Financial Accounting and Corporate Governance Research Proposal

Financial Accounting and Corporate Governance - Research Proposal Example Chief among these participants are the board of directors and management. There are aspects of the corporate governance regime that have an impact on the relationship between shareholders and the company† (Jacques du Plessis & Et. Al., 2010). The regulators and legislators in the United States have realised that transparency is essential to inspire trust and confidence in the business. The Sarbanes-Oxley Act was passed in 2002 by the United States Congress to protect the interest of the investors by making corporate disclosures more accurate and reliable (Hoffman & Rowe, n.d.). Corporate governance helps in integrating the choices and the actions of the managers with the shareholders’ interests. Financial accounting plays an important role in this integration process. Corporate governance can be thought of in terms of the outsider’s perspective or the shareholder’s perspective. The organisation consists of a hierarchy which includes shareholders, board of d irectors and managers. Responsibility is delegated to the various entities in the hierarchy. Corporate governance simply involves alignment of interest of all these entities. Two kinds of agency problems arise whereby the alignment of interest may occur between managers and the board but not the shareholders and alignment between the board and the shareholders but not the managers. The financial accounting system resolves these agency problems. They provide useful information to directors and shareholders (Armstrong, 2009). Corporate governance plays an important role in promoting transparency in an organisation. There are various approaches to corporate governance which result in various theories. The objectives of the organisation are set by the owners or the directors in the agency theory. Managers have the responsibility of execution of the objectives. Structures and processes are designed to enable control of management. The theory holds that individuals are rational and egoist s and thus managers cannot remain faithful to the owners. The managers can resort to diversion of corporate resources to fulfil their selfish needs unless an external control is placed on them. The owners or directors can be considered as the principle in the agency theory. The action is originated by the principle and he bears the responsibility for the action. The principle does not always execute the objective himself. He may employ an agent to act on his behalf. The managers are the agent and should behave ethically and should avoid conflict of interests. Compliance with rules is essential and a minimum threshold exists for the acceptable behaviour. According to the stockholder theory the organisation is merely a property of stockholders. Stockholders take an egoistic view. The owners channelize the members of the organisation towards the achievement of their interest. The owners expect a return from the investments they have made in the organisation. Managers have the duty to f unction in a manner in order that return is maximised. Strategies are implemented to ensure faithfulness on the part of the managers. The stakeholder theory focuses on all the stakeholders of the organisation. All the stakeholders function in a manner to maximise their self interests. The managers have the responsibility to balance out the conflicting interests of various stakeholders. The managers are faithful agents of all the stakehold