CORPORATE GOVERNANCE IN PAYROLL AND FIXED ASSETS PROCESSES (STUDY OBJECTIVE 9)
Recall that Chapter 5 identified four primary functions of the corporate governance process: management oversight, internal controls and compliance, financial stewardship, and ethical conduct. While corporate governance is essential for all business processes, it is especially important in the areas of payroll and fixed assets, where historically there has been a large number of cases of fraud, theft, manipulation, and misuse of funds.
Without good corporate governance, time sheets may be more easily altered, payroll funds can be readily stolen, and fixed assets are more likely to be misused or stolen.
Payroll funds and fixed assets do not belong to the managers of the organization; rather, the managers are stewards, or temporary managers, of those assets. Corporate governance policies and procedures must be in place to ensure that expenditures occur only to benefit the organization and its owners, not to benefit the managers or employees personally. In addition, corporate governance policies should prevent a manager or employee from taking fixed assets for personal use.
THE REAL WORLD
Adelphia Business Solutions, Inc., provides an example of poor corporate governance leading to misuse of corporate funds earmarked for fixed asset purchases. In the late 1990s, Adelphia was the sixth largest cable television company in the United States. The corporation was majority-owned and managed by members of the Rigas family. John Rigas was the founder and chairman, and three of his sons occupied top management positions and served as directors. When the Rigas family's fraud schemes were discovered in 2001, it was apparent that many millions of dollars in corporate funds had directly benefited Rigas family members.
The Rigas family commingled corporate funds with family funds and caused the corporation to buy fixed assets that benefited only the family. These purchases included land and several luxury Manhattan condominiums, as well as the construction of a private golf course. The board of directors, which included Rigas family members, was not an independent board that exercised good corporate governance. Good corporate governance should begin with a strong and independent board of directors, and effective policies, procedures, and systems must be in place throughout the entire organization.
The systems, processes, and internal controls described in this chapter are part of the corporate governance structure. When management designs and implements processes for payroll and fixed assets, it assigns responsibility for executing those functions to various managers and employees. As management assigns and oversees these expenditure processes, it carries out the corporate governance function of proper management oversight.
Management should also establish appropriate internal controls for payroll and fixed assets, such as those internal controls described in this chapter. These controls accomplish the objectives of safeguarding assets within expenditure processes and ensuring the accuracy and completeness of expenditure processes data. These controls are also part of the corporate governance structure.
When management has designed and implemented, and continually manages, processes and internal controls, it is helping to ensure proper stewardship of the company's assets. Corporate governance requires proper financial stewardship. The processes, internal controls, and feedback data from its systems help management report to owners and other stakeholders about proper stewardship of assets within the expenditure processes. These assets include funds for payroll and fixed assets.
Finally, good corporate governance requires ethical conduct. This chapter described some of the ethical issues that management must consider and address within the payroll and fixed assets processes. When top management acts ethically and encourages ethical behavior throughout the organization, stronger corporate governance is the result. There are usually fewer cases of fraud, error, or ethical problems in an organization when top management behaves ethically and encourages ethical behavior.
Perhaps it would be easier to understand the way this chapter's topics fit into corporate governance if you think of it from a negative perspective. For example, if management of a particular organization did not establish sound business processes, good internal controls, and ethical policies, it would lack good corporate governance. In such an organization, expenditure processes would be poorly executed and poorly controlled. Management would not be exercising proper financial stewardship. Therefore, stakeholders such as investors, creditors, and owners would have little or no trust in management's ability to use funds in a manner that would benefit the organization and its owners. The organization would not represent the type of enterprise in which we would wish to invest our own money. On the other hand, when an organization has good corporate governance, the stakeholders can properly have confidence that proper stewardship is occurring. Establishing and executing proper processes, internal controls, and ethical guidelines leads to better corporate governance and, therefore, good financial stewardship.