Role of Accounting In Corporate Governance
Accounting is a vast discipline which primarily takes care of ascertaining and communicating the financial information of companies at or over a given period of time. Various financial statements do reflect the financial position of a company and accountants are in charge of preparing them. But there is more than meets the eye here. Accounting is much more than just the numbers. A decent Accounts training institute teaches not only the basics of Accounting but also how to interpret the financial data to take all-encompassing business decisions and even day-to-day business administration.
Today our agenda is to look at how Accounting contributes to proper Corporate Governance.
First things first, in order to understand the role of Accounting in Corporate Governance we must first understand, you guessed it, Corporate Governance.
Corporate Governance – What
Corporate Governance in general comprises of all the rules, regulations, practices, and principles on the basis of which organisations are directed, managed and controlled. It recognizes and empowers individuals having the expertise and authority to make key decisions in an organisation.
Basically, it is a systematic process enabling the decision-making body of an organisation to tackle the challenges associated with running the business. After all, decision making is a complex phenomenon which needs several parameters taken into account. Especially with opportunity costs in play, one wrong decision concerning a key business process can have a domino effect on other processes. This can subsequently amount to disruption in the daily functioning of a business.
(Courtesy – ResearchGate.net)
Corporate Governance – Why
Corporate Governance is needed to strike a balance between the interests of companies’ stakeholder (comprising of investors and shareholders), customers, suppliers, the management, the government and even the community. This is required for smooth sailing of various business processes without clash of interests.
Corporate Governance offers the management a framework for achieving a company’s business objectives entailing every management function starting from business planning and internal controls to corporate disclosure and the mandatory Corporate Social Responsibility (CSR).
Corporate Governance – Role of Accounting
Corporate Governance and Accounting cannot function independent of each other. The latter serves as fuel to the former. Quality Corporate Governance has become a deciding factor that empowers firms to maintain a strong financial standing in their respective target markets.
Most Corporate Governance failures in events around the world have seen fingers being pointed at the Accounting department in question. This is fair as the Accounting department is sort of an enabler of major Corporate Governance activities undertaken by companies. Exemplary Corporate Governance can effectively build a good image of a company in the minds of investors, thereby leading to lower capital costs in investments.
Accounting, thus can be considered as the catalyst of good Corporate Governance. This is because Accounting professionals periodically compile data to report internal activities of companies to stakeholders. This data reporting has to have some sort of homogeneity in its presentation, otherwise the reporting across markets is going to be ambiguous, which will in turn impact Corporate Governance decisions.
Thankfully, all Accounting processes in companies across the globe are rigorously controlled and monitored by certain global standards and regulations. One such globally accepted convention is the International Financial Reporting Standards (IFRS). IFRS is to Accounting what FIFA is to football, or ICC is to cricket for that matter. The common industry-wide regulations make it mandatory for companies to disclose the needed information to the masses.
Of course, IFRS norms cannot be exactly the same in all countries with varying socio-economic and geographical considerations. TO tackle this, certain IFRS-compliant but slightly tweaked variations are in use in several countries. For instance, India uses Ind-AS (Indian Accounting Standards) which are compliant with IFRS as well as suited to the Indian economic scenario.
Corporate Governance – Role of Accounting : A Closer Look
Accounting practices are highly efficient in Corporate Governance as evident by now. Accountants provide crucial opinion while planning strategies for long term business governance.
Companies generally plan effective business strategies based on the data supplied by accountants. They can decide how to function, where to invest, when to invest and how much to invest so that returns are good and stakeholders are happy too. Accountants assist their firms make effective plans regarding their growth and operations.
For example, an accountant can help shortlist projects, plans or areas that are incurring more costs than returns. On the basis of this information, his/ her company can plan growth strategies in a way that not only complies with industry regulations but also ensures good returns.
Public Limited Companies, unlike Private ones are accountable to the public in several ways. Organisations should meet their obligations, such as paying taxes, to the public. Based on the financial status of firms, public stakeholders consider making investments. Accountants play a major role in ensuring the company’s financial data reaching stakeholders is strictly accurate.
Accountants also have to monitor processes to make sure companies are not indulging in unethical practices to deliberately present faulty (or a rosy) financial image to the public. Accountants intimate companies of the consumer demands, encouraging them to keep the public interests in consideration while implementing strategies.
Shareholders, as is evident from the name are people who have bought at least one share of a company, and thus have placed their trust on the company. Companies are directly answerable to their shareholders, as shareholders have financially invested in them and thereby have become partial owners. It is the responsibility of firms to provide complete and detailed financial information to the shareholders.
Based on the information shared, shareholders can take further steps, such as increasing investments, divesting, or voting against certain undertakings that are resulting in losses. Accountants are the ones who accumulate this financial information to present sharp facts and figures to the shareholders.
Cash Flow Management & Reporting
Accountants assist firms not only to plan long-term strategies, but also to address short-term and everyday necessities to maintain a sustainable business operation. Maintaining a healthy cash flow is one of the major responsibilities of an accountant. He/ she helps draw a clear picture of how much cash the company has in-hand, which helps prioritize and take crucial financial decisions.
Acting on this information, companies make decisions regarding supplies, resources and equipment in a way that doesn’t over-spend their valuable cash in-hand, which in accounting terms is very valuable. This is because liquidity can be hard to maintain specially in trying times like these.
Accountants also help their respective firms manage line of credit and monitor all their short-term financial resources, which assists in avoiding needless debt. Who likes excess debt anyway?
Company Accountability – Management Reporting
Major departments of a company, whether inter-dependent or not are bound by a common thread called Accounting. Financial Reporting entails the accurate reporting of company financials to stakeholders, whereas management reporting involves internal management.
Accountants have to manage both these practices and aggregate the company’s financial data to report accurate figures. Financial Reporting helps the investors by offering valuable insights into the company financials, whereas Management Reporting offers the internal management of an organisation’s detailed inputs and information about the state of affairs in the company.
Thus Accountants play a paramount role in helping organisations conduct both Financial and Management Reporting.
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