A Study On Accounting Therapy For Corporate Governance

The issue of corporate governance is discussed widely in the academic literature. The failure of corporate governance induces capital market fluctuations, which in turn drive local or global financial crises. Scholars analyze the causes of failure and posit various therapies. The dissertation to follow focuses on the accounting activities related to corporate governance and articulates treatments from an accounting perspective.The previous literature of corporate governance focused on the establishment of corporate governance theory and a system of incentives and constraints within corporate governance. Corporate governance stemmed from the separation of control from the ownership that induces both the 'principal problem' and 'ransaction costs'. The principal problem concerns the issue of what managers take for themselves as opposed to the economic objective of profit maximization. The principal problem posited by Berle and Means in 1932 presented a serious challenge for economists because they could not find way to deal with this issue in classical economic theory. Economists began to address the issue in their analysis of the enterprise after Coase presented his famous work, 'The Nature of the Firm' in 1937. Afterwards, theories such as the theory of property rights, the theory of transaction costs and the theory of principle-agent were developed for coping with the interest conflict between the manager and the owners. For solving the problem that the managers impair the owner's interest in business, the theory for the establishment of an incentive and constraint system was a popular topic of both normative study and empirical study by the academics. Especially, the incentive and constraint system received more attention from economists after Jensen and Meckling issued their paper in 1976.The issue of corporate governance is so important that the governments and institutions over the world participated by releasing regulations and guidelines to meet the need of their corporate governance practices. After the Enron and WorldCom scandals, it was considered urgent to improve corporate governance. For the sound corporate governance society is seeking, various approaches to solve the problems were attempted by comparing corporate governance paradigms.With the functions of reporting, controlling and monitoring, accounting plays a major role in diminishing the information asymmetry and overseeing the contract implementation in corporate governance. More and more academics are paying attention to understanding the relationship between the accounting and corporate governance and how to use accounting to improve the corporate governance. Based on Chinese practice, this dissertation concentrates on issues such as the corporate governance structure, accounting policy, internal control systems, financial information disclosure andperformance evaluation. These areas strongly affect the goals of corporate governance. I posit suggestions to improve the corporate governance in China by employing both of normative and positive approaches.After literature review, chapter two summarizes the basic theory of corporate governance to build a foundation for further discussion. Chapter three analyzes how to use the accounting objective strategy to help realize the goal corporate governance. Chapter four discusses how to employ the accounting policy to improve the corporate governance. Chapter five discusses how to strengthen the internal mechanism of corporate governance by evolving the accounting information disclosure. Chapter six analyzes how to defense 'audit fraud' by strengthening internal and external audit system. Chapter seven discusses how to build a proper evaluation system for a sound system of incentive and constraint. Chapter eight focuses on the issues of Chinese corporate governance and posits suggestions to deal with the problems in China.I propose this dissertation to contribute to improving corporate governance from three aspects:First, it reviewed the literature of corporate governance from historical perspective, and classifies the history of corporate governance into two phases. The first phase is the establishment of the theory of corporate governance (1932—1976). In this period, there are three famous works that construct the foundation of the theory: 'The Modern Corporation and Private Property' by Berle and Means in 1932, 'The Nature of the Firm' by Coase in 1937 and 'The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm' by Williamson in 1964. The former posited the problem that alerted academics. The latter two created the foundation to solve the problem. The solution phase was the establishment of an incentive and a constraint system along with the global development of theories of corporate governance (1976— now). In this period, there were three key works: 'Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure' by Jensen and Meckling in 1976, 'Separation of Ownership and Control' by Fama and Jensen in 1983, and 'A Survey of Corporate Governance' by Shleifer and Vishny in 1997. The former two started the era of the establishment of incentive and constraint systems for corporate governance; their successors adapted their thoughts; the later one concentrated on the issue of investors' legislation and stock market regulation.Second, the dissertation summarizes the accounting activities within corporate governance practice. Accounting plays a role in improving the corporate governance by diminishing the information asymmetry throughout the information system using the financial accounting, the external audit practice, the management accounting oversite of the contract implementation and internal audit practice. Currently, accountants give moreand more attention to improving corporate governance by studying the relationship between the accounting activities and corporate governance and positing sound suggestions for accounting practice. Based these previous achievements, this dissertation outlines the accounting activities in corporate governance, and posits suggestions to improve the corporate governance from accounting perspective, as well as, providing a theory to support accountants in their practice.Finally, the dissertation posits suggestions to improve Chinese corporate governance. Practice says, "no hat fits all". There is not a perfect corporate governance paradigm in the world as each paradigm grows up with the specific determinants such as policy, economy and culture. With economic development, each paradigm should be 'fixed up'. It is obvious that there is not panacea in practice; each regime should explore special therapy to cure its problems. The failure of reform of East Europe countries says it is calamity to copy systems from somebody else. Instead, it is imperative to foster a proper model and system appropriate for the environment. With the thousands year's of culture, the issue of corporate governance in China is complex and worthy of exploration. Therefore, based on previous achievements and the Chinese situation, this dissertation contributes suggested improvements to Chinese corporate governance by improving the financial information disclosure, creating new performance evaluations and suggesting means to reduce 'audit fraud'.Of course because the current database is limited, some issues in this dissertation are not completed, and should be explored further. Concerning improving the financial information disclosure, although scholars point out that 'hi-tech' can provide enough support to implement 'access' accounting. How to implement 'access' accounting in China should be discussed further. On the issue of the use of the Balanced Scorecard for evaluating the performance of directors, it is necessary to make a questionnaire to investigate the director's qualifications, performance, moral attitude and healthy situation, and to decide which determinant is necessary for the position, as well as, how to arrange the financial indicators or non-financial indicators to produce a simple system for users who are interested in rating the performance of directors. For building the evaluation system for Chinese listed companies by the positive approach, it needs listed companies to provide the detailed information about the composition and performance of board of directors, but the information about the performance of the board of directors is missed in accounting information systems. I propose this part can be explored when the relevant information is available.