Common themes in Corporate Governance Scandals
According to ACCA (2014) “Corporate governance is the system by which companies are directed and controlled”, also the corporate governance definition in the ACCA (2014) and Financial Times (2015) are quite different but similar at the same time, “How a company is managed, in terms of the institutional systems and protocols meant to ensure accountability and sound ethics. The concept encompasses a variety of issues, including disclosure of information to shareholders and board members, remuneration of senior executives, potential conflicts of interest among managers and directors, supervisory structures, etc.” The two definitions above explain the term corporate governance but in my opinion I personally I feel that Financial Times(2015) definition is an extended version of ACCA(2014) definition and from a readers perspective gives a more of an understanding of the term corporate governance. A lot of the accounting scandals throughout modern history have common themes which include: Audit Failure
Misuse of Authority
As demonstrated in the image above we can see that fraud within a company can come from the management or employee, with reference to management I include the CEO, chairman and the CFO, the type of fraud they involve themselves in are described above. Also on a lower scale we can see that employees endeavour into fraudulent behaviour.
A definition of an audit is that it “states the objective of a financial report audit is for the auditor in opinion about whether the financial report is prepared in all material respects in accordance with a financial reporting framework” (Philomena Leung, 2011). Audit failings tie in with the WorldCom accounting scandal where the company was capitalizing its costs than making them expenses. This was deemed an audit failure because of audit procedures not been able to recognise the fraud. So why did so many companies like WorldCom get away with fraudulent behaviour and accounting scandals for so long? Personally I think auditors need to increase their levels of Professional scepticism. “We expect anyone who comes across a breach to report it immediately, either through SpeakUp, our confidential whistleblowing helpline, to their line manager, or to a member of the controls, compliance and ethics, human resources or legal teams.” (Diageo, 2014) Misuse of authority
All major figures in companies can abuse their own authority with greed, desire to succeed and monetary gain. The main players in these positions to abuse and misuse their own authority is the company CEO, CFO and chairman. “The diagnosis of this string of corporate disasters has focused on two factors: individual immorality and inadequate oversight by boards, auditors, investment analysts, regulators and the media. The combination of personal greed and moral laxity has been viewed as the source of both the outright plundering of corporate resources for private gain”, illustrates Grant(2006). This is the case in many of accounting scandals including the Tyco scandal where CEO & CFO, firstly they stole $150 million and then secondly inflated company income by $500 million.
From Fig 2., we can see that the board of directors of a company and a lot of members have their own personal drive for greed and misuse of authority with them, solely for monetary gain and been competitive in their environment.
Fraedrich (1992) believes that “where business people do behave unethically, these decisions seem to be the result of a combination of factors that interact simultaneously and make an unethical decision easier to choose. Competition is one of the first major factors contributing to increased pressure on people to engage in unethical practices”. As we can read about what happened in the Heathsouth scandal the main people within the company committed serious crime and this was thwarted...
Bibliography: ACCA. (2014). Audit and Assurance. London: BPP Learning Media Ltd.
Diageo. (2014). Diageo Annual Report.
Financial Times. (2015, February 5). Definition of Corporate Governance. Retrieved from Lexicon.ft: http://lexicon.ft.com/Term?term=corporate-governance
Fraedrich, J. P. (1992). Business Forum. Signs and Signals of Unethical Behavior .
Francesca Gino, L. P. (2009). Organizational behavior and human decision processes. Organizational behavior and human decision processes.
Gokhale, J. (2002). Speaking of accounting scandals... Federal Reserve Bank of Cleveland. Economic Commentary.
Grant, M. V. (2006). The Strategic Background to Corporate Accounting Scandals. Long Range Planning, 361-383.
Philomena Leung, P. C. (2011). Modern Auditing & Assurance Services. John Wiley & Sons Australia, Ltd.
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