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Business Failure Essay

1050 words - 5 pages

Enron was an energy marketing corporation that suffered severely from a serious financial scandal, which involved Enron and its accounting firm. The scandal consisted of the discovery of highly irregular accounting procedures and practices which took place during the 1990s. These irregular accounting procedures and practices included the manipulation of stock prices as well as loans to shareholders. As a result, this caused Enron to abruptly file bankruptcy by December of 2001. Based on the sordid background of this particular scandal, there were some serious executive management and leadership issues that were also involved throughout the Enron scandal and beyond with the revelation of ...view middle of the document...

This is exactly where a controlled system of checks and balances were seriously needed.
During this state of Enron, the governance of the corporation failed to exercise their duties of care properly. It was believed the Audit Committee of the Board should have been more critical of the auditors, consultants and their work. But because the prices and earnings of stocks were continuously rising, there was no need to investigate the internal accounting processes of Enron or the opinion letters of the accounting firm. The Board simply had a false sense of security thus was very happy with the success of Enron. This allowed the Board to become relaxed with overseeing management, while accepting information from the executive team at face value.
Enron employees were also involved with the downfall of the organization and in turn suffered as well. The organization employed over 100 internal legal and accounting staff. All of the employees seemed to be operating with approval of the management team, which was supported by the executive team. Just as with leadership and management, the employees’ methods were never questioned due to the fact the employee incentives were high. The employees were getting paid big salaries to help hide corporate debt and boost reported profits. So in turn, the employees remained loyal, supportive and refused to rock the boat about the methods.
Traditionally, corporate governance structures have been a private matter between shareholders, directors and/or and managers with some state law restrictions, but the Sarbanes-Oxley Act (SOX) has since implemented safeguards and structures governing the conduct of the corporation a matter of federal law. Even the adoption of a code of ethics, previously within the domain of management prerogatives, is now a requirement under SOX. Due to the Enron scandal, SOX will provide a method for balancing the power between the board of directors and top management of corporations. Although the SOX does not have the ability to diminish the existing discretions and prerogatives of management in conducting business, the plan can serve as a deterrent, however, it cannot prevent management fraud. So in order to prevent management fraud, the process has to be a vision shared by all involved. This includes shareholders, the boards, top level management, and employees. Under the law,...

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