The Role of Accounting in a Corporate Governance

When a business operates under a corporate umbrella, many of the business basics are governed by accounting results and practices. Through accounting, corporations can keep track of their expenditures and income and establish an accurate picture of their overall financial status. Ultimately, accounting helps corporations run smoothly on a practical, ethical and legal basis, establishing a foundation for continued growth and success.

Accounting is useful on a practical level as a tool of corporate governance. Through accurate, thorough and honest accounting, corporations can make beneficial decisions about investment, growth and operations. As a simple example, accounting might show that a foreign venture was twice as expensive and half as profitable as originally estimated. On the basis of this information, corporate decision makers are able to draft new plans and take corrective action. On the most fundamental level, accounting makes it possible for managers to expand on plans that get good results and to eliminate programs that impede success.

Corporations are accountable to the public in a variety of ways. Proper accounting helps corporations meet their obligations, including their obligation to pay taxes. The public decides whether or not to invest in a corporation based on accounting reports, and investors depend on proper accounting to make sure the company doesn't engage in unsavory practices that could misrepresent the value of their investments. Accounting gives consumers the power to articulate demands, forcing management to address their needs when making decisions. Corporate policies are revealed in accounting records, which are crucial to public perception of a corporation.

Corporations are most accountable to shareholders, who are part owners of the organization. Corporations are legally required to give shareholders detailed financial information. This allows shareholders the right to make informed decisions. For example, if shareholders feel that money is being wasted in bonuses or elsewhere, they are free to withdraw their investment or vote to formulate a new policy. Accounting gives shareholders the information they need to make informed decisions and to have their legal say in the policies of the corporation. This accountability is generally good for profits, since shareholders have an interest in the success of the corporation.

While accounting aids long-term corporate planning, it is also vital for making short-term decisions. Accounting helps company leaders manage money, prioritize and take concrete financial action. Through accounting, managers can see what they have available to spend and where it should go. Decisions about equipment, supplies and labor are made as a result of accounting figures. Accounting also helps corporations manage lines of credit and take stock of all their short-term financial resources. This helps them avoid unnecessary debt.