The Extreme Case Of Enron Accounting Essay

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Corporate governance in my opinion demands close monitoring on a regular basis as it seem to be never ending, hence will continue to evolve in the nearest future requiring continuous improvement in the accountability of organisations to a broad range of stakeholders besides the manager's loyalty to its owners (shareholders).

Corporate governance is mainly concern with the effective management of a company, ensuring appropriate checks and balances from the appointment of non-executive directors, roles of chief executive, auditing committees since any weaknesses in their operations has been seen to have led to corporate failures. The extreme case of Enron shows corporate governance failure regarding the independence of non-executive directors, strong power held at the top and the audit function. Also in the case of the Italian system of corporate governance, Parmalat which collapsed and entered bankruptcy after experiencing massive holes in its financial statements where the power is also held at the top in the hands of the family where of power can easily be carried out and fraudulent activities. Also, a major United Kingdom bank, Barings which the fall created shock waves through the corporate and financial communities throughout the United Kingdom and indeed across the world, where power and control was held at the top, one individual was made both the general manager and the head trader, being in charge of the actual trading (on the stock exchange floor) and of the trading account. Another problem associated with Baring's is the lack of good internal control leading to failure in audit function.

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However, several reviews and reports were aimed at improving the effectiveness of corporation and their accountability of corporate companies as corporate governance failure has been inarguably blamed as the main cause of notable and famous company's collapse.

The extreme case of Enron led to the formulation of Act adopted by the USA congress, in many respects its said to have reflected a mirror imagine of Enron, Sarbanes- Oxley Act in the summer of 2002, it imposes rules aimed at enhancing the independence of directors and auditors, with objective of more precisely aligning managerial behaviour with the interests of shareholders and attempting to address fraud. Also precise objectives linked with United Kingdom responses to corporate scandals made in Higgs Report 2003, Both Acts technically reflecting the main reason for the existence of corporations as to protect and further the interest of their shareholders. However Higgs report has further strengthened the relevance of separation of the chairman and chief executive role technique in the United Kingdom.

Nevertheless, the United Kingdom is generally acknowledged as a world leader in corporate governance reform. There have been several reports of reforms introduced to monitor corporate governance to avoid corporate scandals and the effect in corporate governance is still open to debate till date in my opinion. However, several reform reports that have been introduced are aimed at independent report objectives.

CADBURY REPORT 1992

This report is concern with constant monitoring and assessment of the board of directors, it also shows the importance of transparency and communication with shareholders and other stake holders and the importance of great accountability and engagement with the shareholders

GREENBURY REPORT 1995

This report focus on excessive executive remuneration as in the case of British Gas in the mid 1990 as it's a great concern as the behaviour is pure unethical on the part of the executives. The report tries to establish balance between director's salaries and performance

HAMPEL REPORT 1998

This report is named combined codes as it combined the already treated cases in Cadbury and Greenbury reports focusing on financial and remuneration aspects of corporate governance

Therefore the effect of the Cadbury report and Greenbury report to conduct corporate governance failure was not as effective as intended and expected independently, hence there would not be need to introduce a report combining both codes in the latter year as an approach to conduct corporate governance failure. However the introduction of Hampel report was as a result of another major shocking collapse of a corporate company in the financial sector, Barings in 1995. Since Cadbury report and Greenbury reports could not prevent the occurrence of the fall of Barings from happening, there was the need for another reform report which brought about the Hampel Report serving as a response to the occurrence. Hampel report was however redrafted to become combined code which have been said to be substantially effective.

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Nonetheless, the Hampel report was again faulted to have ignored the importance of a company's accountability towards its broad range of stakeholders to be successful.

Consequently, Turnbull report 1999 also focuses on the provision of companies with guidance to treat internal control system after the fall of the major United Kingdom bank, Barings in 1995.

HIGGS REPORT 2003

The fall of Enron caused the United Kingdom and other countries to re-valuate issues associated to corporate governance in regards to the role and effectiveness of non-executive directors, further examining the Cadbury report and Hampel report. However, non-executive director has been said to be inefficient because of their fear of losing their position as their constant inference may cause them to be voted out. Following Higgs report on this account is the TYSON report 2003 stating the relevance of diversity in the back ground, skills and experience of non-executive directors can enhance board effectiveness by bringing wider range of knowledge on corporate performance as a result needed for better understanding of stakeholder needs for corporate decision making.

SMITH REPORT 2003

This report relates to Higgs report in response to Enron scandal and to examine the role of the audit committee in the United Kingdom corporate governance focusing on production of reliable and honest accounts. Nevertheless there was a revised update, Smith report in 2008 when the big four firm collapsed aimed at encouraging organisations to take account of risks associated with external auditor leaving the market to share issues concerning auditor selection to shareholders and stakeholders.

Furthermore, the combined code was redrafted into a revised one which became more accepted by corporate and institutional investment communities than Higgs report with same message but altered language.

In conclusion, Even in recent time weak corporate governance have still resulted to the economy meltdown worldwide affecting various top companies in the world especially in the United States and the United Kingdom. This financial crisis resulted in not only the loss in investor's confidence but more importantly a lack of effective corporate governance and transparency in financial markets and individual firms. There are so many studies that have attempted to address this issue but the evidence is inconclusive. Strickland showed that shareholders monitoring in Investee Company have led to increase in company value. Nesbitt and Smith also found that pension fund involvement had a significant positive impact on the financial performance of the companies targeted by the funds. However, Maxwell case raise another important issue of corporate governance relating more to ethics stating that no matter the amount of corporate governance checks, balances, codes of practice or even regulation can change an individual character thus no system can completely eliminate fraudulent activities, with this statement we can actually assume that all efforts of corporate governance codes can only reduce fraudulent activities to the minimal and corporate governance codes can only serve as measure to detect frauds. However there are concerns associated with the continuous attempt to improve corporate governance in the United Kingdom, it's been said that it slows that decision making as in the case of Branson's flotation experiment in the 1980s and als

Although the corporate governance reform is worth pursuing, the effect of corporate governance is still very much questionable