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"Discuss the extent to which regulatory reform, prompted by the failure of Enron, has been successful by reference to the financial crisis and more recent developments"
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According to the Federal securities law, the financial statement of any listed company should be certified by an auditor. In case of Enron, it gave much attention the outside audits. The independent auditor of Enron was Arthur Andersen who was taken into justice charges due to the destruction of documents activities. Enron collapsed not due to it was a big organization but the main reason was that it was shown as much bigger than it really was. Publicly traded companies need to publish the information related to their financial statement but in case o9f Enro9n, some imaginary transactions were shown between the parent company and its subsidiaries that covered the true financial position of the firm (Jickling, 2002).
It was the fault of the board of directors to oversee the issues in corporate management to protect the stakeholders’ interest. In the year 1999, the board of directors ignored a conflict of interest to permit the CFO in creating private partnerships. But the transactions that were involved in the partnerships included losses and debts which had a bad impact on the reported profit of Enron. The collapse of the company raises the concern about the capability of directors and bill was passed to question any unauthorized dealings done by the corporate managers (Gudikunst, 2003).
The core business of Enron was energy and it was involved in trading of derivative contracts which were based on the prices of gas, oil and electricity. These types of contracts allowed the buyers to hedge the risk that was caused by increase or decrease in energy prices. As the market in which the company traded were highly unstable thus there were very little information available about the actual financial condition of Enron other than which was in the financial statement. Thus the buyers were influenced by the financial statement without knowing the actual fact and traded speculatively which was a high risky activity for Enron (Rantanen, 2007).
The main reason behind the
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This paper examines failures of real estate values and subprime lending; bad quantitative risk models in banks (Basel 2); rating agencies failures; underestimation of aggregate risks; mark-to-market accounting; shadow banking system; off-balance sheet financing; credit default swaps and over-the counter derivatives; moral hazard problem.
1). The problems in the United States financial system triggered almost worldwide repercussions and lead to regulatory responses on both national and international levels with calls for greater cooperation among countries to avert another crisis. In an attempt to prevent a reoccurrence of the situation and to deal with the problems that caused this crisis, both regulatory and market based solutions have been proposed (Chang 2010, p.
The primary cause of the global recession could be addressed to the collapse that occurred in the sub-prime mortgage market in the United States (US) accompanied by turnaround of housing as reported by several other economies. The impact of the global economic crisis not only affected the financial institutions but the livelihood of almost everyone to some levels or the other (Shah, 2010).
This combination has been a growing problem in the past few decades. The origin of the global financial crisis can also be linked to the bursting of the oil price and housing bubbles, and excessive low interest rates among the key nations in the global economy.
Economy affects all aspects of people’s life, which affirms the importance of monitoring the global economic performance. Countries have established numerous financial crisis regulations that aim at checking emergence of crisis in the future. Particularly, the OECD countries are presently practicing various regulatory measures to safeguard the world’s economy.
The mortgage loans were backed by exotic securities on which unsuspecting investors had invested their money. The investors included investment banks who had only invested public money held by them on fiduciary capacity. Fiduciary relationship should be highly regulated.
This helps in delivering financial information in a positive manner with the help of the accounting standards laid down by the various boards and organization and the legal requirements. Legal requirements are essential for the accurate and financial reporting are quite important to understand the impact of financial reporting on the organizational outcome.
Of course, regulations of financial reporting have to change ensuring better indication of performance. Currently a serious issue regarding the transparency of financial reports is seen as the most urgent. Indeed, "the purpose of accounting is a practical one: the provision of information that allows matters of financial significance relating to particular firms to be investigated, evaluated and compared Instead, accounting rules place an emphasis on abstractions" (West 2003, p.
t has been able to confront the recession; on the other hand, it has been proved that the recession’s effects are stronger in markets that were highly based on faulty financial products – like the subprime products in the USA market. In the case of the recent financial
This shook the global economy and raised questions about the financial engineering and practices. There has been considerable debate on the factors that leads to the corporate
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