The Role of The Accountant in Corporate Governance of Business Organizations

In context of corporate governance, there are two vital elements that needed to be maintained in order to ensure efficiency and transparency of organizational operations. These two elements are accountability and performance. Shareholder’s confidence is enhanced by good corporate governance practices. Thus, Good corporate governance creates shareholder’s value and secures corporate image in the competitive business environment. The goal of corporate governance is to secure interest of all stakeholders and to protect an entity from any kind of financial crises and risks that could damage corporate relations (Rezaee Z., 2007). Accomplishment of this goal requires high level of commitment from all the management employees whose responsibility is to supervise operational task as well as strategic level tasks in order to meet organizational objectives. Accountant position in an organization is of manager or executive who performs critical role in the financial function of organization. All the financial transactions are either initiated by an accountant or presented to board of directors or other stakeholders by him in the form of financial statements and annual reports. Thus, by virtue of his role, accountant enables the board of directors and higher management in fulfilling their responsibilities towards good corporate governance in the financial function of organization. This paper discusses the detailed aspects of accountant’s role in corporate governance of organization.

Although the ordinary shareholders are the owners of the company to whom the board of directors are accountable, the actual powers of shareholders are tend to be restricted, except in companies where shareholders are also assuming the role of directors. Shareholders are often ignorant about company’s current situation and future prospects. And they do not usually inspect the books of account. They only foresee the future profitability of company by analyzing the results presented to them in the form of annual reports or by analyzing the market reports available on daily newspapers or market journals. The daily running of operations of company is not their responsibility; rather, this is the responsibility of management staff and directors to whom this responsibility is delegated. Because of this, there is a potential for conflicts of interest that may arise between shareholders and management staff. Accountant is the part of management staff. The relation between the accountant and an organization is a kind of an agency relationship. By virtue of this relationship, accountant acts as an agent of the shareholders and his responsibility is to maintain accuracy and transparency in accounting information. Accounting information is used for preparation of financial statements and these financial statements are used by stakeholders in decision making (Cox C., 2005). Agency theory was suggested by Jensen M. in 1983 to explain the nature of relationships within organizations. This theory explains aspects of management employee’s role in controlling the functions of organization. Agency theory suggests that audited accounts of limited companies are an important source of post-decision information minimizing investor’s agency costs in contrast to alternative approaches. According to alternative approach, financial statements provide primary source of information for pre-decision making with the perspective of equity investors.

According to the framework of agency theory, every employee group has his own set of objectives within their department. If the achievement of these objectives lead to achievement of organizational objectives then there is said to be goal congruence. And in case if these objectives differ from each other, then conflict of interest arises. For example, in case if an accountant has his own set of objective which might differ from the objectives of organization. An accountant under his role in financial function has a responsibility of maintaining books of accounts and foreseeing cash position of organization. Payments against sale and purchases are to be sanctioned in accordance to cash position of organization. In times of financial constraints, an accountant may suggest that organization shall obtain long term and short term loans from the bank in order to meet financial obligations. This might be a risky decision with the perspective of shareholders. Obtaining loans for meeting daily cash requirements depicts that company’s credit policies are not much effective and debtors are not making timely payments. Instead of suggesting a company to obtain loans for meeting daily cash requirements, an accountant shall suggest higher management to revise the credit policies in order to ensure timely payment from customers. A company which depends too much on loans for meeting its financial obligations becomes highly geared and investor’s confidence is reduced on it. Now this aspect of how to meet the financial obligations depends totally on the information that an accountant presents to the management and directors.

The board of directors has the main overall responsibility for setting the direction of organizational operations and for good corporate governance (Conference Board, 2003). Under this role, the director’s responsibility is to oversight all the functions of organization by direct monitoring, evaluating management’s performance and rewarding them appropriately keeping in view the best interest of shareholders (Rezaee Z., 2007). One of the most important responsibilities of Board is to ensure the integrity in the process of financial reporting and to oversee all the disclosures made in the financial statements. An accountant provides all the necessary information used in making all the disclosures of financial statements. Thus, the integrity of financial reporting system through which these reports are generated depends upon the integrity of accountant who is responsible for the input of data used in making these reports. Accountant’s role is to maintain accuracy of all the financial data and to ensure its completeness. Measurement and valuation of assets and liabilities are based on calculations performed by an accountant. Beside this, all the important accounting estimates are also based on the judgment of accountant. The information contained in books of accounts in the form of assets, liabilities and estimates are used by the Board in making informed and deliberate decisions. These decisions could be related to potential investments to be made in plant or machinery to upgrade production process or to make investments in subsidiary companies or associates. All these investments are made after analysis of the financial data presented by an accountant.

An accountant must maintain the system of internal controls embedded in financial function of organization. In order to ensure completeness of financial transactions, their transparency and accuracy, internal controls must be operating efficiently in organization. An accountant shall also identify the deficiency in design effectiveness of internal control system related to financial system and shall report to internal audit department or to Board any deficiencies identified in the process. This enables the Board to better perform its role of monitoring the financial operations.

One of important developments in corporate sector of America had been the formulation of Sarbanes-Oxely (SOX) Act, 2002. This act was introduced to prevent the scandals, such as, an Enron affair (Rezaee. Z., 2004). It contains rules related to oversight board and tighter regulations in order to address accounting issues that could materially affect the transparency (such as, off balance sheet finance, a particular problem in the Enron case). This act has set the responsibilities at the end of management to ensure that financial statements are free from material misstatements and any kind of fraud[1]. The act requires the companies to produce a signed statement (signed by CFO and CEO of company) that their accounts (quarterly and annual) are accurate and must comply with applicable legislation and accounting standard.[2] This requirement also means that only the assignment of external auditor may not be enough measure for detection of material misstatements or fraud, rather, the whole management shall perform its duties with due care in order to prevent any kind of fraud or misstatement of financial reporting. The applicability of Financial Reporting standards ensure that financial statements are free from material misstatements and that financial statements are presented fairly. An accountant role is to apply the financial standards that are applicable on industry and shall record the assets and liabilities balances as per the recognition criteria defined on the applicable standards. The application of these financial reporting standards is the duty of accountant as well as management employees responsible for supervising the financial function of organization.

An accountant must be aware of the corporate laws and tax laws applicable on entity and shall help the management and Board in establishing an effective corporate governance model which ensures compliance with these laws. As accountant is well aware of the financial reporting system of company, thus, he could best enable the management and directors in preventing the fraudulent transactions that could be susceptible otherwise, by efficient running of control system and maintaining the control environment in the financial department according to the ethical principles set by top management (Rezaee Z., 2007). In other words, it is the duty of accountant to translate the code of corporate governance in the financial function of organization. Under the code of corporate governance, it is the management’s utmost responsibility to safeguard company’s assets from any kind of embezzlement through system of internal controls. Through strong control environment, an accountant ensures the safeguarding of company’s assets by proper recording of all the financial transactions and by accurately classifying them. An accountant’s role is to records and process transactions that are duly authorized by the management. Beside the financial records maintained in computer based accounting system, an accountant shall also maintain proper manual documentation of all the supporting documents and important agreements entered into by the company. These documents ensure the transparency of transactions and are also reproduced to auditors of company as well as other regulatory bodies (for example, taxation authorities, SEC filing requirements) at time of statutory audits.