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The Importance of Corporate Governance - MPAC 290

   

Added on  2020-03-01

15 Pages4091 Words62 Views
RELEVENCE OF ASSURANCE FUNCTION AND CORPORATE GOVERNANCE 1

ContentsIntroduction................................................................................................................................3Body...........................................................................................................................................4Conclusion................................................................................................................................12Reference List..........................................................................................................................132

IntroductionThe importance of corporate governance in the modern day corporate set up is of hugeimportance. Corporate governance is basically the various sets of rules that guide themanagement of the corporations. Corporate governance has various components which dealwith various aspects of the management of a corporation. The principles of corporategovernance takes into consideration the interest of the various components of a corporate setup. The various components of the modern day business are the shareholders, management,supplier, financers, government and the immediate community of the business. Corporategovernance principles guide all these components and make sure that each of them issatisfied. As we can see from the set up that the modern businesses are such formed that themoney of an entity is utilised by another set of people to conduct the business. Such set upsare especially risky because in case of lack of accountability the mistake of one set of peopleis capable of harming many people in terms of money. Thus the importance of clear andethical corporate governance rules is of high importance. Various incidences andmalfunctions prove such points more clearly. The Enron scandal has been one eye openingexperience of the level of the magnitude of mal practice and the number of people who areimpacted by that. Enron has been one of the largest financial frauds till the year 2011 inUnited States of America. The amount of asset involved in this was an astonishing $ 63.4billion. This has made the security and exchange commission to close the business ofpartnering audit firm. This incidence has also triggered the formation of legislation like theSarbanes-Oxley Act. 3

BodyThe Enron ScandalThe corporate governance and its importance can be understood properly with a properillustration of the Enron scandal. The Enron Corporation was formed in the year 1985 whentwo companies Houston natural gas and Inter North was merged. Kenneth lay was the personresponsible for this successful merger. This merger helped the company Enron to sell energyat a good rate contributing to a higher amount of revenue for both the company. In the year1992 Enron became the largest company in the energy sector (Harford et al. 2012). Thefinancial auditing of the company was done by a large accountancy firm called ArthurAndersen. The company utilised various loopholes in the accounting system to hide moneyfrom its debt account and was able to show that they were in a good position which hashelped the company to gain investment which it didn’t had the capacity to pay back. Not onlywere they unable to pay back they also spending the money thus earned relentlessly byproviding a large fund to its executives to utilise. Thus they were able to keep employees. thecompany even though they were having poor financial performance in generating profit theywere also making loss in most of the ventures they were able to attract large number ofinvestment just with the help of false information.( Fan et al. 2007) They used to release theirearning statement each year without their balance sheet. They were the only company whowere trading their stocks at a price which was 55 times of the amount that they were earning. The Enron financial scandal not only destroyed the company it was also the reason for thedeath of the Arthur Andersen audit firm. Arthur Andersen was one of the largest audit firmscounted among the first 5 largest audit firms in the United States. The management of thecompany also convinced the financial firm to approve their faulty method of accounting.Later cases proved that Enron management rather used force to make Arthur Andersen to4

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