homework

Running Head: CORPORATE GOVERNANCE

Corporate Governance

Name

Institution

Introduction 4

Enron Corporation Case Study 4

Objective 5

Literature Review 5

Research Technique 7

Inductive Technique 7

Multiple Case Analyses 8

Data Collection 8

Conclusion 9

References 10

Abstract

Enron Corporation, an energy company based in America is discussed greatly as one of the biggest bankruptcy cases in American history. Analysts speculated the great collapse to have been caused by excessive utilization of economic hedging through a time there was inadequate regulations of the same but the actual cause was identified to have been a collapse in the corporate governance structures of the company. This was termed as a failure in corporate governance despite the utilization of high yielding market operations of swaps and derivatives. It is therefore the scope of this proposal paper that this case study is analyzed comprehensively in suggesting the most appropriate approaches to corporate governance. Drawing from this analysis the primary objective of this paper is to identify role of corporate governance towards true financial reporting. Literature review is featured in context of institutional and logical perspectives as well as the connection of corporate governance to audit and the factors that foster the corporate governance. Research methodologies put forth include inductive and multiple case-sampling for data collection through interviews, documentations and observations. Generally, corporate governance is recommended as the solution to a healthy company.

Ideally, there exists a very strong connection between business entities and societies. Towards the societies, businesses hold a great level of responsibilities to ensuring an all-round thriving and elimination of any selfish drives to satisfy any personal interests. This relationship falls under the branch of corporate governance. It is within this corporate governance blueprint that businesses are able to put clear their values, missions and visions towards the society. Under focus is Enron Corporation in a bid to advise the top management on how to act responsibly towards the business and the society.

The case of Enron Corporation was an instance of a market success through swaps and derivatives but a corporate failure on the part of corporate governance (Li, 2010). The perceived and portrayed market value of a billion dollar company was erased alongside the loss of jobs, wiping out of personal savings and retirement contribution funds. Mainly there was the argument of whether the financial hedging through derivatives caused the collapse or the obscure reporting of the financial position in the aim of concealing losses in order to bolster earnings (Li, 2010).

In addition to this proposal coverage is the utilization of derivatives which were privately negotiated and swaps. Usually, such financial risk management tools are known for their ability to enable firms face risks prudently and to realize efficient funding. Regarding the Enron failure, it has been argued that there is inadequate regulation of the derivative markets but there is no substantive arguments that there are not working. Instead additional government regulation poses the risk of making the derivative benefits more costly, rendering them less available (Li, 2010). It is therefore in the interest of this paper to illuminate more on the underlying challenges and their solutions. At hand is the accounting issue of going concern which was prioritized at the expense of true financial reporting of Enron. It has been recommended before that there needs to be a clear cut line between risk functions and control function within any company.Following the elimination of swaps and derivatives as the cause of failure, it is identified that there was a corporate governance failure that stemmed from non-compliance of the established accounting standards as well as the disclosure policies. In the absence of the above compliances, there was a performance gap of overstated earnings.

According to the above stated facts, it is the objective of this paper to evaluate the role of corporate governance in ensuring that such compliances are adhered to in communicating the correct financial position of the company.

While examining corporate governance there is the common ground of how a company handles its operations responsibly within the scope of compliance but the implementation of the same varies from one company to another. Conceptualization of this function alongside social responsibility has over the years continued to take eminence factoring in various approaches used depending on the company. This chapter aims at reviewing several literatures on aspects regarding corporate governance.

Based on the institutional perspective, there has been a significant failure in properly defining the reasons for companies to exercise corporate governance (Brammer, Jackson & Matten, 2012). Rather than an external and proactive approach to implementing corporate governance, the focus is laid more on the normative bits. Considering any company is an institution by itself, there needs that services offered to the society are accounted for. For instance such aspects of proper compliance to both external and internal regulations should be at the center of any operation (Brammer, Jackson & Matten, 2012). Additionally, taking the entity of an institution there is the need of having a well-organized self –governance. These institutional features work together in ensuring that the company serves in line with its mission and values. Previously conducted researches indicate that companies that were more concerned about the implementation of missions through its operation realized more effective corporate governance. However, analysts indicated that Enron Corporation focused more on the public image to mean it only stuck to the formalities of just having mission statements and documented values and not the obligation to deliver on the same.

Secondly, there is the perspective of logic towards the implementation of corporate governance. Considering that there the regulations to be adhered to within any industry, it only makes sense legally to comply despite the challenges faced. Manipulation of books and results in putting forward a favoring company image only calls for punishment through the legal channels put in place (Brammer, Jackson & Matten, 2012). Using this approach of corporate governance and social responsibility yields benefits to the company itself. For instance, companies with logical corporate governance benefit from the information of how sustainable the business is considering it is within the accounting interests to ensure the business future continuity is realized. In the 21st century there has been a great drive to assure business stakeholders that the business operations are safe from termination at any particular point and this in some cases has gone beyond the legislative norms. Instances have been cited of companies doing everything possible to report a healthy going concern position. However, within this approach, companies within such malpractices stand to lose a great deal due to the false impression of sustainability into the future (Brammer, Jackson & Matten, 2012). Another benefit goes the way of stakeholders in identifying if the operations of the company in question are authentic or dubious. In line with the stakeholders it is also possible that logical corporate governance would foster effective communication techniques between the business managers and the stakeholders. This third benefit enables three important aspects which include information dissemination, engagement structures and involvement by the stakeholders. Using previously conducted empirical studies; findings indicate that the perception identity of top management individuals is essential in logic making process of corporate governance (Brammer, Jackson & Matten, 2012). It was therefore recommended that the variables of education level and top management position be equal proportionate in ensuring optimal and effective corporate governance.

