A lot of the basis of corporate governance hinges around the principle-agency problem and the needs for accountability of those responsible for the management of the company who handle resources that do not primarily belong to them.
The importance of good corporate governance can be gauged by the studies by McKinsey which show that many investors are willing to pay a premium for the stocks of companies that illustrate really good corporate governance (Newel 2002). In regards to this, financial reporting assumes greater importance in terms of allowing the corporate governance system to function well. The accountants of the company prepare the financial statements, which the directors have to assume are prepared according t the standards and with due ethical concerns in mind. This is supplemented by review by independent external auditors who vouch for the accuracy of the statements.
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