The Relationship Between Corporate Governance and Financial Reporting in the UAE Organizations

Abstract

Corporate governance and financial reporting are critical elements associated with the success of an organization. The trends in the corporate sector indicate how the incorporation of active managerial practice influences the success of the firm. This mixed method study was carried to determine the interrelation between corporate governance and financial reporting as a practical investigation of the UAE organizations. The study found out that effective corporate governance is essential for comprehensive and ethics-based financial reporting. On the other hand, the existing corporate governance and financial reporting frameworks and practices in the UAE organization have contributed to the accountability and financial obligations. Moreover, the Board of Directors, its shareholders and other stakeholders in the practical study with the UAE organization are directly responsible for the development of the managerial culture that influences the critical outcomes in the organization. Furthermore, the study did not determine any significant relationship between the size of the board and firm performance in the UAE organization; however, smaller sizes depicted swift decision making, limited compromise, and professionalism but are associated with limited ideas, which limits the level of innovation and influence.

The Relationship Between Corporate Governance and Financial Reporting: Practical Investigation of the UAE Organizations

Introduction

The prevalence of accounting scandals and misappropriations have been a phenomenon among global corporate ventures. Such cases have ignited the questioning of the nature of quality associated with the process of financial reporting. The need for a transparent mechanism that can enhance the process of integrity and governance has been the desire across the sectors of investment. In most cases, a framework that includes the managerial implication in corporate ventures has been proposed as part of the critical measures that enhance the success of financial reporting and integrity. Several reputable firms such as WorldCom and Parmalat have been linked to inadequate accounting frameworks that have led to financial scandals (Karamaou & Vafeas, 2005). Such cases have led to deteriorating reputation that hampers the first perception that investors had regarding the organization. Although several measures have been set to enhance the process of financial reporting such as the establishment of primary ISO framework and guidelines, the management and the culture of the organization plays a significant role in influencing the extent to which an organization will depict the highest integrity while handling fiscal-related affairs. Worth pointing out is that the increasing cases of failure in finance-based disclosure have been linked to the capacity and competence of the board of management in implementing the proposed frameworks that enhance accountability. In such a case, corporate governance and financial reporting have become critical variables in business research to provide a vital baseline for sustainable and long-run recommendations for firms (Brown et al., 2010). This paper has examined the qualitative relationship between corporate governance and financial reporting from the case study perspective of the organizations in UAE.

Literature ReviewThe literature review section addresses the significance of corporate governance among various organizations. The relationship of corporate governance and management of the company is highlighted to provide a better understanding of the research topic. The effects of size of the boards and criteria for selections are illustrated as essential in the corporate performance of the organization. The details of the context are based on existing literature to show the extent to which the subject has been explored and relevance to the UAE organizational setting.

According to Pierce (2008), the UAE companies have been experiencing pressure in the recent years due to the need for the advancement and adoption of the favorable corporate governance activities in their industrial sectors. Based on the study, different UAE organizations have been listed to adhere to the national rules and regulations due to the poor practices and non-binding guidelines in their operations. Such a move will enhance the realization of fundamental governance and compliance requirements, especially in most financial institutions like Dubai Financial Market, Abu Dhabi Securities Exchange among others. In such a way, the significance of corporate governance initiatives will be realized in the population.

Importance of Corporate GovernanceAccording to Hasan (2011), corporate governance system entails rules, procedures, and processes that direct the manner in which the organization is managed or controlled. Such a consideration shows the significance of corporate governance in the functioning of the company. In the management of corporate governance, it is clear that the system must attain a balance between the interests of the stakeholders, like management, customers, investors, suppliers, government, and the community among others. The approach used in v allows for the development of organizational objectives since it points out every aspect of management in the company. The operations meditated by corporate governance range from action planning, internal controls to evaluation of performance or possible disclosure. For every situation of corporate governance, a set of regulations, policies, controls, and resolutions must be developed to influence the performance of the companys operations or dictate the corporate behavior. Studies indicate that proxy advisors and shareholders are vital elements of stakeholders whose efforts affect corporate governance (Tanviir, 2011). The attribution is supported by the role of the board of directors, which is central to corporate governance because it can enhance necessary changes in the performance assessments.

In the board of directors, corporate governance is likely to be influenced by the decisions of the stakeholders since they are responsible for the selection of the directors through the shareholders or other board members. The board of directors is tasked with making decisions that directly implies on the performance of the company like the appointment of corporate officials, development of dividend policies, and rates of compensations among others (Teagarden et al. 2009). The responsibilities of the board go beyond the optimization of finances, especially when the resolutions of the shareholders necessitates for some social or environmental aspects to be prioritized. The composition of the board can show certain aspects of dependent or independent members, where the former represents the significant shareholders, executives, and founders, while the latter indicates have no ties with the inside activities. The independent members of the board are likely to be brought in the company due to their dedicated expertise or education in management to enhance performance. More so, the independents are considered highly useful in corporate governance since they neutralize the powers or possible biases created by the insiders to help in aligning the activities or shared interests in the board.

Poor corporate governance can demonstrate doubts about the reliability, obligation, and integrity of the shareholders, which negatively affects the performance of the company. For instance, the board might project support for illegal activities that can destroy the reputation of the organization, like the Volkswagen scam in 2015 (Jamali, 2015). Studies indicate that lack of cooperation among the board members can enhance the development of inappropriate and noncompliance reports. Some of the bad decisions made by corporate governance are insufficient compensation among the executives that lowers individual performances. As well, boards with weak structural constitutions are likely to face challenges in ousting ineffective incumbents. Under worse scenarios, a company might be forced to develop strategies of restoring the confidence of the public or markets after facing severe corporate issues, like accounting frauds evident in Enron, WorldCom that are accessible and high-profile organizations (Anderson et al., 2005). However, effective corporate governance facilitates transparency in the rules and regulations in the company that will help in improving performance. In such regard, research shows that most firms strive to have a higher level of corporate governance rather than prioritizing on profitability. Most shareholders have to demonstrate good corporate citizenship through public awareness, ethical behaviors, and effective practices to enhance positivity.

Corporate Governance and Company ManagementIn most cases, corporate governance and company management have a significant relationship in enhancing performance amidst their differences in operations. For instance, Fulmar and Conger (2004) show that corporate governance involves activities primarily structured to help in the protection of the business, while the management involves how the tasks are channeled to help in the growth of the business. Through corporate governance, the UAE companies will have to design approaches based on rules and procedures so that activities conducted by the firm are by the legal provisions, while the management will have to formulate methods of implementing the processes to provide optimal benefit to the firm (Tanviir, 2011). Such a consideration indicates that the organizations have to seek for better corporate governance for effective management of the company. The UAE Companys management has to demonstrate a sufficient technique through its corporate executives to maintain the progress and operations within the firm. Studies indicate that corporate governance offers the mode of control of the actions within the organization for the benefit of all. The policies of corporate governance can have the capacity of restricting the board of directs from awarding contracts to themselves or family members with the aim of enhancing mutual effective company management. The restrictions can also help in minimizing possible cases of financial fraud in the company that might affect its posterity.

According to Teagarden et al. (2009), the company management is tasked with the role of appropriating actions to lead the organization in the positive direction using the decisions made by the board of directors. For instance, managers should set budgets within the provisions of the board, directing staff members and implementing strategic plans on product development of marketing. UAE can develop management teams within their corporations to accommodate the...