In 2001, Enron once the giant energy company in U.S.A.

collapsed, became the biggest bankruptcy

filing in the U.S. history after the CEO, Jeff Skilling found guilty in accounting scandals. The next year,
the main player in U.S. long distance phone industry, WorldCom was filed for bankruptcy where its
CEO Bernie Ebbers inflated companys assets by as much as $11 billion. Parmalat, the Italian biggest
milk manufacturer was discovered with a blackhole scandal in year 2003, where $14bn has gone
missing from the companys account. These collapses have led to thousands of jobs lost and even
billions of investors losses in term of money. The increasing number of collapses among these large
corporations causing irreparable lost have increased governments and communitys concern on the
importance of corporate governance.

Corporate governance is the procedures, mechanisms, and relations by which companies should be
operated, regulated and controlled. Governance structures and principles monitor the activities,
policies, practices, and choices of enterprises including agents and influenced stakeholders by
identifying the distribution of rights and responsibilities among stakeholders which divided into
external and internal stakeholders. Major members of external stakeholder included communities,
customers, suppliers, trade creditors, debtholders and shareholders while the main elements of
internal stakeholder are B.O.D., managers and employees.

Principles of todays corporate governance basically are derived from the 3 main documents: The
Principles of Corporate Governance (OECD), Cadbury Report, and the Sarbanes-Oxley Act of 2002
(Sox). The Cadbury Report and OECD are the fundamental standards where businesses are expected
to follow in their operations to assure proper governance. while Sox is an endeavour by the national
administration of United States to enact several of the standards prescribed in Cadbury and OECD.

Before discussing the core guiding principles of corporate governance, it is crucial to understand
who are the key actors and the relationships among each party. The key actors of corporate
governance included board of directors, management teams and shareholders. B.O.D. are those who
are in charge for the governance of organizations and have the vital responsibility of overseeing the
companys management and business strategies to achieve long-term value creation. Although the
shareholders normally do not involve in the day-to-day management of business operations, their
role in governance is crucial for a companys success, to appoint the directors and auditors. Besides,
they have the right to receive relevant and needed information like investment information and so
on. Management, leading by the CEO, is responsible for setting, managing and executing strategies
of the company is another key actor of corporate governance. Managements responsibilities
included not only strategic planning but also risk management and financial reporting.

There are 5 fundamental principles promoted in corporate governance that should be followed by
companies. The first one, organizations need to respect the privileges of shareholders and assist
them to practice their rights either by effectively and openly communicating information or by other
forms of assistances. Besides, companies should realize that they have legitimate, legally binding,
market and social driven commitments to non-shareholder stakeholders, including investors,
suppliers, creditors, employees, suppliers, communities, customers, and policy makers.
Organizations should clarify and make openly known the roles and duties of board and management
to provide stakeholders with a level of accountability. Disclosure of material matters concerning the
organization should be timely and balanced to guarantee that all stakeholders have admittance to
clear data. The Board should steer the organization to meet its business objectives in both the short
and long term hence should have a proper mix of skills, experience and freedom to empower its
members to release their obligations and duties adequately. The last but the most important
principle: integrity. Integrity need to be a crucial necessity in picking corporate officers and board
members. A set of accepted rules shall be developed for executives and directors to promote ethical
and responsible decision making. By so, the Board should lead the organization to direct its business
in a transparent and reliable way that can withstand stakeholders' investigation.

Corporate governance structure is often a combination of various corporate governance codes.

Corporate governance codes are there for a long-time period and have been developed in many
jurisdictions worldwide. A corporate governance code is a set of best practice suggestion including
policies, customs and laws with respect to the behaviour and structure of the top executives of a
firm. Each country has their independent governance code. For example, the first governance code,
Cadbury Report was developed in year 1992 in U.K. under the leadership of Sir Adrian Cadbury. Sox
2002, U.S.A. which was developed after the well-known financial scandals of WorldCom and Enron
to ensure the transparency of management and to enhance investors confidence. While in France,
the Vienot I Report which focuses on responsibilities of B.O.D. was the first established governance
code

Advocated by OShea a good governance should have 6 universally accepted practices: a balance of
executive and non-executive directors to ensure fairness in management, a clear responsibility of
board chair which distinguish from the CEO, provision of timely and quality information to the board,
responsible decision-making by top executives, integrity of company reporting especially financial
reporting and recognition of shareholder rights and the legitimate interests of stakeholders.

UK has great degree spearheaded the development of Corporate Governance codes and principles.
Some of the greatest corporate disasters in UK like BCCI and Robert Maxwell scandals have then
generate strong influences in the history of Corporate Governance.

The UK Corporate Governance Code, a set of principles which focus on companies listed on the
London Stock Exchange (LSE), supervise by the Financial Reporting Council (FRC). The LSE is the
cornerstone in building up the immediate credibility of the code by including a prerequisite to its
Listing Rules that all companies had either to organizations had either to conform to the code or
disclose to their shareholders why they had not done as such. However, since 29 June 2010,
corporate governance has been part of the legal system for all the listed companies because of the
new Listing Regime and it is applying to all organizations with a Premium Listing of equity shares
regardless of whether they are consolidated in the UK or not.

