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Corporate governance and sustainability in the context of contemporary organizations
As a stakeholder of any company, it is important to know whether the organization is managed and driven forward using a sustainable strategy. Corporate governance is a key area where stakeholders need to focus since it highlights the way in which the organization is governed or in other words, how decisions are taken, what processes are followed and best practices adopted within the organization to cater to the best interest of the organization as a whole. Thus, in return will maximize shareholder value (Ahmed, 2014).

Directors of a company are accountable to its shareholders and financial performance of the company can be assessed by analyzing the financial statements which will be published on an interim and annual basis. A company’s annual report will have the financial statements and also for listed companies the stock exchange will have a compulsory requirement to publish interim financial statements so that the share holders and other stakeholders can have access to the financial information for decision making (Senaratne). Usually, an investors decision to buy or sell shares of the company will depend on the financial performance of the company. Thus, it is very important that the board of Directors take the full responsibility to ensure that the financial statements give a true and fair view to its shareholders and other stakeholders to making investment and other decisions.

Financial statements will consist of the income statement which will give the financial performance of the company and the balance sheet which will give the financial position of the company. All figures provided will be with previous year comparative value. Usually, financial statements are audited by an external auditor and will be called audited financial statements. However, a key point to note is that the auditors will give their report based on a sample test of the financial transactions of a company based on an audit plan which might not highlight some errors or even frauds. Also, since the external auditor is appointed by the board of directors of the company and for the auditing company this will be an income as audit fees there could be instances where manipulations happen, and the financial statements may not give a true and fair view of the company’s financial performance and position. Thus, it is the responsibility of the Board of directors to ensure that they provide and environment for the external auditors to provide an unbiased and accurate opinion which will be published in the auditors’ report (Senaratne).

When it comes to misleading stakeholders, some of the most common things that are done by companies are to deliberately provider a wrong picture of the company by way of financial misrepresentation, using or changing financial policies which will enhance the financial performance of the company (for example revaluation of assets, changing depreciation policy, revenue recognition etc.) and to make the financial statements more complex by using technical terms and methods that an ordinary stakeholder may find it difficult to understand (Ahmed et al, 2014). Ahold company CEO and CFO of Netherlands were taken to courts for the misreporting of financial health (Ahmed, 2014).

Thus, there are legal duties of a director which will vary depending on the country to ensure stakeholders will have a true and fair view of the company. Most common duties are to get the financial statements audited by and independent auditor, accounts to be approved by the board and after that approved by the shareholders at an AGM, directors report to be approved by the board and published, remuneration committee and audit committee reports to be published, directors’ interest in contracts to be submitted to the company registrar. Although these methods are not fool proof it will make it more difficult to commit fraud or mislead stakeholders.

Usually, the internal audit of an organization reports to the audit committee so that they will be independent to report their findings to an independent party. For example, if the internal audit reports to the chief financial officer of the company it will not be effective since any unfavorable findings will not reach the external stakeholders or even the board of directors. Thus, the internal audit should be given sufficient power and an environment to work independently to present their findings to correct errors and prevent fraud (ACCA,2021).

Audit committee and remuneration committee will be appointed by the board of directors with the approval of shareholders. Although this sounds very transparent and effective it could be that directors appoint powerless people to these committees so that they will have full control on what they report to the stakeholders. When the shareholders approve such recommended person at a general meeting or at an annual general meeting, they might not have information as to whether this person can perform his duties in an unbiased manner. Thus, for any committee to be effective they must be competent and independent.

Many companies opt for large and established external audit companies such as Ernst & Youngs, PWC, KPMG etc. to audit their financial statements so that the stakeholders will have more confidence in the audited financial statements they produce as a result of large external audit firms having more power over what they report compared to a not so established small scale audit firm. Even with large and established audit firms, the effectiveness of the audit will depend on the availability of a proper audit plan and execution of such plan and being able to work independently. What could practically happen is that the external audit team might have very new employees (audit trainees) who are less experienced reporting to an audit manager who will be managing multiple company audits. Thus, if the data gathering and initial analysis of financial data is not up to the expected standard the final output of the external audit report which is the auditor’s opinion on the financial performance and position of the company might not give a true and fair view as expected. Also due to the rush to submit the audited financial statements to the relevant authorities such as the inland revenue department closer to the deadline, they could be shortcuts taken by the external auditors to meet such deadlines which will not serve the purpose of the external audit. Also, the reappointment of auditors for the next financial year will depend on the board of directors (with the approval of shareholders at a general meeting) the auditors might not want to give an adverse report on their performance (Senaratne).

Another area where corporate governance fails is when there are ineffective boards of directors managing companies. What is common in developing countries is that when a powerful person is appointed as a director to a board, as a result of his shareholding of the company, political influence or some other reason, the board of directors will act according to the agenda of the newly appointed director. New directors might be appointed to support him with the approval from existing directors because of his power. Thus, if such situation arises there is will be a good chance of corporate governance failure.

If the regulators who are expected to identify and rectify any misrepresentation or fraud fails to perform their duty this will result in failure of corporate governance. For example, if the central bank of a country fails to identify the noncompliance of any local bank not adhering to the guidelines stipulated by the central bank the depositors and other stakeholders of such local bank will suffer financial losses due to the inability of the regulators to identify and correct noncompliance.

In summary, corporate governance is a key for sustainability of any organization irrespective of its legal form, size or the nature of business. If corporate governance fails in instances such as the ones discussed above, most likely a company will face a decline in its financial performance which will lead to a decrease in shareholder wealth and even closure of the company. A classic example will be the collapse of the energy corporation Enron towards the end of 2001 (Ahmed, 2014). An example from Sri Lanka will be Pramuka bank which collapsed due to corporate governance failure in 2003 (Jayakodi, 2008). Thus, it is a collective duty of the board of directors, regulators, and the stakeholders to ensure that companies comply to corporate governance best practices and guidelines. If any deviation is identified, corrective action should be taken immediately to ensure that the company is put back on the right track.

Wrongdoers who maybe employees or directors of companies who are responsible for the noncompliance with corporate governance best practices which resulted in financial loss to its shareholders should be dealt with severe punishments to ensure that people will be forced to adhere to corporate governance best practices. For example, in most countries like UK and Sri Lanka, if financial statements are presented deliberately in a misleading manner to its shareholders that will be treated as fraud which is a criminal offence.

Recommendations


 * An independent audit committee and remuneration committee should be appointed by the board of directors with the approval of majority shareholders
 * Independent nonexecutive directors should represent the board
 * Internal audit should be independent and should not be reporting to CFO, Finance director positions where influence could be used to alter findings
 * External auditors should be changed at least every 5 years
 * Corporate governance should be communicated to all employees of the organization so that each and every employee will be aligned to it.

References

ACCA. (n.d.). Corporate governance and its impact on audit practice. Retrieved June 22, 2021, from ACCA : https://www.accaglobal.com/pk/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/corpgov-audit.html

Ahmed, G. A. (2014). Failing in Corporate Governance and Warning Signs of a Corporate Collapse. Pakistan Journal of Commerce and Social Sciences, 846-866.

Jayakodi, P. (2008, October 26). Financial scandals:who takes responsibility. Colombo, Sri Lanka.

Senaratne, L. (n.d.). Financial reporting and corporate governance part 1. Sri Lanka.