Corporate Governance and the Regulation of Financial Reporting

Abstract This paper examines the inter-dependent role of corporate governance and financial reporting within the institutional context of listed companies in the UK. Four related issues are addressed: the nature of the current problems of corporate governance, the role of financial reporting as a palliative for these problems, the need to regulate financial reporting if it is to fill this role, and the form which such regulation is likely to take. It is concluded that improvements in financial reporting may be a necessary condition for improved corporate governance, but they may not be sufficient. Improvements in financial reporting are likely to be facilitated by some form of regulation, because of the need to devise a standard form which will aid inter-firm comparisons. Self regulation by professional bodies has emerged as the initial method of regulation, but this is unlikely to be a permanent solution. If the professional body has monopoly power, there will be pressure for a wider form of private sector regulation, including other parties (such as users of accounts), in order to prevent abuse of monopoly power in favour of the profession. If it lacks monopoly power, the self-regulation will have inadequate enforcement power, and this will lead to calls for legal backing from the state, which will involve a degree of public regulation.