Corporate Governance Reporting and Regulation: Enron Collapse, Worldcom, Maxwell Pension Scandal - Case Study Example

The failure of corporate governance in business world as seen through the Enron collapse , Worldcom , Maxwell Pension scandal and Shell Nigeria prompted governments to act on the issues of accountability and corporate social responsibility. This resulted to establishment of measures by various governments such as the Higgs Report (UK) and Sarbanes-Oxley Act ( US) ( Solomon 35). Nevertheless, measures are enough to prevent unethical practices in corporations. As Solomon asserts, a “stakeholder theory” being adopted in UK maybe more appropriate as this spreads the accountability to all people who involved and affected by the organization. This paper will analyze the role of corporate governance in the collapse of international corporations such as Shell, Enron, Worldcom and Maxwell. ENRON Corporation Enron Corporation was admired by many as a rapidly growing business due to its being innovative. This company grew at a fast pace and in the year 2000 it’s claimed annual revenue was about US $ 100 billion. At this point in time the Enron was ranked the sixth-biggest energy corporation in the globe and also as the seventh-biggest of the Fortune 500. In the same year the stock price of the company reached its peak at US $ 90. (CBCNews, 2008) This positive reputation was later tainted after the discovery of management practices that were questionable. Accounting frauds and corruptions by the top management have taken years to settle. The independent auditors, who should have acted as watchdogs on behalf of the interested public and the stakeholders, did not take the necessary action to save them the time and money lost in this company’s fall. The board members and the auditors did not demonstrate enough confidence to challenge the management of Enron on their actions. Bond raters and the financial analysts did not smell a rat. They just thought and reported the company business as one of the best coordinated. Special Purpose Entities’ and Unconsolidated Partnerships’ accounting procedures were applied to cover up the extent to which Enron was indebted. However, when it came to light the fraudulent accounting procedures saw the disappearance of previously reported profits. Enron had a rapid collapse, subsequently. The management had decided to rob the people of their wealth in a fearless process of deceiving them. This issue has sparked a lot of debate in the USA and also out of its borders. It was in October 2001 that Enron reported the first quarterly loss after the last four years. In November of the same year the business announced that it was going to restate the reported profits since 1997, in a SEC filing. This led to the reduction of the reported profits by US $ 586 million. In December 2001, the Enron Company filed for bankruptcy under Chapter 11. In the House of Commons and the senate, nine committees were held to discuss the fall of Enron. The Department of Justice, which is yet to terminate its business, is the one responsible to carry out the criminal investigation process. (CRS report, 2004) According to documents which were filed in a court of New York by the Enron energy company, the top executives of the company enriched themselves greatly in the year 2000. That’s before the bankruptcy of the company in 2001. The consequences of this were, among others, the high levels of job loss by its employees and also their pension savings. The top executives departed with large amounts of dollars in bonuses and revenues awarded to them by themselves, selfishly. Among the executives mentioned to have received the largest windfalls was the company’s former chairman, Kenneth Lay, who had an income of US$ 150 million in stock packages and bonuses. The other person was Jeffrey Skilling, who was the former CEO and who ranked in US $ 25 million. The former company’s financial officer, Fastow Andrew took in about U.S$10 million. Another top executive involved was Thomas White, who was in the energy sector of the company and is said to have been given U.S$17 million. Note that the figures given are inclusive of some estimates since there was uncertainty regarding the whole amounts lost in the collapse. Yet still the mentioned culprits are those who have been charged with the crimes committed and thus, the list may not be inclusive of all the involved persons. (Kay, 2002) The fall of Enron Company has had a negative impact on many. Predicaments set in when in November 2001 S&P index, put the Enron’s debt to the status of junk box or did a down grading of the company. It was unfortunate to the debt holders since the debt contracts between the Enron Company and the debt holders had clauses which stipulated that this company would be required to make further payments to the holders of debt. Subsequent to the company’s down grading. After the collapse of Enron Company, the other company’s fears or anybody else’s fears across the US is whether the white collar crime will persist. One of the major steps to monitor all the companies inclusive of the fortune 500 was the sighing into law the Sarbanes-Oxley Act in July 2002.Questions about companies have always been there. However, after a major fall, like that of Enron, it takes a long time to restore the investors’ and the entire public’s confidence. (The Michigan Daily, 2007) . This act is sometimes simply known as Sarbox or SOX. The reason for the Sarbox act was to enhance legislative changes to the financial practices and also the corporate governance streamlining. The Act introduced new rules with a major objective of the investor’s protection. The investor’s protection would be ensured through the improvement of the reliability and accuracy of the disclosures of a corporate business. The Act was named after Senator Sarbanes Paul and the house representative Oxley Michael, who drew the Act. The higher profile scandals like that of Enron are the ones that triggered for the same. The other reason for the Act’s enactment is to prevent and duly punish accounting and corporate fraud as well as corruption. It also ensures justice is done to wrong doers and the shareholders and workers interests are protected. (Sarbanes-Oxley Act Forum, 2008). WORLDCOM The collapse of Worldcom sent a clear message to all business owners: fraudulent bookeeping along with irresponsible corporate would bring down any big organization. Even at the last end of 2004, the company officials tried to cover-up to the public the issue by reorganizing its financial statements as well as the organization. It was a hopeless case since the company had an outstanding debt not less than $35 billion prompting the newly appointed CFO then Robert Blakely to conduct a monumental financial audit. In fact, Joseph McCafferty claimed that”( during) the peak of the audit in late 2003, WorldCom had about 1,500 people working on the