NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY
Faculty of Engineering
Department of Industrial and Manufacturing Engineering
Business Studies TIE 5205
Assignment 1
Vhurinosara Tapiwanashe A
[N01519724V]
Lecturer : Mr L Mpofu
Due Date 25 May 2020
Discuss the role of Corporate Governance in the preparation of Financial
Statements. [25]
Introduction
Financial statements represent the basic ways for companies to report on the success of their
business, financial and property conditions for external interested parties. The companies that
want to invest in other countries or collect funds in the international capital market have to
compile financial reports understandable for business partners and investors. Therefore, the
financial reports have to be made according to the accounting standards accepted in most
countries. The need for international standard acceptance has its practical dimension because
they equalize the accounting practices around the world, simplify stock exchange business
outside the national borders and enable national and international market growth, as well as the
complete economy. True and honest financial statements represent a first class public interest so
the principle of the objective reporting should be the leading principle for the financial reports
creators. Blurring and feigning of the results leads to the decisions of the investors, which are not
in the function of efficient capital allocation, and we can see that in a number of financial frauds
in large and powerful companies in the developed countries. The consequences of the false
representation of successful results are the failure of the seemly successful companies overnight,
where the burden of the great losses is first suffered by shareholders, and then other investors as
well, and the side effect is the spread of distrust in financial market functioning.
On the other hand, the existence of the information asymmetry is a regular catalyst of the market
inefficiency and instability of the complete financial system. Corporate governance is one of the
key elements in economic efficiency and growth improvement, as well as investor trust increase.
Corporate governance offers the structure with company goals set and allocate the resources to
achieve the goals and performance monitoring. Adequate business management should provide
the appropriate encouragement for the board of directors and management to focus on the goals
of interest for the company itself as well as its shareholders. The existence of the appropriate
system of corporate governance, within individual companies and the economy as a whole, helps
in providing a certain level of trust necessary for the market economy to function in the
appropriate way.
1
The Roles of Corporate Governance.
Good governance is the starting point for any discussion about accounting information. Also,
financial and accounting transparency is only a part of the larger corporate governance
framework therefore reliable mechanisms and tools are needed to ensure the quality of the
accounting information. In addition to the principle of disclosure and transparency that can be
applied from the availability of quality information that directly reflected on the financial market
in particular. Therefore, through this aspect, it will be tried to address:
1. The Tools Used by Corporate Governance to Enhance the Quality of Financial
Statements.
In order to effectively implement corporate governance, mechanisms and tools must be
available to help. These tools represent a set of mechanisms, namely the auditing. Financial
statements of companies are usually audited. An audit is an independent examination of the
accounts to ensure that they comply with legal requirements and accounting standards. The
findings of the audit are reported to the shareholders. The type of auditing that can be used
include external audit and the audit committee (Alsalim, 2016).
External Audit
External Auditor adds confidence and credibility to accounting information by providing a
neutral and technical opinion on the validity and fairness of the financial statements prepared
by the economic units through a report prepared by the external audit annexed to the
financial statements. The role of external audit has become essential and effective in the field
of corporate governance because it limits the conflict between owners and management of
economic unity. In other words, eliminating the procuration problem. It also limits the
problem of information asymmetry, particularly between managers and shareholders.
Furthermore, external audit reduces the problem of congenital deviation in economic units
(Isa, 2008).
Audit Committee
Several scientific studies in the United States have shown that the establishment of audit
committees within companies will increase the quality of accounting information and reports
2
issued by companies to third parties. The existence of an independent committee to oversee
the preparation of financial reports, to strengthen the independence and role of the external
auditor, and to ensure the compliance with the principles of governance, will necessarily
increase the confidence of investors and other external parties that base their decisions on the
basis of this financial information issued by companies in these reports.
Moreover, many international and financial stock exchanges are now demanding the Audit
Committee in the registered companies to issue a report within the financial reports in order
to increase the quality and credibility of the information contained therein. Also, the audit
committee should ensure that the disclosed accounting information is adequate, and it was
prepared in accordance with generally accepted accounting principles (Saban and Soliman,
2005). Through the previous tools, the accounting information can be reached by achieving
different criteria for the quality of accounting information.
2. The interrelationship between governance, disclosure, and the quality of financial
reporting.
The proper application of the principles of corporate governance constitutes an effective
input to the quality of financial reports and the resulting information. The application of these
principles affects the degree and level of accounting disclosure, which emphasizes that
disclosure, transparency and corporate governance are two sides of the same coin, and they
affect and influence each other. If disclosure is one of the most important principles of
governance, the framework of corporate governance should be disclosed in a manner that is
consistent with financial and accounting quality standards. The direct impact of applying the
rules of governance is to restore confidence in accounting information by achieving the
comprehensive meaning of these information taking into consideration that the information
produced by the financial reports are one of the most reliable bases for measuring the size of
risks of various types; such as, market risks, liquidity and interest rate risks, and business,
management and exchange rates risks. Moreover, the application of governance principles
has a role in the prediction process that considered as another input that is used to analyze the
investment decision in the stock market which depends on a main assumption. This mean
assumption infers that each security paper has a real value that can be accessed through
accounting information by studying the accounting revenue, the rate of distributions, the
3
growth rate, and some accounting ratios. Also, financial reports affect investors' decisions by
providing them with information about the companies that put their shares on the financial
market before the make a buy or sell decision to support and rationalize that decision.
