Online Tutoring on Corporate Governance
Research Background
This section presents the introduction of the research to show the justification behind the work and encompasses the background of the research introducing the topic overall view. It also comprises research gap, summary and organization of the study.
Corporate governance is related with the structure, process and power mode that dictates the rights and responsibilities of various groups engaged in the management of an organization. Corporate governance is all about the management of corporations, which may not be a mainly telling statement from a definitive perspective, but it reminds us that corporate governance relates to corporations and also relates to the determination of the practices in which they are fully involved (Brown, Beekes & Verhoeven, 2011). The Cadbury Committee Report (1992) stated that ‘Corporate governance is a type of structure or process by which companies are controlled and monitored. Corporate governance is seen to accurately identify the rights and responsibilities of every one of the firm’s stakeholders. Since the perspective of the agency theory, corporate governance refers broadly to a system of matching management desires with that of shareholders or from the legislative point of view as a mechanism of guaranteeing adherence with all relevant legislation, policies, and procedures (Ho & Wong, 2001). Corporate governance is no longer merely a regulatory mechanism, but a strategic business requirement that is critical to corporate sustainability and corporate social responsibility objectives (Rezaee & Kedia, 2012). Over recent times, a growing trend has been the requirement for widely improving corporate governance and transparency for business organizations. In the light of the last global financial crisis, corporate governance has received significant coverage and is now growing as a core issue for policymakers and publicly traded companies.
Processing dimensions of corporate governance have been the main focus of regulations and recommendations. There are many laws, acts and regulations based on the structure of corporate governance such as the United States Sarbanes-Oxley Act (SOX 2002), the Combined Code on Corporate Governance (Financial Reporting Council 2003) in the United Kingdom (UK), and the Principles of Good Corporate Governance and Best Practice Recommendations (ASX 2003, 2007) in Australia. Reasonable corporate governance, though, includes adjusting adequate reporting levels with good corporate performance (Cadbury 1997). Earlier work shows a link between improved corporate governance structures and greater quality of financial reporting (Christensen, Kent & Stewart, 2010), more accurate reports and price-sensitive information (Beekes and Brown 2006), minimized fraudulent reporting (Beasley 1996), less failures of accounting and reporting standards (Dechow, Sloan & Sweeney 1996), and bad abnormal returns mitigation (Brown, Lee, Owen and Walter 2009). Another study by Larcker et al. (2007) reveals it often hard to prove causal relationships between the performance of governance measures and the company’s performance.
This research based on corporate governance is particularly involved with examining the structures that have developed to make the accurate financial statements of retail companies especially in the case of Australia. Financial accounting is one way to giving basic source of needed information of the managers’ performance that is required by the investors and financiers (Sloan, 2001). Nonetheless, some of the key characteristics of financial accounting, including the use of historical costs, the requirement of precision, the concept of realization and the concept of conservatism, are hard to comprehend except if a corporate governance viewpoint is adopted. If governance issues are absent then financial accounting’s function would be limited to supplying investors with the risk and return information needed to promote the best decision to assign portfolios. Consequently, the study by Bushman and Smith (2001), discusses an area of key importance in financial accounting.
In the structure for which shareholders nominate directors and external auditors, the company’s board of directors is involved in setting governance. The study explores how corporate governance can have an effect on the corporate financial statements in the retail sector when reporting annual transactions and decisions. The research is based on determining how corporate governance is different from other methods or techniques of management. It discusses not only the impact on the financial statements but also how it can be strengthened as corporate governance is integrated into the enterprises. Very less literature is available in the area where this research is focusing that retail companies. The emphasis of this study is on corporate governance that has an impact on company management and not on the financial statements-produced results as it has other areas to examine.
