Accounting Shenanigans and Agency Problem

Corporate Governance and Financial Concepts

• Accounting shenanigans refer to accounting schemes that distort financial statements to hide financial problems or paint a brighter picture of economic performance, also known as "window dressing."

Agency Problem

• Occurs when corporate managers (agents) use their authority for personal benefit, rather than for the benefit of the shareholders (principals).

CORPORATE GOVERNANCE ROLES

• Audit Committee: composed of directors who oversee the financial reporting process, select external auditors, and receive audit findings.
• Board of Directors: the governing body elected by shareholders that exercises corporate powers, conducts business, and controls properties.
• Executive Director: a director with executive responsibility for day-to-day operations of part or whole of the organization.
• Independent Director: a person independent of management and controlling shareholders, who exercises independent judgment.
• Non-Executive Director: a director not involved in operational work of the corporation.

FINANCIAL CONCEPTS

• Debt Ratio: a measure of financial soundness, computed as total liabilities divided by total assets.
• Energy Derivatives: complex financial instruments based on energy products (e.g., oil, natural gas, electricity), traded on formal exchanges like the Chicago Mercantile Exchange.
• External Auditor: an independent accounting firm that provides a report or opinion on a company's financial statements.
• Internal Control: a process designed to provide reasonable assurance regarding operational, reporting, and compliance objectives.
• Off-Balance Sheet Accounting: not reflecting assets and/or liabilities on financial statements.
• Special-Purpose Entity (SPE): an entity created for a narrow and specific business objective, such as obtaining finance.

OTHER CONCEPTS

• Corporate Governance: a system of stewardship and control that guides organizations in fulfilling their long-term obligations to stakeholders.
• Corporate Issuer: a corporation that issues securities (e.g., stocks, bonds) to the public.
• Enterprise Risk Management: a process to identify potential events, manage risks, and provide reasonable assurance regarding entity objectives.
• Organisation for Economic Co-operation and Development (OECD): an inter-governmental entity promoting economic growth through policy formulation.
• Publicly-Listed Company: a company whose shares are traded on a stock market (e.g., Philippine Stock Exchange).
• Sarbanes-Oxley Act: a corporate governance regulation that strengthens corporate governance structures, regulates auditing, and assesses internal controls over financial reporting.