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CORPORATE GOVERNANCE

Assignment 2

CORPORATE SCANDALS OF ENRON AND WORLDCOM

(A SOLUTION TO THE CASE STUDY)


Submitted to: Mr. Muhammad Aleem

(Lecturer)

Submitted by: Awais Ahmad

CIIT/FA09-MBA-027/LHR

Muhammad Adeel Khan

CIIT/FA09-MBA-069/LHR

Najm-ul-Hassan

CIIT/FA09-MBA-112/LHR

Submitted on: October 21, 2010

COMSATS Institute of Information Technology


Defense Road, Off Raiwind Road, Lahore.
1) What are the key factors for the collapse of two companies in the view of
Corporate Governance?

The following key factors resulted the two companies to a collapse.

i) Senior Executives were encouraged to lie, cheat and manipulate records


by providing them high margin of profits.

ii) Executives were interested in their personal reward structure ignoring the
stakeholders’ benefits.

iii) Board members were mostly highly rewarded and consist of the friends,
who did not raise questions on any doubtful and ambiguous records.

iv) Non-Executive Directors were also highly rewarded and they worked
independently.

v) Audit Team was bribed, so that the team will produce a clean audit report.

vi) Illegal profits were generated and it was shown that all the policies and
rules implemented from the top were for the benefit of the company and
shareholders, and hence, were ethical.

vii) The cost of heavy machinery purchased in a particular period was not
spread by the company in the next coming financial years.

2) Who was mainly responsible for the downfall of Enron and WorldCom?

Almost every person involved in any type of unhealthy activity was responsible for
the downfall of both companies. However, they can be arranged in a sequence from
most responsible to less responsible as in the following:

i) Board of Directors firstly: As they were involved in fraudulent and cheat.

ii) Non-Executive Directors secondly: As they were involved with Board of


Directors in unhealthy activities.

iii) Internal Audit Team thirdly: As they were bribed by Board and
Management to show their audit report clean.

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3) What do you learn from these examples?

As a Business Individual, one can learn a lot from these two corporate scandals. One
can understand the importance of Corporate Governance in the recent business life.
However, we learnt that:

i) The business should implement those rules and policies which are
favourable for almost every stakeholder of the company. Nothing should go
wrong while implementing the right rules and policies.

ii) Showing the fine and fair records is an easy task in one glance, but
difficult to manage after showing them. When these records are shown as fine
and fair, they raise a lot of questions in the External Audit Team as well as the
Stakeholders of the company.

iii) The Internal Audit Team should keep proper check and balance on the
company’s records. Such team should fulfill its work with honor, as it is an
obligation for the team itself.

iv) While implementing the rules and policies, focus should be on


stakeholders’ benefits, not just personal benefits.

v) A rule or a policy, when implemented, must have a legal and ethical


purpose. Implementing an ethical but illegal policy is no longer successful and
vice versa.

vi) The shareholders should have complete right to vote for directors. So that
they can use their right in choosing the most suitable persons for the executive
personals.

vii) The only right of independence should be with Board of Directors.


Management should work under the board, following their rules and policies,
not their own.

4) Place your recommendations being a Business Consultant in order to stand


the both companies in the market again.

As a business consultant, we should take the following steps if we want Enron and
WorldCom again on the peak in market.

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i) Give proper voting right to the shareholders of the company. The Board
will be elected again by shareholders so that they may choose most suitable
executive personals.

ii) A strict following to the company code of conduct will be made. The
company culture will improve and as a result, the company may be prevented
from frauds and cheats.

iii) A new audit team will be chosen for conducting the audit work. It will be
trained for not having involved in unhealthy activities and there should be
proper check and balance of the accounts.

iv) The records shown by only papers will not be encouraged. The actual
stocks and plants will be physically visited by the audit team and any type of
mismatching of actual things with reported things will be noted and reported
clearly. If there is a chance of fraudulent again, interim audit will be suitable
for the company.

v) Any new policy and rule will be clearly disclosed to the stakeholders.
Nothing will be kept hidden or ambiguous.

vi) Governance Best Practice will be followed to regain the customers trust on
the company.

vii) Every Annual General Meeting will decide the board members and their
legal and ethical obligations for the next year.

One fact should be accepted that when a company suddenly collapses, it is very
difficult for itself to regain its previous status and goodwill. The above
recommendations may not be successful depending upon the circumstances. There
may be a possibility that the company will recover its status as slowly as it may take
few years. However, a Business Consultant should taken into account all the
circumstances regarding the market, so that he will make the best choices he can.

References:

Corporate Scandal Case Study: Enron and WorldCom

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