Given the importance of corporate governance in the financial performance of the companies, it is necessary to investigate empirically and understand the role of financial statements because financial accounting information is considered as an input for the corporate governance mechanism. There is lots of research being conducted on corporate governance but the area that shows the effect of corporate governance on making accurate financial statements in retail companies are missing or has very little literature. The main theme of this study is the effects of corporate governance to prepare the accurate financial statements of retails companies of the Australia. This study is divided into five sections. Section 1 introduces the study and address the research background; section 2 describes about research problems and contains research question and research objective; section 3 contains theoretical background and literature review on corporate governance and accurate financial statements. Section 4 explains the research design and methodology of research. The final section includes conclusion. This research will expect to apprehend the effects of corporate governance on financial accounting information based on financial statements of the companies reporting under its principle guidelines. This research will help to comprehend the actual value of financial reporting by examining preferences of retail investors over selected layout, use and value of three sections of financial information. This study will contribute to the understanding of the current value of financial reporting by analyzing retail companies’ financial statements.
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Research Problem
Agency theory argues that corporate governance is important in terms of the management of companies. This enables management to match the company’s priorities with those of shareholders and other stakeholders; as a result, this will impact the financial statements. Organization owners are distinct from those who manage the firm that leads to the principle of the theory of agencies (Fooladi & Nikzad Chaleshtori, 2011). Corporate governance impacts heavily on corporate performance. This is because of the factors it contains. It considers that there should be an adequate board size, independence between board members and risk management and audit committees should be assured. Corporate governance not only offers corporate guidance but also a contributed in better management structure (Vo & Nguyen, 2014). Corporate governance can have a range of effects on corporate efficiency, and not just on financial reporting. This restores trust in shareholders and leads to high business growth. Earlier there were many issues that result in failing of companies because of failure to adhere to corporate governance. Failure to comply with corporate governance leads to a loss of trust in shareholders, increasing finance will also be hard for such organizations, and risk management will not occur (Lister, 2017). The research concern for this research is ‘finding how corporate governance can bring organizations betterment’ with the help of its accurate financial statements.
Research Question
Following is the research question of the study
- What is the effect of corporate governance on financial statements of the companies reporting under its guidelines?
Research Objective
Following is the research objective of the study
- To investigate the effect of corporate governance on financial statements of the companies reporting under its guidelines?
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There is vast literature present on the topic of corporate governance (CG). Corporate governance can be viewed as the mechanism and system used to administer and manage business affairs with the ultimate goal of increasing business stability and corporate accountability (Zabri, Ahmad & Wah, 2016; Yameen, Farhan & Tabash, 2019). It is widely acknowledged that good corporate governance structures are required to cut the problem of ‘agency’ ascending from the independence of ownership and regulation in corporations. Jensen and Meckling (1976) describe the relationship between the agencies as a contract under which one party (the principal) employs another party (the agent) to conduct a certain facility on their behalf. Managers working as agents and operating in their own interests are unable to optimize shareholder (principals) returns unless effective governance mechanisms are enforced to protect shareholder preferences (Jensen & Meckling 1976). On the similar source, businesses with better governance structures, i.e. more autonomous directors, should offer their shareholders with greater returns than those with weaker governance structures.
A significant literature looks at the usage of accounting information in performance compensation contracts. Most of this work is based on economic models and is generally recognized in the perspective of the wide range of executive incentive of academic research. The beginnings of research into corporate governance can be traced back all the way to Berle and Means (1932), who stated that control of management in large companies is inadequate to establish managerial opportunities for maximizing value. Despite extensive presence of organizations defined by the parting of capital control from capital ownership, corporate governance study has interested in considerate the frameworks for mitigating agency difficulties and promoting this method of financial organization (Bushman & Smith, 2001).
In the domain of agency theory and its related issues, it is practically difficult to ensure that the agent makes choices that are in the public interest of the community without the idea of constructive monitoring and bonding costs (Jensen & Meckling 1976). Corporate governance functionality can boost monitoring; therefore, the agency theory assumes that the selection of independent qualified non-executive directors is a way of reducing the agency costs (Hodgdon & Hughes, 2016). Previous research finds a greater proportion of independent qualified non-executive directors participating in higher volunteer disclosure rates (Chau & Gray 2010).