3. The Implications of Governance Rules on Disclosure and Quality of Accounting
Information in Financial Reports.
The existence of a strong disclosure system and the quality of accounting information
encourage the real transparency of listed companies, and it is considered as a key factor for
the shareholders’ ability to exercise their property rights on a well-researched basis.
Experiments show that accounting disclosure and the quality of accounting information
contained in the financial reports are a powerful tool for ascertaining the behavior of
companies, and protecting the rights of the investors. In other words, adequate disclosure of
information in a timely manner can contribute to attracting capital, and maintaining
confidence in the capital markets. Additionally, the importance of disclosure and the quality
of financial reports are also demonstrated by the increasing need of joint stock companies to
be financed by money markets, stock exchanges, and bonds. Disclosure is a prerequisite for
the establishment of financial markets, which are often overseen by professional or quasi-
governmental bodies that require companies that are listed in the financial market to follow
procedures, laws, and basic rules that are determined by the profession, so that disclosure and
published financial reports will gain credibility for the users and shareholders.
The Corporate Governance are responsible for preparing the annual financial statements in
accordance with applicable law and regulations. Company law requires the corporate governance
to prepare financial statements for each financial year and such financial statements must give a
true and fair view. Hence, they are required to:
Select suitable accounting policies and then apply them consistently.
Make judgements and estimates that are reasonable and prudent.
State whether they have been prepared in accordance with IFRSs.
Corporate Governance are responsible for the internal controls necessary to enable the
preparation of financial statements that are free from material misstatements, whether due to
error or fraud. They are also responsible for the prevention and detection of fraud.
4
Use of the International Standards in Financial Reporting
Investors need transparent and reliable information that accurately reflects the financial situation
of a company in order to enable the smooth functioning of the market and efficient capital
allocation. In the world that is becoming more globalized, the investors seek opportunities to
compare the companies in important parameters in order to make rational business decisions
about investments. Accounting is becoming more globalized as the companies are becoming
more multinational, and the scope of trade and investments between the companies increases all
the time. These factors reinforce the need for financial reports which will be internationally
comparable and consistent. According to the Committee for the international accounting standard
frame, the point of all financial reports are:
1. To present the information on the financial position, business and changes in the
financial position of the entity:-The financial reports prepared for these purposes satisfy
the usual needs of most users. However, the financial reports do not offer all the
information the users might need to make economic decisions, because they largely
reflect financial effects of the previous events, and they do not necessarily contain non-
financial information;
2. To show the results of the management work, that is, their responsibility for the
available resources entrusted to them:-The users of the information who want to
evaluate the work or responsibility of the management do that in order to be able to make
important economic decisions, the trust to the existing management among other things.
In order to achieve the above mentioned goals, the information about property, liabilities, capital,
cash flow, income and costs are contained in the financial reports of companies. These
information, with other data cited in the notes of the financial reports, help the users to
understand the company's business in the previous period and predict the future flow of the
company's results, especially the cash flow.
Conclusion
The skepticism of external users concerning truthfulness and objectivity of the financial reports,
that is, fair and honest representation of the company performances is understandable, bearing in
5
mind a large number of manipulations, fraud and accounting tricks with the aim of covering up
the real position of the company and showing its more favorable financial result. Managers and
accountants’ use creative accounting in order to get to new credits more easily, attract new
investors, achieve higher bonuses and compensations, etc. The brunt of the financial
manipulations, which ultimately often lead to the company failure, is borne by the shareholders
and investors. The result of all that is widespread of general distrust in the functioning of the
financial markets and it is reflected through economic activity reduction.
6
References
Jonston, D.J., (2004). OECD The principles of corporate governance 2004, Belgrade. OEBS
mission in Serbia and Montenegro: economic issues and environment policy sector
Kothari, J., Barone, E., (2012). Financial accounting, the international approach, DATA
STATUS, Belgrade
Hammad & Abdel-Aal, Tarek (2005), Corporate Governance (Concepts, Principles, Experiences,
Governance Applications in Banks), Aldar Al_Jamia, Egypt
Issa, Sameer. Kamel. Mohamed (2008), "The Impact of External Audit Quality on the Profit
Management Process", Journal of the Faculty of Commerce for Scientific Research, Alexandria
University, Issue 2, Volume 45, July.
Kieso, Donald. E.& . Weygandt, Jerry. J. & and Warfield, Terry. D. (2001), Intermediate
Accounting, Tenth edition, page (68).
Mubarak, Bousha. & Bishousha, Heba (2009), "The Role of the Quality of Accounting
Information Security in the Management of the Global Financial Crisis", the International
Scientific Conference on the Implications of the Global Economic Crisis on Business
Organizations. Challenges, Opportunities and Prospects", Jordan, 3-5 November, p. 3, 4.
