Chapter2 - GOVERNANCE FAILURE AT ENRON 1. Enron share price continued to rise dramatically throughout the 1990s but eventually, because of major accounting fraud and questionable ethics of business as well as the executives looting the firm, it resulted to bankruptcy of the firm. The Enron business failed most in internal forces because they are directly responsible in determining both the strategic direction and execution of the company. Enron's collapsed mainly due to massive incompetence of the management. It also affects the externally because of the deceit corporate governance culture practices, it also fails as an outcome.
I agree with you that this rule may have reduced the likelihood of this fraud. According to the case, the conspiracy began in 2000, shortly after Ebbers' bank started calling in his personal loans because of the company's falling stock price. He faced the decision to either lie or admit WorldCom financial position. Ebber’s borrowings from the Company and his loans tie with the company’s stock performance put him under pressure to ensure that WorldCom stock price does not decline further. He began falsifying the books to give the impression that WorldCom was doing well.
* The firm or the accountant losses credibility in the market, if an accounting fraud is found. * The trust built in the company over a long period of time by its investors and employees may be lost due to such accounting practices. * If the company indulges in inappropriate practices, it can affect the willingness of suppliers and customers to conduct business with it. Over time, this may lead to the destruction of the business entirely. * If company management is unethical to the extent of committing accounting fraud, the company could be subject to criminal penalties.
pg. 417). Additionally, Mr. Madoff was able to convince others that his company was much more lucrative than it actually was by controlling the stream of cash flow. Madoff Due to Mr. Madoffs’ greed many people and organizations (both for profit and non-profit) lost millions of dollars. Due to these loses, unfortunately some lost everything and others took their own lives, including one of his sons, Mark.
Unit 1 Project Separation of Consulting and Auditing Firms Independence is a critical component of being able to successfully audit a company. An auditor loses independence when focus lies on the company and not working separate from the company. This was the case of Arthur Anderson and the organizations involvement with Enron as an auditory and a consultant. The Enron case shook up the financial market and caused many investors to question the accuracy of financial statements. The fear brought many negative affects to the finances of companies and to the areas of auditing and consulting.
He also said, “ But few are aware of the doom it portends”(Allan, 5.2) referring to the crash that’s about to happen. Foreshadowing is important in both the Great Gatsby and The Roaring Twenties, people are so concerned about having money they aren’t realizing what’s about to happen to them. The Great Gatsby foreshadows something bad will happen due to people’s carelessness and blindness to anything unrelated to money. While the Roaring Twenties foreshadows the Wall Street crash from peoples increase spending and lack of actual money present. The setting in the Great Gatsby shows how people are divided by the amount of wealth they have.
Step 6: What are the consequences of each course of action? Under Option 1, the true values would be reported. He would not maintain the requirement of the bank loan, which may have a negative affect on the financial state of his business. However, Josh would maintain his values and reputation, which best serves the interest of the shareholders. Under Option 2, false values for the current ratio would be reported.
For instance, after worldcom collapse, Mr. Ebbers was recalled as saying that the project to write a code of ethics was “a colossal waste of time. All those failures ended up putting pressure on the accountants to make improper accounting entries to present a good image of the company. For instance, Mr Sullivan
‘The preferable goal of the firm should be the maximisation of shareholder wealth.’ (Financial Management 5th Edition 2009) This goal however, sometimes will conflict with other goals of the firm such as avoiding unethical or illegal behaviour in the pursuit of the first goal. History has shown that unethical and illegal behaviour often occurs, and does so because of the constant drive to maximise the value of a company’s shares and potentially increase management salaries and bonuses. Examples include well know cases like Enron, who in 2001 filed for bankruptcy, investigations found that its auditing company had falsified its reports. This eventually led to the collapse of the company and its auditor, as well as causing the public to lose what trust they had in large enterprises. (Enron: The fall of a wall street darling) Other such examples are HIH, ABC Learning and Leighman Brothers.
Was it a lack of transparency, which enabled the growth of such a morbid system? This paper examines the impact of non-transparency on the financial crisis in 2008. With help of examples of the major banks, it investigates which role the lack of transparency played and concluding, if more transparency could prevent a future crisis.