Enron’s accounting scandal Corporate governance is a term used in business organizations to define the overall direction of the enterprise and method of control used by the executives. This involves the use of proper management techniques by the chief executive officers and major shareholders of the company, who must act in the best interests of the company. Failure to follow through with effective governance will automatically lead to the collapse of a vibrant business venture. One such example was the case scenario seen in the collapse of Enron Organization.
The company began as an energy providing business in Houston due to a merger of two gas companies and later transformed itself into a major energy trading corporation led by Kenneth Lay, its founder. However, there emerged some corporate problems in the management who seemed to be out of control as they did what pleased them defying company’s interests. Reports were that the entire management team was behaving in a manner that did not blend in well with most of their clients. The latter were described to be out to propagate their own agenda and thus became negligent in providing company affairs.
To elaborate, the head of the internal audit committee had her senate husband funded by the organization. In addition, Lord Wakeham who was part of the audit committee had a concurrent consulting firm in the same company. Cases of arrogance were very common in the organization as was bootlicking on the part of senior management. The subordinate staff was very afraid of the Chief Executive Officer and adhered to him as though they were enslaved. Records of mismanagement in the accounts records were evident.
It began with the falsification of profit gains due to claims of a successful collaboration with Blockbuster Video that never was. To cover up the conspiracy, they had to manipulate their accounts leading to an actual consequential loss of profits of $600 million, and a total loss of all company profit estimated to the figure of $591. This ultimate loss led to an increase in debt figures for the organization in the amount of $628 million as was the case in the year running from 1997 to 2000.
This fraud in their accounts records guaranteed them an opportunity to increase its earnings in the share market due to the prevailing pressure of reflecting a high EPS figure. The former was a ratio of total earnings divided by the number of shares of a company (Mitchel & Sikka, 2012). The above fraudulent case would have prevented had there been accountability on the part of the internal audit team, who went ahead to provide incorrect figures without giving a second thought to the outcome of their consequences. They acted independently without the knowledge of the major stakeholders of the company as the management set up of the company did not interfere in their affairs.
There should have been regulation in the way business was conducted in the organization as all the non-executive heads were left to task in the performance of their duties. They were not held accountable for their actions as they were allowed to independently cater for any shortcomings in the business. Lastly, there should have been an alignment of management goals with those of shareholders to prevent conflict of interests as was the apparent case. Bibliography MITCHELL, A.
V., & SIKKA, P. 2012. Dirty business: the unchecked power of major accountancy firms. MONKS, R. A., & MINOW, N. 2011. Corporate governance. Chichester, Wiley FREEMAN, R. E. (2010). Stakeholder theory: the state of the art. Cambridge, Cambridge University Press. BAVLY, D. A. 1999. Corporate governance and accountability: what role for the regulator, director, and auditor? Westport, Conn. [u. a.], Quorum Books. JONES, M. 2011. Creative accounting, fraud and international accounting scandals. Chichester, West Sussex, England, John Wiley & Sons. KAMMERER, M. 2009. Creative Accounting, the Enron Case and its impact on Corporate Governance.
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