Case Study Of Effects Of Corporate Governance To Prepare The Accurate Financial Statements of Retail Companies

Abstract

Due to the economic globalization, the increasing complexity of modern business systems has contributed to a significant change in modern corporate governance concepts, guidelines, principles and techniques. The evaluation of strong corporate governance principles in general and especially has progressively needed a specific focus on sustainable development, which reduces risks and, at almost the same time, guarantees a positive perspective for the company’s own future through reasonable and accurate financial statements. This study will strengthen the link between corporate governance and sustainability in retail companies from the perspective of Australian retail companies and the effect of corporate governance systems, with specific focus on the Australian retail system. The study will emphasize that advancement and effectiveness in processes, encouraged and enforced by governance that values honesty and disclosure, allows retail firms to reach consensus and resources, precipitating a vicious cycle of profitable business growth and development. The quantitative research design will be used and survey tool will be taken as a research technique. The convenience sampling technique will be used. This study will use a survey of 20 retail companies of Australia to investigate the effect of corporate governance on financial statements of the companies reporting under its guidelines.

Keywords: Corporate governance, guidelines, agency theory, retail companies, financial statements, financial information.

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Section One: Research Background

This section presents the introduction of the research to show the justification behind the work and encompasses the background of the research introducing the topic overall view. It also comprises research gap, summary and organization of the study.

Corporate governance is related with the structure, process and power mode that dictates the rights and responsibilities of various groups engaged in the management of an organization. Corporate governance is all about the management of corporations, which may not be a mainly telling statement from a definitive perspective, but it reminds us that corporate governance relates to corporations and also relates to the determination of the practices in which they are fully involved (Brown, Beekes & Verhoeven, 2011). The Cadbury Committee Report (1992) stated that ‘Corporate governance is a type of structure or process by which companies are controlled and monitored. Corporate governance is seen to accurately identify the rights and responsibilities of every one of the firm’s stakeholders. Since the perspective of the agency theory, corporate governance refers broadly to a system of matching management desires with that of shareholders or from the legislative point of view as a mechanism of guaranteeing adherence with all relevant legislation, policies, and procedures (Ho & Wong, 2001). Corporate governance is no longer merely a regulatory mechanism, but a strategic business requirement that is critical to corporate sustainability and corporate social responsibility objectives (Rezaee & Kedia, 2012).  Over recent times, a growing trend has been the requirement for widely improving corporate governance and transparency for business organizations. In the light of the last global financial crisis, corporate governance has received significant coverage and is now growing as a core issue for policymakers and publicly traded companies.

Processing dimensions of corporate governance have been the main focus of regulations and recommendations. There are many laws, acts and regulations based on the structure of corporate governance such as the United States Sarbanes-Oxley Act (SOX 2002), the Combined Code on Corporate Governance (Financial Reporting Council 2003) in the United Kingdom (UK), and the Principles of Good Corporate Governance and Best Practice Recommendations (ASX 2003, 2007) in Australia. Reasonable corporate governance, though, includes adjusting adequate reporting levels with good corporate performance (Cadbury 1997). Earlier work shows a link between improved corporate governance structures and greater quality of financial reporting (Christensen, Kent & Stewart, 2010), more accurate reports and price-sensitive information (Beekes and Brown 2006), minimized fraudulent reporting (Beasley 1996), less failures of accounting and reporting standards (Dechow, Sloan & Sweeney 1996), and bad abnormal returns mitigation (Brown, Lee, Owen and Walter 2009). Another study by Larcker et al. (2007) reveals it often hard to prove causal relationships between the performance of governance measures and the company’s performance.

This research based on corporate governance is particularly involved with examining the structures that have developed to make the accurate financial statements of retail companies especially in the case of Australia. Financial accounting is one way to giving basic source of needed information of the managers’ performance that is required by the investors and financiers (Sloan, 2001). Nonetheless, some of the key characteristics of financial accounting, including the use of historical costs, the requirement of precision, the concept of realization and the concept of conservatism, are hard to comprehend except if a corporate governance viewpoint is adopted. If governance issues are absent then financial accounting’s function would be limited to supplying investors with the risk and return information needed to promote the best decision to assign portfolios. Consequently, the study by Bushman and Smith (2001), discusses an area of key importance in financial accounting.

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In the structure for which shareholders nominate directors and external auditors, the company’s board of directors is involved in setting governance. The study explores how corporate governance can have an effect on the corporate financial statements in the retail sector when reporting annual transactions and decisions. The research is based on determining how corporate governance is different from other methods or techniques of management. It discusses not only the impact on the financial statements but also how it can be strengthened as corporate governance is integrated into the enterprises. Very less literature is available in the area where this research is focusing that retail companies. The emphasis of this study is on corporate governance that has an impact on company management and not on the financial statements-produced results as it has other areas to examine.

