CORPORATE GOVERNANCE IN EXPENDITURE PROCESSES (STUDY OBJECTIVE 12)
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 important for all business processes, it is particularly necessary in the expenditures processes. Funds expended by an organization do not belong to managers. Managers are stewards, or temporary managers, of those funds. Corporate governance policies and procedures must be in place to ensure that funds are expended only to benefit the organization and its owners, not to benefit the managers or employees personally. For example, corporate governance policies should prevent managers and employees from using company funds to purchase items for their personal use. In other words, strong corporate governance should help prevent fraud, theft, and mismanagement within expenditure processes.
The systems, processes, and internal controls described in this chapter are part of the corporate governance structure. When management designs and implements processes for purchases, purchase returns, and cash disbursements, it assigns responsibility for executing those functions to various managers and employees. As management assigns and oversees these expenditure processes, it is carrying out the corporate governance function of proper management oversight.
Management should also establish appropriate internal controls for expenditures processes, such as those controls described in this chapter, which accomplish the objectives of safeguarding assets within expenditures processes and ensuring accuracy and completeness of expenditures processes data. These internal controls are also part of the corporate governance structure.
When management has designed, 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 these systems help management report to owners and other stakeholders about proper stewardship of assets within the expenditures processes. These assets would include inventory, raw materials, supplies, cash, and operating assets.
Finally, good corporate governance requires ethical conduct. This chapter described some of the ethical issues that management should consider and address within the expenditures 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 frauds, errors, and 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 processes, good internal controls, and ethical policies, it would lack good corporate governance. In that organization, expenditures 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 that funds were expended in a manner that would benefit the organization and its owners. The organization would not represent the type of organization 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 more confidence that proper stewardship is occurring. Establishing proper processes, internal controls, and ethical guidelines leads to better corporate governance and, therefore, to good financial stewardship.