Corporate governance has the management of the company to manage and control the operations. It has the company to know about the shareholders desires and tries to fulfil them. Corporate governance can also be defined as a group of processes policies and certain laws that affect the company in which they are directed. The core component of the corporate governance is financial reporting. Financial reporting helps the stakeholder assess the financial performance and know about the financial position of the company. This further helps them to take investment decisions. It was observed that there was a disguise of several well established and large companies. Few of them are Enron 1, World com 1 and Paramalat 1.There were certain statements found in the financial statement of these companies which has resulted in losing of faith of the stakeholders. As a result the stock markets have been suffering for several years and also it is observed that the pension system in the world is under great pressure. (Datar M. S., 2015
(Kuhn, 2013)Financial reporting has been given a major important nowadays and it is no longer considered to be a bookkeeping exercise. One of the important task of financial reporting is to heal the information asymmetry as it provides relevant information about a company’s economic situation the stakeholders which further help them to take economic decisions and assessing the quality of the management (Datar S. , 2016). The sleek holders are always interested to know about the cash flows timing and the uncertainty regarding the cash flows of the company. The information is demanded by the stakeholders in order to fulfil the following:
Economic point of view- the capital should be allocated in the most efficient manner and this can be achieved only when important and reliable information is available to the stakeholders. The stakeholder might take wrong decisions on the basis of the misleading information provided to them by the companies. There is a chance of the collapse of the capital market if the stakeholders are provided with wrong and biased information. Financial reporting narrows the gap between the company insiders and the outsiders. A misleading financial reporting not only impacts the capital market but also the market performance of a company. Therefore the company should provide reliable and to information to the investors so that they can take economic decisions accordingly (Girard, 2014). Lack of relevant data or hiding important information about the company hinders the interest of the investors which leads to wrong decisions. The only thing that prevents the company from making any wrong disclosures in the financial reports is the legal consequences. Therefore we can conclude that in order to get an effective corporate governance system there is a requirement of effective information system as well as effective financial reporting system. Hence we conclude that financial reporting is the key aspect of corporate governance. (Holtzman, 2013)
The main element of the financial information system is transparent reliable and high quality information that is provided to the stakeholders (Horngren, 2012). A good quality of financial reporting results in a decrease of information asymmetry between the managers of the company and the market participants. In case of information asymmetry the operations carried out by the management is not clearly visible to the investors which when does the process of decision making by them. (Armstrong, 2015) The monitoring cost arises when there is a conflict between the managers as well as the shareholders. Financial accounting information is a vital role to know the managerial behaviour which is helpful in determining the efficient contract mechanism (Ittelson, 2009). It has been observed in the past that financial reporting helps to address problems in the process of corporate governance. The main objective of the financial reporting and the information provided by the management in the process of corporate governance if the compensation contract that goes to the fact that these contracts are not considered complete until relevant information is supplemented with them. For instance, in compensation contracts if transparent information is provided then it helps to assess the performance evaluation of the management and helps to filter out the activities that are not necessary for the management to carry out. (Gow, 2016) The financial report provides credible, timely and relevant information to the outsiders all the independent directors. The quality of the financial reports helps to monitor and assess the performance of the board of directors. Although it is seen that the board of directors can have access to the internal reports but still there is a huge demand for the public information and still there is a huge demand for corporate transparency. The financial report is said to be transparent when proper public disclosures according to the rules and improvement is made and has already been monitored by the auditors (McLaney & Adril, 2016).
In order to improve the quality of corporate governance it is important for the company to appoint independent auditors and directors. It is usually assume that the board of directors who are independent provide a better report about the management performance without any biasness (Piper, 2015). However the independent director all this is the same problem that is faced by the outsiders which is no access to or less access to credible information. The decisions that are taken by the board of directors based on the quality of information that is provided to them. If the board is provided with Limited information when it contains the activities carried out by them such as decision making. The legal systems and regulations have been made most strict and it has been made compulsory to enforce the existing accounting standard in order to enhance the quality of corporate governance which is considered to be a significant area of recent accounting research (Raun, 1962).
A transparent and high quality financial reporting is required by the corporate governance system as well as the regulatory bodies. Therefore, it can be said that there is a close relationship between the efficiency of contracts, the information transparency and also the governing mechanism. Efficient corporate governance can result in reducing management incentive to hide information and encourage flexibility in accounting. There are certain mechanism that helps to monitor whether the management is working in the interest of the stakeholders or not.
A company can strengthen its corporate governance and control only by improving the quality of financial reports. The interest of the stakeholders lies in the maximization of their wealth. If the stakeholders of the company are satisfied then the company is expected to carry out its operations in the long run and there is no possibility of it being shut down. It is very difficult for the company to survive if the stakeholders of the company are not satisfied with its operation and results. Therefore, it is very important for the company to provide reports of its working so that it helps the stakeholders to get a true and clear picture of the results (Sargeant, 2010).
It has been observed in the recent years that the accounting information provided by the companies are not accurate which leads to wrong decisions. There are certain limitations of financial reporting which also contribute to this problem such as recognition of intangible assets and measurement of assets and liabilities at fair value (Seal, 2012). The activity of corporate governance as well as collection of information not only has the management of the company but also the outsiders of the company. So it is beneficial for both of them. The enhancement of the corporate governance is not only required by legal authorities but also to increase the financial knowledge. in order to lessen the gap between financial reporting and corporate governance there should be a better understanding and resources available to analyse the information provided by the company. Unfortunately in many cases it has been observed that just the opposite happens which has resulted in so many standards in the recent years.
Therefore we can conclude that a true and fair financial performance and position should be depicted in the financial statements of the company correctly and fairly which would further help in corporate governance (Siciliano, 2015). If a company provides transparent and reliable information to the stakeholders then it would be successful in winning the confidence which has been lost in the recent years. A transparent information system reduces the barrier between the insiders and the outsiders which creates a good relationship and leads to the betterment of the company (Taillard, 2013).
Armstrong, C. S. (2015). Corporate Governance, Incentives, and Tax Avoidance. Journal of Accounting and Economics , 60 (1), 1-17.
Datar, M. S. (2015). Cost accounting. Boston: Pearson.
Datar, S. (2016). Horngren’s Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Gow, I. D. (2016). Causal Inference in Accounting Research. Journal of Accounting Reseach , 54 (2), 477-523.
Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.
Kuhn, T. (2013). Corporate Scandal and the Theory of the Firm. Formulating the Contributions of Organizational Communication Studies , 17 (1), 20-57.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.
Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.
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Sargeant, A. (2010). Fundraising principles and practice. San Francisco, Calif.: Jossey-Bass.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.
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