Governance in a Globalising World.
Governance in a globalizing world 3
Governance in a globalizing world
Enron Energy Company scandal
The scandal of Enron Corporation was discovered in the year 2001. Andrew Fastow, who was the chief financial officer of the company, provided information that was misleading the board of directors. The scandal of Enron Corporation is considered to be the largest audit failure in the American history (Culpan and Trussel, 2005). The company was experiencing some loopholes in accounting reports that led to increasing the risks associated with the accounting practices of the company. The poor financial reporting made it possible to hide many millions as a debt due to the failed company projects. The management of the corporation was not committed to ensuring that the wealth of the shareholders was maximized as they used financial reporting practices that led to hiding the large loss that the company has suffered.
The shareholders filed a lawsuit of around $40 billion after the price per shares decreased to $1 from around $90.75. The securities and exchange commission of United States started investigations to establish the fraud and a competitor offered to buy the company at a low price. The deal of buying the company failed and the year 2001 Enron Corporation filed for bankruptcy. The assets worth $63.4 billion of Enron made it the largest corporation that company to become bankrupt in the history of United States. The executives of the company were indicted for different charges where some of the executives were imprisoned. The auditor of the company was said to destroy the financial documents that could be crucial in the process of making investigations. Arthur Andersen, who was the auditor of Enron was said to be guilty of destroying the evidence (Weaver, 2004). The shareholders do expect that the managers act towards maximizing their wealth through ensuring that their interests of the shareholders are considered. The management did not consider the interests of the shareholders in the process of making some of the important financial strategies. The auditor did not exercise his independence in the process of reporting the financial reports of the company. Instead, he collaborated with the management of the company to defraud the shareholders (Markham, 2015). The auditor was expected to ensure that he informed the shareholders concerning the true financial position of the company.
The management of an organization is trusted to exercise good financial management skills in the process of management the funds of the shareholders. The managers are expected not to management the organization as per their interests, but they are expected to consider the interests of the shareholders. The shareholders do expect to be engaged in making a decision concerning crucial financial decisions. In the case of Enron, the shareholders were not aware of what was taking place in the company (Gordon, 2002). The management was formulating and implements investment strategies without consulting the shareholders. The board of directors has the duty of ensuring that the managers do manage the organization in the right way aiming at maximizing the wealth of the shareholders. The shareholders do expect the board of directors to call for a meeting of the shareholders to make decisions concerning the crucial investment decisions.
The management was not considering the potential risks in the process of making investment decisions. The necessary feasibility study in the process of making investments was not conducted in the right way. For instance, the company did not consider the infrastructure conditions that led to the failure of electricity project that Enron Company took. The failure to consider the market made the company fail as it supplies electricity to an area that could not afford electricity making it fail (Giroux, 2008). The failure of the electricity project can be associated with the failure of the management to engage stakeholders in the process of making investment decisions. If the shareholders were in involved in the process of making the venture they could have assisted in conducting a feasibility study to assess the market size. The failure of the company to ensure that it involved the shareholders in the process of making investment decisions. The failure of the Enron Corporation can be associated with the management practices that did not consider engaging the relevant stakeholders of the company (Li, 2010). This resulted in a significant loss due to the failure of the project that had high costs as the company invested large amounts of money.
The board of directors failed to exercise its supervisory role in the management of the company as it did not reveal the fraud that took place in the financial management of the organization. The management comes up with crazy ideas that made the company suffer a big loss in the process of managing its funds. For instance, there was a failure on the side of the board of directors to exercise control of some of the management practices that were very crazy like trading electricity aiming at covering the loss realized (Petrick and Scherer, 2003). Besides, the executives were collaborating with the auditor to change the figures of financial accounts aiming at covering the losses that were experienced in the company.
Volkswagen emission scandal
Volkswagen is a German automobile company that admitted to be involved in the installation of illegal software. Around 11 million Volkswagen cars had been installed with the illegal software globally. The illegal software was aimed at representing low emission of nitrogen oxide to satisfy the required levels of emission by the US testing agencies (Ewing, 2015). The management has the duty of ensuring that its operations do consider the welfare of the society. The illegal software led to increased emission of the poisonous gasses posing a danger to the health of the community. The acts of the management did not protect the environment where it was not committed to ensuring that the emission could not cause pollution. Instead, the company management was highly focused on making profits. The management had the duty to balance the profit making objective with the profit-making goals of the organization. The failure of the organization to protect the environment led to damage to the reputation of the company.
The designing of the illegal software was intentional, and the management was aware that the software could not reduce the emissions to the required low levels. This is an indication that the management failed to ensure that the management practices of the company did not care about the environmental effects of the emitted gasses. In fact, the vehicles were producing nitrogen oxide to levels that were over 40 times the required level of emission. Besides, Volkswagen had admitted that the fuel consumption and carbon dioxide figures were underestimated in more than 800,000 vehicles (Barrett, et al. 2015). The authorization of the installation of the illegal devices was not clear who within the organization was responsible for authorizing the installation of the defeat software. However, the engineers of the company were claiming that the CEO of Volkswagen was given the unreasonable demands of manipulating the figures to show that the Volkswagen Company was complying with the emission regulations.
The scandal can be associated with the two-tier corporate governance culture that was employed in the company that included management board and supervisory board (Burki 2015). The communication between the management board and supervisory board did not ensure efficiency in the operation as they were mainly considering the improvement of the organizational performance. The corporate governance of Volkswagen Corporation was much focusing on the organization’s profits failing to consider the welfare of the society. The management of the company had the duty of ensuring that they care for the welfare of the public. Designing software that was illegal to report low levels of emission might have an increase in the respiratory diseases to the members of the public. This is a clear indication that the management of the company was not concerned with the welfare of the society.
Barrett, S.R., Speth, R.L., Eastham, S.D., Dedoussi, I.C., Ashok, A., Malina, R. and Keith, D.W., 2015. Impact of the Volkswagen emissions control defeat device on US public health. Environmental Research Letters, 10(11), p.114005.
Burki, T.K., 2015. Diesel cars and health: the Volkswagen emissions scandal. The Lancet Respiratory Medicine, 3(11), pp.838-839.
Culpan, R. and Trussel, J., 2005. Applying the agency and stakeholder theories to the Enron debacle: An ethical perspective. Business and Society Review, 110(1), pp.59-76.
Ewing, J., 2015. Volkswagen Says 11 Million Cars Worldwide Are Affected in Diesel Deception. The New York Times, 22.
Giroux, G., 2008. What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, pp.1205-1238.
Gordon, J.N., 2002. What Enron means for the management and control of the modern business corporation: Some initial reflections. The University of Chicago Law Review, pp.1233-1250.
Li, Y., 2010. The case analysis of the scandal of Enron. International Journal of Business and Management, 5(10), p.37.
Markham, J.W., 2015. A Financial History of the United States: From Enron-Era Scandals to the Subprime Crisis (2004-2006); From the Subprime Crisis to the Great Recession (2006-2009). Routledge.
Petrick, J.A. and Scherer, R.F., 2003. The Enron scandal and the neglect of management integrity capacity. American Journal of Business, 18(1), pp.37-50.
Weaver, J.L., 2004. Can energy markets be trusted? The effect of the rise and fall of Enron on energy markets. Houston Business and Tax Law Journal, 4.