restatement, under the combined management of Blakely and five controllers…total cost to complete it: a mind-blowing $365 million"(McCafferty 24 ). The result of the audit was shocking since it revealed that aside from fraudulent bookkeeping, WorldCom had committed the costly mistake of overvaluing several of its acquisitions by a total of $5.8 billion. ( Mosberg Romar 7 ). The biggest mistake however was reporting a $10 billion profit for 2001-2002 when in fact it suffered a loss of &73.7 billion. The exposure did not only bring Worldcom to its knees but brought disgrace to the whole telecommunication industry as well, including the AT & T. It is a tragedy when cases like this happen especially when one of the perpetrators belong to the Board of Directors. Instead of playing their role as fiduciary, they would distort the information for personal gains. In a CNBC News show titled “"The Big Lie: Inside the Rise and Fraud of WorldCom," it was revealed that the fraud was committed by major participants in the company including the former chairmen of AT&T and Sprint (Faber, 2003). In relation to the roles of non-executive directors, these people could have played the part of inquiry and probe so that the people inside the company will be challenged. They have a more fresh outlook of the events since they are distant in the operations of the companies ( Higgs 8 ).Unfortunately, theory does not sit well with practice since once the scandal ensued, these people disappeared. The Case of SHELL The case of Shell in Nigeria is riddled not only with financial issues but with political ones as well. Shell in Nigeria has been constantly reporting militant attacks on its facilities which translates to company losses due to production downtime. This causes shell to raise its prices in the world market . Later, the issue was complicated since Shell’s public relations was marred when it was linked to the execution of activist Ken Saro-Wiwa in 1995. In addition to this, scandals such as cover-ups and risky speculations made Shell Nigeria top of the headlines in the mid-1990s causing even the Department of Justice to investigate on the dealings of hell. Again, a high-ranking official in the person of former Shell chairman Phill Watts was involved in the cover-up of proven reserves by 20 percent in the hope that Shells new discovery would justify his actions ( Callus 2004 ). In this case, the Board of Directors and key participants had conflicting interests since Watts suggestion was often met with opposition by other company officials. However, Watts succeeded since other stakeholders were anticipating the profit rather than the risk. The Robert Maxwell Case and Aftermath In 1991, Robert Maxwell’s body was found near his yacht which caused hysteria especially to the retirees since Maxwell stole 400M pounds from the Mirror Group pension funds. In 2006, Tony Wright , Chairman of the Public Administration Select Committee heavily criticized the government mainly for not warning the public about the chronic risk of their pension. Moreover, he also saw “constitutional issues” when the government rejected the findings of the scandal ( Merril 2006 ). The Parliamentary Ombudsman upon analyzing this case concludes that the government, particularly the Department of Treasury for Work and Pensions had inaccurate records regarding the security of final salary. In this case, we can see that the government is a stakeholder in the society since it must perform its duties of acting as vanguards of public security. This case also manifests that it is the government’s business to act as a watchdog since the public is a stakeholder. More so, Maxwell’s company has relationship with the government itself since the concern is pension. Although the government could not intervene, it could have prevented such tragedy by orienting the public. CONCLUSION In conclusion, issues in Enron Company, Shell , Maxwell and Worldcom shows evidence that the problems has a lot to do with poor corporate governance. Corporate governance involves a set of policies, customs and processes as well as institutions and laws affecting the direction of a company by the administration. These ensure that the goals and the objective of the company are achieved at ease. The biggest stakeholders in the corporate governance are the shareholders and the management. The themes that the management should follow to enhance the company’s achievement and the goals and objectives are transparency and accountability. Accountability is a term concerning ethics and in the context of the company it requires the company to let shareholders know their actions and decisions taken to keep them informed. It also synonymously related to the responsibility in general terms. Transparency on the other hand calls for the management to inform the shareholders about each and every of the actions in their company. The companies discussed were lacking in terms of accountancy and transparency in the part of managers. A healthy financial position had been reported before but in accountancy fraud. The fraud is said to have been creatively systematically and institutionally planned and it thus translated into the better known Enron’s scandal. Tedlow ( p 441-442) made recommendation to other companies in a similar situation is to ensure that the management upholds the requirements of good corporate governance. Works Cited: CBC News. Enron Company’s Collapse, 2008, January 24, 2009. . CRS report. Enron Company’s Collapse, 2008, January 24, 2009 ,< http://www.fpc. state. gov/documents/organization >. Faber, David. The Rise and Fraud of WorldCom. CNBC, 8 September 2003. Higgs, Derek . Review of the Roles and Effectiveness of Non-executive Directors. January 2003. Kay, J. World Socialist Web Site: Articles, 2002 , January 24, 2009 .< http://www.wsws. org/articles/2002/jun2002/enro-j22.shtml >. McCafferty, Joseph. "Extreme Makeover: How Robert Blakely and an Army of Accountants Turned Fraud-ridden WorldCom into Squeaky-clean MCI." CFO, July 2004. Merrill, Jane. Ministers blamed for pensions scandal bigger than Maxwell,.2006. Daily Mail April 15, 2009. Moberg, Dennis and Romar, Edward. WorldCom ,2003. University of Massachusetts-Boston .12 April 2009.. N.A. Andrew Callus Shell reserves scandal may aid Ogoni case. 21 April 2004. , planetark. 10 April 2009, Sarbanes-oxley forum. Sarbanes-Oxley Act. 2008, January 24, 2009 ,. Solomon, J. Corporate Governance and Accountability. John Wiley and Sons, (2007) p35. Tedlow, R.S. Andy Grove: The Life and Times of an American Business Icon. Portfolio, 2007. The effect of Enron’s fall on other companies. 2007 , The Michigan Daily ,January 24, 2009, < http://www.michigandaily.com/content/enron >. SUGGESTED TITLE; Strict corporate governance and regulation would prevent irregularities and unethical business practice OR : Corporate governance and regulation is a responsibility of all stakeholders Read More