ABSTRACT
Background
Revealed in 2001, the Enron scandal, involved Enron company and the accounting, auditing, and consultancy partnership of Arthur Andersen. The corporate scandal eventually led to Enron's fall, resulting in the largest bankruptcy in American history. Arthur Andersen, which was one of the five largest accounting firms in the world, was dissolved.
Many excutives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a state court, and have been charged to prison for several years, but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down in 2002. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the reliability of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, revealed in 2002, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain objective and independent of their clients.
This research will propose a scenario of applying the set of rules and procedures of corporate governance that ensure that Enron managers do indeed employ the principles of value-based management and the key shareholder's objective is implemented.
This research will also check that if these rules and procedures were applied, what will be the effect on Enron's financial statement.
introductioN
Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation or company is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world.
There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.
Enron
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.
Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than a $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through, Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy.
problem statement
Overview
If Enron applied the corporate governance the right way, what would have happened ? Was it going to fall ?
This research is highlighting on the importance of corporate governance and what is the effect of implementing it on a company who did not apply it right and did fall.
Research Question/Hypothesis
Theoretical framework
This research will study in depth the reason of Enron rise and fall and how they were implementing corporate governance to identify what did go wrong.
Relationship between not implementing corporate governance the right way and Enron fall is going to be demonstrated and then try to create a new scenario of implementing the corporate governance and then test the effect of this implementation by changing Enron's financial statements according to new variables and findings then finally test the effect of the corporate governance implantation and confirming the relationship of not implementing corporate governance and Enron's fall.
The data will be used from Enron annual reports.
The base theory of corporate governance will be the controller of this research.
The main comparison will be between the results of the financial statement with both the original case and the suggested scenario which the research is going to implement.
METHOD