Given the importance of corporate governance in the financial performance of the companies, it is necessary to investigate empirically and understand the role of financial statements because financial accounting information is considered as an input for the corporate governance mechanism. There is lots of research being conducted on corporate governance but the area that shows the effect of corporate governance on making accurate financial statements in retail companies are missing or has very little literature. The main theme of this study is the effects of corporate governance to prepare the accurate financial statements of retails companies of the Australia. This study is divided into five sections. Section 1 introduces the study and address the research background; section 2 describes about research problems and contains research question and research objective; section 3 contains theoretical background and literature review on corporate governance and accurate financial statements. Section 4 explains the research design and methodology of research. The fin           al section includes conclusion. This research will expect to apprehend the effects of corporate governance on financial accounting information based on financial statements of the companies reporting under its principle guidelines. This research will help to comprehend the actual value of financial reporting by examining preferences of retail investors over selected layout, use and value of three sections of financial information. This study will contribute to the understanding of the current value of financial reporting by analyzing retail companies’ financial statements.

Section Two: Research Question and Research Objectives

Research Problem

Agency theory argues that corporate governance is important in terms of the management of companies. This enables management to match the company’s priorities with those of shareholders and other stakeholders; as a result, this will impact the financial statements. Organization owners are distinct from those who manage the firm that leads to the principle of the theory of agencies (Fooladi & Nikzad Chaleshtori, 2011). Corporate governance impacts heavily on corporate performance. This is because of the factors it contains. It considers that there should be an adequate board size, independence between board members and risk management and audit committees should be assured. Corporate governance not only offers corporate guidance but also a contributed in better management structure (Vo & Nguyen, 2014). Corporate governance can have a range of effects on corporate efficiency, and not just on financial reporting. This restores trust in shareholders and leads to high business growth.  Earlier there were many issues that result in failing of companies because of failure to adhere to corporate governance. Failure to comply with corporate governance leads to a loss of trust in shareholders, increasing finance will also be hard for such organizations, and risk management will not occur (Lister, 2017). The research concern for this research is ‘finding how corporate governance can bring organizations betterment’ with the help of its accurate financial statements.

Research Question

Following is the research question of the study

  1. What is the effect of corporate governance on financial statements of the companies reporting under its guidelines?

Research Objective

Following is the research objective of the study

  1. To investigate the effect of corporate governance on financial statements of the companies reporting under its guidelines?

Section Three: Theoretical Background/Literature review

There is vast literature present on the topic of corporate governance (CG). Corporate governance can be viewed as the mechanism and system used to administer and manage business affairs with the ultimate goal of increasing business stability and corporate accountability (Zabri, Ahmad & Wah, 2016; Yameen, Farhan & Tabash, 2019). It is widely acknowledged that good corporate governance structures are required to cut the problem of ‘agency’ ascending from the independence of ownership and regulation in corporations. Jensen and Meckling (1976) describe the relationship between the agencies as a contract under which one party (the principal) employs another party (the agent) to conduct a certain facility on their behalf. Managers working as agents and operating in their own interests are unable to optimize shareholder (principals) returns unless effective governance mechanisms are enforced to protect shareholder preferences (Jensen & Meckling 1976). On the similar source, businesses with better governance structures, i.e. more autonomous directors, should offer their shareholders with greater returns than those with weaker governance structures.

A significant literature looks at the usage of accounting information in performance compensation contracts. Most of this work is based on economic models and is generally recognized in the perspective of the wide range of executive incentive of academic research. The beginnings of research into corporate governance can be traced back all the way to Berle and Means (1932), who stated that control of management in large companies is inadequate to establish managerial opportunities for maximizing value. Despite extensive presence of organizations defined by the parting of capital control from capital ownership, corporate governance study has interested in considerate the frameworks for mitigating agency difficulties and promoting this method of financial organization (Bushman & Smith, 2001).

In the domain of agency theory and its related issues, it is practically difficult to ensure that the agent makes choices that are in the public interest of the community without the idea of constructive monitoring and bonding costs (Jensen & Meckling 1976). Corporate governance functionality can boost monitoring; therefore, the agency theory assumes that the selection of independent qualified non-executive directors is a way of reducing the agency costs (Hodgdon & Hughes, 2016). Previous research finds a greater proportion of independent qualified non-executive directors participating in higher volunteer disclosure rates (Chau & Gray 2010).

Several recent studies enhance the awareness of the connection between the features of corporate governance and accounting outcomes, such as deceptive financial reporting, restatements, consistency of earnings / accruals and accounting consistency. Due to the division of ownership and control (and the subsequent organization difficulties) in the today’s professional world, a corporate governance system is needed, by which management is regulated and monitored to offset the expenditures of the agency and reconcile management objectives with those of the shareholders. Although there is no widely recognized definition, corporate governance can be characterized as a structure containing all the individuals, procedures and activities to help confirm stewardship over the assets of an entity’ (Messier, Glover & Prawitt, 2008). Lin and Hwang (2010) stated that a good corporate governance structure ensures that the organization makes effective use of the capital of the company in the long-standing interests of the property owners and reasonably records the financial condition and operating performance of the company.

