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 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 s. 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 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 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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