The Code is essentially a consolidation and refinement of several reports and codes concerning
opinions on good corporate governance. Corporate governance developments in the UK started in
late 80s and the early 90s in the wake of corporate scandals like Polly Peck and Maxwell. The first
step on the road to the starting iteration of the code was the publication of the Cadbury Report, a
response to major corporate scandals in the UK which associated with governance failures. It is a
report highlighting recommendations about the duties of CEO and administrator, balanced
composition of the board, selection procedures for non-official chiefs, transparency of financial
statements and the requirement for good inward controls. It also incorporated a Code of Best
Practice containing 19 arrangements managing board and committee structures, compensation and
financial reporting, and depicting the suitable association with auditors. These suggestions of the
Cadbury Report made part of the Listing Rules of the LSE after the alteration of Listing Rules. The
evolution of UK corporate governance is then followed by several reports like the Greenbury
Reports, the Higgs Report and so on. However, the Combined Code of Corporate Governance in
1998, The Turnbull Guidance on Internal control established in 1999, the Stewardship Code
developed in 201 and the Companies Act 2006 amended in 2013 has been the key stages
contributed to the evolution of todays UK Governance.
Financial reporting involves the disclosure of several financial information that stakeholders,
normally investors and creditors use to assess an organization's financial health over a specified
period. Financial reporting normally known as the final product of accounting. The standard contents
of financial reports are balance sheet, cash flow statement and income statement.

The objective of financial statements is to provide information regarding the financial position,
performance and changes in financial position of an organization that is helpful to an extensive
variety of users in decision making. However, it is almost impossible to emphasize the actual
importance of financial reports since each and every stakeholder has distinct reason on the need of
these financial information. For example, top executives would need the financial information to
visualize the figures which is crucial to improve decision making while the potential investors would
need financial reports to assess the financial health of a business, analysing the investment risk and
viability. Creditors will need the information to evaluate the viability of grant and so on.

A good financial report is important for every stakeholder either to the organization, shareholders,
investors, creditors or even the government to minimize risk and to avoid failure. Hence, corporate
governance plays a crucial role in the efforts to ensure the accountability and transparency of a
financial report.

Todays central issue in the field of corporate governance is whether the top management of
organizations, generally all, is possessed of integrity in the eyes of the public. And it is this integrity
which highlights the main objective of corporate governance. Under the UK Corporate Governance
Mechanisms, there is this formal requirement to ensure information published by companies of are
realistic and authentic: financial report must reflect substance of transactions instead of their
authoritative document. This means that off-balance vehicles need to be incorporated into
consolidated financial report. The second but the key requirement is that financial reports must
present a true and fair view. After the collapses of Maxwell, BCCI, Polly Peck in UK, corporate
governance mechanisms of UK have moved from rule-based approach to the one based on
standards and rules that are necessary to show how the principles should be connected in pragmatic
circumstances. By moving from voluntary to mandatory, this has developed and promoted
acceptable and rigorous accounting and auditing standards. Besides, by promoting these standards
that promote transparency and standardization of information, it could minimize information
asymmetries among management and investors which in the end improve credibility of companies.

Auditors, either internal or external are playing a vital role in ensuring quality of financial reports and
hence providing confidence to stakeholders. Ethical standards of auditors, auditing standards and
guidance on audit committees are highlighted under UK Corporate Governance Code, Section C.3.
According Section C.3, an annual audit should be conducted by a competent, independent,
competent and qualified auditor in accordance with high-quality auditing standards give an outer
and objective affirmation to the board and shareholders that the financial reports decently reflecting
the financial position and performance of the organization in every aspect. The independence of
auditors and their accountability to shareholders are required. External auditors should be
responsible to the shareholders and owe an obligation to the organization to exercise due
professional care in the conduct of review. Nevertheless, FRC has launched several principles in year
2014: 10-year audit re-tendency and 20-year-old audit firm rotation is mandatory, non-audit services
are prohibited.

Corporate governance mechanisms are principles rather than rule. Law is appropriate for imposing
basic standards of conduct where principles are more effective in encouraging best practices as it
raises self-actualization among organizations. The more imbued the corporate governance system in
business community, the less detailed regulation is needed to guarantee consistence with good
standards for behaviour in business. The other reason where corporate governance could be more
effective than law is that corporate governance is more flexible than law where it is adaptive to
companys needs and its less costly for organizations to comply with principles than regulations.
Hence, it increases the willingness of companies to comply with these governance standards and as
the result, risk of moral hazard is reduced.

However, there are some limitations brought by corporate governance as well. Corporate
governance needs a specific level of government oversight to abstain from increasing levels of
defilement. The absence of governmental oversight in corporate governance will prompt to a
misallocation of credit that conflict with rivalry. The misuse of corporate governance has set off the
enactment of an extensive collection of state and government laws intended to keep such abuses
from repeating. Compliance with these laws can be costly and burdensome for government. The
officers and directors who run the everyday affairs of an organization and make most of its policy
decisions are not necessarily shareholders. This can turn into an issue in extensive, publicly traded
organizations. On the off chance that no shareholder holds a controlling interest in the corporation,
and most shareholders vote by proxy, the enterprise's benefits are controlled by the B.O.D. and the
officers. The separation of ownership and administration can prompt to an irreconcilable situation
between management's obligations and shareholders. This happened when they attempt to gain
individual advantages from organization's prosperity instead of working towards expanding
shareholder wealth and causes agency problem which is severe to a firm.

A coin has two sides. Thus, it needs a very careful plan on the implementation of corporate
governance mechanisms to ensure its effectiveness and efficiency.

In conclusion, a sustained and effective corporate governance mechanism is pivotal to guarantee the
quality of financial reports in every sector either by strengthening the accounting standards,
improving the auditing process, reinforcing the listing requirement or any alternatives. After the fall
of several major companies around the world, a good corporate governance is crucial to restore
credibility of financial reports, reputation of accountancy profession and hence public confidence
which directly influencing potential investors confidence level.