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Reasons behind the Financial Crisis - Essay Example

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Name: Instructor: Course: Date: Reasons Behind the Financial Crisis In regard to the financial crisis, director’s liabilities played a crucial role in fueling its onset. The first notable instance of liability is liability of tort whereby most directors can be said to be guilty of negligent mismanagement…
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Reasons behind the Financial Crisis
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Download file to see previous pages Still on torts, directors can be held liable due to their subordinates both beneficial and non-beneficial. The financial crisis is fostered by inept decision making poor planning and general laxity in troubleshooting. These problems accrue from middle management personnel, but a director is liable (Berlatsky 3). Directors can be held liable for breaching fiduciary duty to the corporations they run. This situation arises when a director tries to avoid conflict of interest such that, through their actions or omissions, they are doing an injustice to the corporation. An example is when directors knowingly enter into contracts that are financially inappropriate for their companies. The directors view their personal interests in the contract to be of greater value. Most directors have a tendency to act outside their authority in regard to letters patent and other corporate governing documents. Such decisions result in misappropriation of company resources, poor investment decisions and an inevitable financial crisis (Berlatsky 34). Directors are also liable for Risk Management in regard to the investments made by the company. However, this liability extends even more to the Gate keepers. Gatekeepers include lawyers, accountants and investment bankers. This group of professionals plays a significant role in advising the directors on what ventures they should and should not undertake. The first group is the accountants. An accountant’s failure to comprehensively account for the acquisition and use of financial assets, therefore, is equal to the failure of the company. Investment bankers should transparently render their advice on which ventures are more profitable than the others. Most investment bankers lack transparency owing to their self serving motives this led to increased debt burden or over-leveraging. Another crucial batch of professionals is the lawyers. Their work should be to ascertain the legal financial implications made by a director and in extent the company they represent. These professions collectively failed to render their services effectively and with efficiency. They also did not uphold integrity especially in regard to safeguarding company assets. Finally, they did not comply with the law especially in light of contract procurement (Hamdani & Olin 56). The most eminent failure of internal and external auditors is fraud. Auditors are the main whistle blowers in regards to a corporation’s failure and success despite how minimal. In the event that they turn a blind eye to illegal, inappropriate activities of a company in managing and investing finances the result will be a financial crisis (Hamdani & Olin 78). Notable failures of credit rating agencies are apparent in the following three areas: Ratings methodologies: in this case, most of the credit rating agencies did not follow the recommended rating methodologies. There are also reports of the ratings leaking to interested parties before publish which is surmountable to fraud. This unfair rating systems contributed to the great number of poor financial decisions made that led to the financial crisis. Fiduciary legislation: managing conflicts of interest: the agencies do not have clear cut policies to manage cases of conflict of interest. This is especially notable in instances where the issuer holds large shares in the firm. Timely, accurate disclosures: credit rating agencies are slow to disclose errors and fix them especially in reg ...Download file to see next pagesRead More
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