Effect of corporate governance in retail companies

Over time, the retail market has experienced significant systemic transformation which has resulted to improvements in both large-scale retail business growth strategies and governance. Such changes took place at various times and in different ways, depending on the particular geographic setting, defining the gaps in organizational approaches and governance represented in the current competition.

Therefore, retail companies that were born and established in certain environments where market changes happened earlier and at a much rapid pace are now presenting more complex growth and management policies that have, in effect, helped them to become main players in the international retail market. In this regard, depending on the development witnessed by some large retail firms beyond their domestic market and taking into account such governance structures that exist globally, two major corporate governance frameworks are widely assumed to be adopted by companies competing throughout different market spaces (Salvioni, 2008). Large-scale retail companies, represented by various patented forms and models of governance, hence compete in different business facilities. Furthermore, it is worth noting that, in order to assure long-term profit in an open and uncertain competitive environment, such a governance strategy must achieve the two-pronged purpose of expanding the shareholder value whereas fulfilling other various stakeholder groups found in different parts of the world.

Retail companies play a significant role in the growth of sustainability across the entire supply chain, behaving as the interface between demand and supply. The size and market power of these companies allow them to affect supply relationships; while their closeness to customers allows them the first interlocutors in the demand for new products and services and therefore able to affect the behavior patterns of customers.

Corporate Governance and Financial structure of companies

There are various attributes relevant to the structure and operation of the board in general and its audit committee in particular are the corporate governance structures that are the subject of recent legislation and previous studies. Corporate governance structures that are appropriately designed are intended to reduce earnings control as they provide effective management oversight in the financial reporting cycle (Lin & Hwang, 2010). At the theoretical level, Shleifer and Vishny (1997) stated that the agency theory describes many explanations why good corporate governance improves firm value and efficiency. This argues that problems of corporate governance emerge as a result of ownership and management separation. Berle and Means (1932) argue that modern companies are marked by an inadequate corporate governance system due to the separation of ownership from company management. Jensen and Meckling (1976) and Fama and Jensen (1983) have agreed that in situations where the owner and manager are not one, the business costs arise.

Therefore, agency theory is the reference point to most corporate governance studies. Corporate managers may have personal goals which compete with the aim of optimizing value for long-term shareholders. As a matter of fact, corporate managers are pursuing actions that meet their own personal interests (GC, 2016) at the shareholders’ expense. Good governance generally involves better oversight, increased transparency and financial disclosures between shareholders and managers. This leads to higher investor confidence and a decline in the control and appropriation of leases by managers. Well-governed firms are expected to be less risky and operate more efficiently and have lower auditing and monitoring costs (Denis & Kruse, 2000). These elements tend to ease capital costs and accumulate higher expected cash flow, that in turn generates higher firm value and improved performance (Macey, 2008).

Although numerous estimates that configured corporate administration and training are accessible, the best tool that is important for improvement and persuasive and sustainable work is known as the Review Board of Trustees (AC). Association controllers, universal bodies and government professionals have suggested that an internal investigation is a strong instrument that can improve the simplicity and steadfast performance of money-related data and finally pave the way for convincing corporate governance. Furthermore, confinements, as shown in the suggested study, indicate that development has yet focused barely any parts of the world, commonly notable of which were IAF, AC, and the developing of relationships between different variables which suggest a key role in the competent and effective corporate governance framework. More research should focus on Intergovernmental Review Forums, Audit Committee, Open Supervision, Internal as well as Inside Review, Inspection Measures, Review duties and various aspects of Corporate Management (Lin & Hwang, 2010).

Section Four: Research Design and Methodology

This study is designed to assess the effect of corporate governance on financial statements of the retail companies reporting under its guidelines. As per nature and requirement of study, a quantitative research approach is used to measure the effect of corporate governance on financial statements of Australian retail companies.

The study will use the quantitative research approach with exploratory type of research. The data will be collected from retail companies of Australia. The financial statements of retail companies of Australia will be considered and evaluated.  Convenience sampling technique will be used for collection of samples. The sample size of retail companies is around 20 based on the availability of the management consent of the selected companies. The primary financial data will be taken from Australian retail companies. The data will be collected through survey tool technique. Survey will contain multiple questions that will consist of both types of questions i.e. open ended and close ended questions. The interviewers guaranteed the interviewees about the research’s anonymity and its privacy to decrease the biases. The aim of the study was mentioned on the questionnaire, indicating that it should only be used for educational reasons. The data will be analyzed by multiple statistical analysis.

Section Five: Managerial implications and Conclusion:

There will be some expected managerial implications on this research:

  • It may necessitate company managers to keep an eye on unpredictable and unstable situations all the time.
  • Efficiency and accuracy in corporate governance involves appropriate risk management, requiring management to be capable of managing risk effectively.
  • If internal controls are inadequate, management may need to reconsider internal controls.
  • The management needs to maintain a positive attitude towards anyone.
  • To sustain efficiency in corporate governance, management might need to reshape the corporate structure and thus management needs to be reminded of future events and prepared to handle problems.
  • The management involves the timely and inconsistent provision of accounting information.

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