Final answer:
Controls in a corporation aim to ensure operational integrity and efficiency, guided by the board of directors, auditing firms, and internal bureaucracy, as well as oversight from large outside investors. Weak or failed controls can lead to situations like the Lehman Brothers' case, where investors were misled. Effective controls protect against issues like worker collusion and ensure management's actions are appropriately evaluated.
Step-by-step explanation:
The Role of Controls in Corporate Governance
Controls within a corporation are essential mechanisms designed to ensure the integrity and efficiency of its operations and oversight. The board of directors, as the primary body elected by the shareholders, serves as a primary line of oversight for top executives, setting the tone for corporate governance. The auditing firm plays a critical role in verifying the company's financial records and overall financial transparency. When controls are weak or fail, as was the case with Lehman Brothers, it can lead to a lack of investor confidence due to inaccurate financial information being provided. In addition to these formal institutions, internal oversight through bureaucracy, as well as external oversight exercised by large outside investors such as mutual funds and pension funds, contribute to the governance landscape. However, bureaucratic oversight is not without challenges, as individuals inside the organization may face significant personal costs when reporting mismanagement or corruption.
Controls are meant to ensure that operations, including the internal audit activity and management's planning and directing processes, are both efficiently performed and properly evaluated. This is to avoid potential issues like worker collusion that might circumvent management's plans. Effective control mechanisms are vital for maintaining the solvency, reputation, and legal compliance of an organization.