ACCOUNTING &
CORPORATE
GOVERNANCE
Three Channels through Which Financial Accounting
APA, MENGAPA &
BAGAIMANA GCG
What is corporate
governance?
Organization for Economic Cooperation and Development (OECD) “Corporate governance is the system by which companies are directedand controlled, in the interest of shareholders and other stakeholders, to sustain and enhance
value”.
Cadbury Committee
“It is a system by which companies are directed and
Corporate Governance Definition
The system of rules, practices and processes by
which a company is directed and controlled. Corporate governance essentially involves
balancing the interests of the many stakeholders
18-6
Corporate Governance
Corporate governance
refers to the combination of external and
internal mechanisms implemented to
safeguard the assets of a company and protect the rights of shareholders
External control mechanisms
Sarbanes-Oxley
Internal control mechanisms
Impact of good corporate
governance
It is all about having a better organization, a better socially responsible society and a better financial and economic system.
On the society On the society
More open, transparent society Corruption prevention Rule of law: fair and orderly Promoting ethical wealth creation
On the economic system On the economic system
Revitalizing market
economy Sustainable economic growth Positive development on capital market More globally competitve
Increasing competitiveness through
fair competition
On the organization On the organization
Why corporate
governance?
Corporate governance is
a crucial part of financial institutions and banking industry as a whole.
Effective corporate
governance is essential to the safe and sound functioning of a financial institution
Banks and financial
institutions play a
significant role in the economy and they
should adhere to strong corporate governance standards to:
ensure stakeholders’
satisfaction; and
confidence in the
Incentives for the financial services
industry
• Adoption of Internationally accepted governance
standards will help them to achieve their corporate aims.
Individual banks
• By increasing the compliance in the system the
industry can attract depositors, borrowers, counter parties and the investors.
Banking Industry
• To protect their sponsorship against all risks
and ensure that wealth is multiplied.
Shareholders
• Strengthen banking sector and discourage
fraud and misrepresentation.
Regulators
• At large makes sure that social reward is
maximized
Corporate governance models – a
comparison
• Principal – agent model
• Relationship of managers vs.
shareholders
• Principal – agent model
• Relationship of managers vs.
shareholders Anglo-Saxon or
“neo liberal” approach
• Stakeholders’ model
• Relationship of managers vs.
stakeholders
• Stakeholders’ model
• Relationship of managers vs.
stakeholders The European
model
• Stakeholders’ model + Shariah • Answerable to Allah Almighty
• Stakeholders’ model + Shariah • Answerable to Allah Almighty
Islamic corporate governance
CORPORATE GOVERNANCE IS
EQUITY INVESTMENT
CONTRACT
Corporate Governance Roundtable 12
The Subject is
Summarized in Three
Simple Statements
Equity investment requires good corporate
governance.
Good corporate governance requires
credible disclosure by the issuer.
The absence of credible disclosure by
issuers will have macroeconomic effects:
bank financing and conglomerate internal
capital markets will not support the
Corporate Governance Roundtable 13
Step One: Corporate
Governance is the Equity
Contract
We are all familiar with the debt contract: a
detailed document specifies the interest rate, the repayment date, the debtor’s covenants, and the events of default.
What is the equity contract?
The corporate governance system specifies the rights of
an equity holder and the steps available if management breaches its responsibilities
Corporate Governance Roundtable 14
Step Two: Good
Governance Requires
Credible Disclosure
The corollary to Gilson’s rule of value:
You get what you can measure.
The algebra of governance and disclosure:
You pay for what you get = you get what you can
measure
Canceling yields:
You pay for what [you get] = [you get what] you can
measure:
You pay for what you can measure!
The difference between disclosure and credible
Corporate Governance Roundtable 15
Step Three: The Effect
of a Bad Equity
Contract
A bad equity contract – an issuer’s inability or
unwillingness to make credible disclosure – makes it difficult for the market to distinguish good risks from bad.
The increased cost of capital shifts financing
and the capital market toward debt.
Consequences:
Debt is ineffective at financing high risk, high return
early stage investment.
The capital market will not support cutting edge
Corporate Governance Roundtable 16
The Institutions
Necessary to Support
Credible Disclosure
Legally Mandated Disclosure
Requirements.
Good Accounting Standards.
Independent Auditors.
Corporate Governance Roundtable 17
Legally Mandated
Disclosure Requirements
Problem:
How do we distinguish between those who
disclose accurately and those who do not?
Absent effective private intermediaries, a
reputation model will not work.
By imposing penalties on false disclosure, a
Corporate Governance Roundtable 18
Good Accounting
Standards
The critical characteristic is not the particular
standard – the metaphysics of accounting – but that the form of disclosure allow users to
rearrange the information to their own use.
Good rule of thumb: an accounting system that
has no use for the adjective “hidden.” Examples:
German hidden reserves.
U.S. debate over charging the value of employee stock
options to earnings.
CAPITAL MARKET
EFFICIENCY
•
When capital markets are efficient,
costs (labor, capital, and natural
resources) are “correct,” which
improves decision making.
•
Market efficiency is often artificially
affected by government policy:
•
Currency controls
•
Price controls
•
Subsidies
•
Efficient markets protect
against:
•
Adverse Selection: One party
in a transaction has an
information advantage, and
uses this advantage to receive
preferential pricing or risk
transfer.
•
Moral Hazard: One party does
not bear the full risk of its
actions and so engages in
excessively risky transactions.
•
Efficient capital markets “discipline”
corporations:
• Poor decisions are punished. • Stock prices decline.
• Cost of capital increases.
• Risk of bankruptcy or being taken over
increases.
•
When governments eliminate the risk,
poor governance (and maybe illegal
activity) often follows
•
If a country lacks efficient
capital markets, something else
often takes its place:
•
Wealthy families
•
Large banking institutions
•
Other companies
•
Governments
•
These entities also “discipline”
corporations in order to protect their
investment but, their interests may be
different from those of other
shareholders and stakeholders.
•
Usually, private parties are less
effective at monitoring companies than
capital markets due to vested interests
and lack of enforcement power.
ACCOUNTING & THE
MARKET
Sources of Influence on
Accounting*
*Daniels ,Radebaugh, and Sullivan; International Business 14th Edition; Pearson
Cultural Differences
in Accounting
Classifying Accounting
Systems
Weak vs. Strong Equity Markets
From Micro-Uniform to
Micro-Based Systems
Macro uniform accounting system
Government influenced
Japan, Germany, China, France
Micro based system
Pragmatic business practices
Strong vs. Weak Equity
Markets
Strong equity markets vs. weak equity
markets
Movement towards strong
Failure of Corporate
Governance
Regulations have not always been
effective
The Enron’s case (an exemplary board that
failed miserably).
Regulations have been reactive as
opposed to proactive
Examples: The Sarbanes Oxley Act.
Corporate Governance will not stop the
collapse of SME’s
Conclusion
High quality checks/balances in the oversight of
Financial Institutions are cornerstone of effective governance
Remember “one size does not fit all”
We shall take into consideration that institutions will
adopt different approaches to governance based on size, complexity and nature of their significant activities
It is important that regulators and policy makers
Qualities of the
Accountant of the Future
Personal attributes, which include insight, sound
professional judgment, project management skills, integrity and ethics
Leadership qualities of strategic thinking, planning and a
cross-functional perspective
Broad business perspective, which includes a good
understanding of one’s organization and industry, risk management and organizational systems and processes
Functional expertise in the traditional technical skills,
including financial management and taxation
Strong communication skills, be well versed in IT, be
committed to life time of learning
Ability to combine technical skills with strategic vision, see
