Corp Governance and Ethics

Pradnya Bhere

Professor Dr. James Owens

FIN 5311 Second Paper

July 28, 2016

Abstract

During the past few decades, the fall of the companies like Enron, WorldCom, Lehman Brothers, Satyam and the role played by external players such as external auditors, bank lenders and credit rating agencies, has sounded an alarm in the world’s capital markets. Such failures of large magnitudes have shaken the confidence of the public and the stock market investors. This has led to substantial decline in share prices and drastic financial losses to minority shareholders. The general public and corporate experts worldwide have acknowledged that the failure of corporate governance on various levels has caused these scandals. The objective of this essay is to discuss the significant role external players such as independent auditors and creditors play in protecting the interest of shareholders and investors.

Introduction

Corporate governance refers to the system of processes, practices and regulations that various participants of a corporation define and implement. It essentially involves that the various stakeholders of corporate firms which include management, financiers, shareholders, regulators, auditors and the credit rating agencies working together towards the interest of all stakeholders. Excellent corporate governance provides a framework to attain a corporation’s objectives, which includes every aspect of management - internal control systems, policies, action plans to performance measurement and procedures for the corporate disclosure. Internal as well as external corporate governance players concentrate on gaining shareholder’s trust and achieving shareholder wellbeing by acting as trustees on behalf of the shareholders and securing their rights as true owners of the corporation.

In the past two decades, corporations have had to strive hard to achieve a high level of corporate governance as it is not enough to be solely profitable. Corporations have to be socially responsible, maintain commitments to their code of conduct, and balance interests of various stakeholders while simultaneously maintaining their organizational values. The purpose of this paper is to give a brief overview of external players who are outside the corporate firm’s influence and have the ability to improve a corporation’s governance framework, especially by making sufficient disclosures when necessary. Numerous failures of high-profile companies like Enron and WorldCom in recent times imposed more accountability on the external players whose role it is to monitor and scrutinize the practices of a corporation’s internal players.

Role of Auditors

Corporate governance framework improves the effectiveness of accounting and audit measures in the interests of shareholders and stakeholders and hence, it advocates heavily on external, independent auditing. In respect to corporate governance much more responsibility is placed on the auditors because in most of the cases, auditors will be the first ones to spot a fraud or misuse of funds. The primary responsibilities of the auditor require that the auditor make certain inquiries to detect and prevent any fraud, report to the shareholders on the accounts examined and disclose if any fraud is uncovered. External auditors have the power to detect wrongdoing within the corporation and report about the corporation’s mismanagement objectively and thereby, promote good governance. Also, external auditors can remove bias from the company’s financial statements and disclosures.  However, in recent years, in cases like Enron and WorldCom, the auditors fell short of their fiduciary duty to discover and report the wrongdoings to shareholders.