Implication of Corporate Governance Codes and Advantages of Sole Trader and Company

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FIN4001
Introduction to Finance

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Question 1:
Part A: Implication of adherence to various corporate governance codes in prevention of
corporate scandals and collapses
The corporate governance systems and mechanism within organizations has been a
subject of discussion among the investors and the professional bodies involved in developing and
implementation of the governance reforms since many years. They can be defined as the
structures and processes that need to be adopted by businesses for maintaining direction and
control in order to protect the interest of the stakeholders. The importance of such structures and
processes has been emphasized after the occurrence of corporate collapse such as Enron,
WorldCom and others high profile organization mainly due to their weak corporate governance
structures (Adewale, 2013). These corporate collapses have highlighted the importance of
development and implementation of strong corporate governance mechanism within
organizations for increasing transparency and accountability in the business operations.
The typical method for ensuring effective corporate governance structures in the
companies is through implementation of corporate governance codes that are the documents
stating rules and procedures for governing and managing corporations. The codes are developed
by self-regulating professional bodies in coordination with the relevant government regulating
agencies. However, these are adopted and implemented by the board of directors of a business
corporation. The compliance with these codes is regarded to be necessary for the prevention of
corporate frauds and scandals. For example, it has been demonstrated by the case of corporate
collapse of Enron that the main reason for its downfall is lack of an effective corporate
governance structure which lead to the occurrence of agency issues. The lack of alignment
between the shareholders and the company directors lead to the rise of principal-agency issues.
The business managers were driven by the pursuit of maximizing their self-interest and relatively
ignored the interest of the shareholders which eventually lead to the downfall of the company.
The board of directors failed to meet their regulatory role within the company resulting in
prevalence of illegal activities which eventually lead to its downfall (Cuong, 2011).
Thus, the presence of corporate governance codes helps in ensuring that business
conducts their operations in an ethical manner and helps in resolution of agency problem or any
type of conflict of interest between the shareholders and the business managers. These codes
help in ensuring that managers acting as agents are continually monitored for prevention of abuse
of power and they act in the best interests of the organization. They act as proper checks and
helps in overcoming the agency issues by ensuring that agent goals are aligned with that of
principal (Otusanya, Lauwo and Adeyeye, 2012).
Part B: Advantages of Organization acting as a sole trader as compared to that of a
Company

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The major advantage of acting as a sole trader as compared to that of a company it
provides complete control over the business. Being a sole trader, one can retain all the profits
after tax while in a company there is less control of the owner over the business as the profits can
be retained only after meeting the corporation tax and the dividend payments. In addition to this,
it provides the benefit of making the decisions alone and this it is relatively easy to make the
significant changes as per the external conditions. For example, it is easier for causing changes in
the prices or making modifications in the product to meet the needs and requirements of the
customers (Bouchoux, 2009). Thus, the ability to make quick decisions can provide major
benefits for a sole trader in a competitive and dynamic market. On the other hand, in a limited
company the decision-making is slow as the owners cannot make the necessary changes by
themselves and the decision are taken in mutual consent with the board of directors.
The formation of sole trader is also regarded as the quickest and simplest way for running
a business in comparison to that of establishment of a limited company. This is because there is
no requirement for registration of a company unlike to that in the case of a limited company
which requires registration and therefore the process of its establishment is rather complex. Also,
the business running in the form of sole proprietorship does not require professional guidance
which significantly reduces the cost of establishing a business. On the contrary, the owners
usually employ the services of a formation agent during the establishment of a limited company
which consequently leads to increase in the cost as fees need to be paid to them for their
professional guidance. The accounting processes in the case of sole traders is much simple as
compared to that for a limited company with no requirement of developing financial reports on
an annual basis or filing tax returns. There only exist requirements of maintaining records of
invoices and expenses whereas in case of limited company there is complex accounting process
that involves recording and maintaining of financial statements (Miller and Jentz, 2009).