Question

Explain how a good governance contribute to high quality of financial statements.

Answer 1

Financial reporting is the process of compiling the information regarding affairs of the company for presentation to the stakeholders of the company. Such financial reporting consists of Financial Statements which includes Balance Sheet, Profit and Loss Statements, Cash Flow Statements and Statements of Changes in Equity.

All these compiled together become financial statements.

Governance which includes Corporate governance means rules and regulations which govern the business. It takes into account the internal and external factors which affect the stakeholders and taking care of thode factors.

Such factors when taken care off without hurting any other stakeholder is a sign of good corporate governance.

Good corporate governance improves the performance of the company also increases the Return on Investment. It also helps in increasing the goodwill of the company as society sees such company as epitome.

Promoting fairness and accountability in business is also a part of corporate governance. It includes increasing the values for equity shareholders and at same time ensuring growth of society as a whole.

The primary aspect is to create such policies and processes which are corporate compliant. Such processes helps in increasing the confidence of public as a whole in company.

Their are various stakeholders like shareholders, management, society, employees, government, etc.

All such parties are primary and it is important to take care interest of all the parties.

Increasing the value for shareholders, paying proper salaries to employees, helping in growth if society, paying proper taxes to government and keeping the environment in check. These are all important and these determine the good governance.

These are to be disclosed in financial statements and such statements are the source of information to public at large. Hence, good governance helps in high quality financial statements.

Also, financial statements include the corporate social responsibility disclosure. Corporate social responsibility is the responsibility towards the society. The company is surviving and growing because of the people and hence it has a responsibility towards the people.

When such responsibility is properly complied, the people get a sense of belongingness for the company and hence it increases the goodwill.

Such things which are a part of good governance increase the quality of Financial Statements.