. Such reports highlight the financial performance of the business against preset targets (Gibson, 2010). Besides, these reports assist the corporate governance board of a company in making transactions and business processes more efficiently and improving accounting functions in business management.
Reflectively, an efficient and systematic accounting system controlled by the CFO acts as a shield against misappropriation and other unethical accounting practices that might interfere with efficiency aspect of corporate governance (Ramnath, 2012). Thus, the corporate governance team in an organization may find the reports by the CFO vital in improving monitoring systems, investor’s confidence, and inclusive structuring as the financial demands of a company (Monks & Minow, 2012).
Putting into consideration of the external and internal dynamics of accounting role in strategic organization financial sustainability, the corporate governance strategy becomes more a flexible, self regulating, and consistent in monitoring financial performance when the role of the CPAs and the CFO are well executed. Specifically, when financial reporting, compliancy, and focusing roles of accountants are merged with appropriate corporate governance mix, the strategy will secure a stable organization performance in the short-term and long-term.
The corporate governance strategy for companies should take up the role of ensuring that it offers assistance through creation of an accounting unit that addresses the loop holes in financing reporting to create watertight financial records and reports that are accurate and dependable in decision making. This is because the strategic financial management system provides a sustainable corporate governance foundation upon which the image, performance, and sustainability of a company are laid.
Gibson, C. (2010). Financial reporting and analysis: Using financial accounting information. Alabama, AL: South-Western Cengage Learning.
Monks, R., & Minow, N. (2012). Corporate governance. New York, NY: John Wiley & Sons.
Ramnath, S. (2012). Investor and analyst reactions to earnings announcements of related firms: An empirical analysis. Journal of Accounting Research, 40(5), 1351-1376.