Thirdly, corporate governance is viewed to be the main controlling unit of auditing. Auditing operations aim at ensuring that the reported accounts and bookkeeping provide a true and fair image of the company being evaluated. According to the auditing standards put in place, auditors whether internal or external are required to maintain an independent mental approach regarding reviewing of company accounts. However, in the growing malpractices of ‘cooking data’ to favor continuity of companies indicates, auditors and auditing as a standard practice have faced threat from interference from senior management officials who talk them away from reporting the books as they are (Lin & Hwang, 2010). A great deal of information is drawn from audit reports that are important in the overall operation of a company in relation to its environment. Moreover even the auditor services beyond the context of audit are catered for in regulations such that there are certain banned services which are (Lin & Hwang, 2010):

• Auditor handling the book keeping operations for the respective audit client. Such an activity is considered to alter the independence of audit.

• It is also prohibited that an auditor provides other expert services that do not relate to audit.

• Furthermore, it is not the role of auditors to design or install any information system relating to accounting.

• Also an auditor is prohibited from holding any management function within the firm being audited.

It is within these prohibitions that unscrupulous company officials take advantage of some legal loopholes and auditors end up performing some activities that not allowed in law. The focus of this paper which is Enron Corporation is seemingly observed to have influenced the false audit reporting through the concealing of losses and manipulation of accounting procedures in order to favor positive reporting. However, the end result of these malpractices resulting from these gaps in corporate governance led to the conviction of majority of all the top management officials at Enron Corporation due to non-compliance to the law.

Following the identification of what corporate governance facilitates, it is also important to look at prerequisites necessary for effective corporate governance. Apart from level of education highlighted before, experts have previously indicated that there are other three attributes namely: information, behavior and processes (Lin & Hwang, 2010). Practically, audit and other oversight activities would only be possible through a corporate governance plan that embraces the behavior of accountability and openness of operations. Additionally, it would be very important that the board captures correct information in relation to decision making that supports effective corporate governance and social responsibility. Still in understanding the proper approaches to corporate governance, it would be very important the appropriate processes are understood and properly adhered to. These discussed attributes have been major guiding points for recommendations that Deloitte among other audit firms offer to their clients in relation to corporate governance (Lin & Hwang, 2010).

In order to practically identify the need of having healthy and strong corporate governance, it is necessary that a qualitative approach is used more so the inductive approach. Rationale for selecting this technique is that it uses the perspective of social constructivism which holds reality according to the standards of a societal and social background. Beyond proving the need and role of corporate governance, there is the explorative angle to the research method that will aim at improving the quality of corporate governance and social responsibility. Ideally, this method also captures the qualitative part of the results to be obtained.

More into researching about the need of strong corporate governance, analyzing several different cases of corporate governance effectiveness across different company entities will be necessary. Basically, this approach is important in identifying relationship patterns that define the various working constructs of corporate governance. This will aim at developing a logical argument that seeks to build on the basic need of embracing effective and genuine corporate governance.

The different collected data will be brought together in a bid to identify the various intersections in relation to corporate governance. This approach will be effective in developing a balanced review of corporate governance due to the elimination of biased focuses on specific sources. These data to be used will be gathered from documentation, observations and interviews.

Particularly, the top management individuals in the selected companies would be of great help to the understanding the functioning of corporate governance. Such officials may include: HR, brand, CSR and financial managers. Among the main pointers to check off for the interview include: policies that guide the corporate governance, actions and issues of corporate governance, stakeholders responsible for corporate governance policy, openness of corporate governance to employee participation, external communication of the corporate governance policies and the external evaluation of the same corporate governance.

On the part of documented data, documentations such as websites, CSR reports and both internal and external reports will also be resourceful. Such sources of data can be categorized under secondary sources of information. They enable the capturing of the ideal of image of corporate governance as documented in company documents and as a result the practical experience obtained from interviews will be used on a comparative basis to identify gaps in the actual implementation of the documented policies about corporate governance.

Considering the observational sources, data can be obtained from activities and practices that relate to corporate governance and social responsibility. Additionally, meetings and forums can also provide important corporate governance in relation to stakeholders.

In the overall, corporate governance is a very important function in the proper running of a company. Full implementation of corporate governance ensures that the company complies with the available standard frameworks available. Furthermore, it ensures that market discipline is adhered to amid growing competition aspects. This position means that despite stiff competition any company will not result to dubious approaches to fulfilling businesses as it was with the Enron Corporation. Corporate governance is also an important component of audit. All these roles depend upon a strong and well defined corporate governance structure that is built upon tenets of information, policy, education, processes and behavior. The main players in corporate governance include all levels of employers and other stakeholders because effective corporate governance goes beyond strategizing and policy formulation to cover even implementation (Lin & Hwang, 2010).

Brammer, S., Jackson, G., & Matten, D. (2012). Corporate social responsibility and institutional theory: New perspectives on private governance. Socio-economic review, 10(1), 3-28.

Li, Y. (2010). The case analysis of the scandal of Enron. International Journal of Business and Management, 5(10), 37-41.

Lin, J. W., & Hwang, M. I. (2010). Audit quality, corporate governance, and earnings management: A meta‐analysis. International Journal of Auditing, 14(1), 57-77.