Corporate Governance

Topics: Corporate governance, Sampling, Board of directors Pages: 12 (4001 words) Published: March 8, 2013
1.1 Introduction
Corporate governance has been the subject of numerous theoretical and empirical studies especially after the fraudulent reporting scandals such as Enron,, Adelphia, and has come to mean many things. Traditionally and at fundamental level the concept refers to corporate decision making and control, particularly the structure of the board and its working procedures, Hermes (1994). Jenifer (2002) defines corporate governance as a set of interlocking riles by which corporations, shareholders and management govern their behaviour. Private Sector Corporate Governance Trust (1994) referred to corporate governance as the manner through which the power of an organisation is exercised in the stewardship of the corporation’s total portfolio of assets and resources with the objective of maintaining and increasing shareholders value with satisfaction of other stakeholders in context of its corporate mission. The Organisation of Economic Cooperation and Development (OECD), (2004) provides the most authoritative functional definition of corporate governance: “Corporate governance is a system by which business corporations are directed and controlled. In each country, this is a combination of a legal system that sets some common standards of governance and systems of behaviour determined by the firms themselves.” Given the importance of corporate governance practises, many analyses have been conducted in developed countries evaluating the relationship between corporate governance and financial performance. It has been characterised by ineffective boards of directors, weak internal controls, unreliable financial reporting, lack of adequate disclosure lack of enforcement to ensure compliance and poor audits. These problems are evidenced by unreported losses and understated liabilities. A going concern is a business that functions without the threat for liquidation for the foreseeable future, usually regarded as at least 12 months. Going concern is also an early twentieth century term for “business” or “enterprise”. The going concern concept directs the accountants to prepare financial statements on the assumption that the business is not about to be liquidated (i.e. where the business closes and sells all the assets for whatever price they can get.) 1.2 Background

Corporate governance scandals and accounting failures such as Maxwell in the U.K and Enron in the U.S have been dominating business debates during the last decade. Increasing ethical problems are recognised as symptoms of failing corporate governance and systems of accountability and control in publicly quoted firms. The Enron scandal is one of the most significant corporate collapses in the world. This scandal demonstrates the need for significant reforms in accounting and corporate governance, as well as for a closer look at the ethical quality of the ethical quality of the culture of business generally and of business corporations. The Enron failure demonstrated a failure of corporate governance, in which internal control mechanisms were short-circuited by conflicts of interest that enriched certain managers at the shareholders. As one commentator put it, “the Enron board had all of the committees one would hope to see in a corporation of its size, including an Executive Committee, Finance Committee, Audit and Compliance Committee.” Despite all of these measures, Enron still went bankrupt, and has become known as “one of the largest frauds in business history.” In addition there was inadequate regulation in respect for the governance of corporate firms. The development of more open and transparent reporting develops cooperation between shareholders and small stakeholders. In this study, auditors’ going concern opinion is used as a proxy of the company financial difficulties to examine its relationships with the board of directors’ good governance characteristics. A going concern audit opinion is expected to provide a more...
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