POST ENRON DEVELOPMENTS ON U. K. AUDIT The 2001 Enron disaster served to turn the international spotlight on contemporary corporate governance, accounting and auditing practices. The definition of corporate governance has two parts. Firstly, it is a set of procedures, traditions, programme of actions and rules that govern the way a corporation is supervised, administered or controlled. Secondly, it encompasses the significant connection among the many players concerned – shareholders, board of directors, management, employees, creditors, banks, society and the environment. Corporations are expected to adhere properly and faithfully by this definition while they go about achieving their goals and objectives. 1 Corporate governance focuses on three themes.
The first theme is ‘accountability and fiduciary duty, ’ whereby it recommends enforcing official recommendations and means to promote good behaviour and shareholder safety. The second theme is ‘economic efficiency view, ’ that advocates targeting maximum economically favourable results, especially on issues involving shareholders’ welfare. The last theme is ‘stakeholder view, ’ that recommends more serious consideration and accountability to those involved players who are not shareholders of the corporation, such as employees, creditors, banks, society and the environment. 2 All players involved in corporate governance have either a straightforward, or an indirect interest in the proper functioning of the corporation.
Shareholders obtain capital return in the form of dividend; directors, management members and employees get their remuneration in the form of salaries and/or benefits, as well as build up on their personal 1: Wikipedia. 2007. Corporate Governance. 2: Ibid. work experience and reputation; society (customers) acquire the products (goods or services) of the corporation; and suppliers, creditors and banks obtain an amount of money for the goods or services they provide to the corporation. 3 The paramount factor that motivates shareholders and other stakeholders to invest financial capital in the corporation is the trust that they will be compensated by a reasonable and impartial amount of returns.
The trust factor is based on the principles of truthfulness, adherence to moral values, frank openness, acting authority, loyalty and accountability of the corporation. If this crucial factor is compromised (as it glaringly happened in case of Enron in 2001, which focused mainly on irregularities associated with their audit conducted by the firm Arthur Anderson LLP), 4 then stakeholder outrage fuels a gigantic public mistrust of corporate governance in general, and corporate governance practices of corporations in particular. 5 It is the fundamental right of every shareholder to expect accuracy and reliability in the publicised account reports of the companies they invest in.
The accuracy and reliability factor basically governs the shareholders’ relationship with the company, because such published account reports are the only indication about the company’s financial position (especially the soundness and proper functioning of its current investments), and as such, represents the basis on which the shareholders decide about investment in the company.
Shareholders, therefore, need to be assured about the accuracy and reliability of the company’s published accounts. This is the reason why it is mandatory for companies to get their accounts checked by an independent auditor. High profile cases like the Enron