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Enron scandal impact on stakeholders
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Issues Facing Stakeholders and Top Management
Given the large scale manipulation in the company’s accounts and misconduct within the organization, the name Satyam (which means “truth” in Sanskrit) hardly seems appropriate. “It was like riding a tiger, not knowing how to get off without being eaten.” That is how Chairman Raju described how the company inflated profits for years. The admission of the biggest corporate scandal in India’s history has drawn swift comparisons with Enron, which quickly went from being one of the United States’ most admired companies to a ward of the bankruptcy court after accounting fraud came to light. The media has latched onto the Satyam controversy mercilessly, labeling it "India's Enron moment" and a "shame and scandal." Satyam’s image has been tarnished by the scandal and as lost the confidence of clients, investors, and employees alike. Thus, the key challenge facing top management is repairing the damaged reputation of the organization and regaining the trust of the public, an obstacle that Enron executives were not able to overcome.
The issue of violating corporate governance had been raised even before the company’s fraudulent accounting practices became known. Previous actions threw up red flags and caused investors and clients to become wary of the organization, such as Satyam’s dubious $1.6 billion takeover plan of two sister companies that caused the company’s stock to plunge by over 55 percent and resulted in the resignation of three board members. So, the announcement less than a month later that acknowledged the fact that top management officials “cooked the books” inevitably turned investors away and will sent clients to competitors like Infosys, TCS, and Wipro.. Given the company’s extreme betrayal it will be difficult, if not impossible, for Satyam to regain the trust that was loss.
However, it is not just Satyam alone that will face challenges due to the company’s scandal. The size and scope of the fraud raises questions about regulatory oversight in India as a whole. The scandal is likely to result in a loss of confidence of foreign investors in India, at least in the short-term. Observers may be pressed to know whether similar problems might lie buried elsewhere. The fraud has put a question mark on the entire corporate governance system in India. As a result, the risk premium for Indian companies may rise in the eyes of investors. Also, other stakeholders, such as Pricewaterhouse Coopers who was the company’s auditor, will have to engage in damage control due to their association with Satyam.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
The reasons for fraud all surrounded Satyam attempted to meet investor’s expectations. As Raju wrote in his letter to the board of directors, the gap between actual operating profit and the one listed in the books began to grow exponentially. As mentioned earlier, promoters owned a small percentage of Satyam, where foreign and domestic investors owned the greatest percentage. If Satyam slightly revealed its poor performance, it could result in a takeover revealing the company’s poor
Building standards of ethical behavior is essential for public company. Otherwise, it causes accounting scandals and bankrupts. Over the last decade, there were a lot of enormous bankrupts that because of unethical behavior of investors and auditors. Lehman Brothers Holding Inc. is an example of accounting scandals. In this research paper, I am going to analyze this firm.
After the HS Holdings incident when James contacted Ashok in India, then only he came to know about the reasons behind those low ratings. He realised that the meeting times were not perfectly suitable for the India...
In contrast, the whistleblowers will be saving the company both from the private and public sector. Also, the company may have been blacklisted into other contracts because of the corruption (Nicol, 2015,
The major groups that were directly affected are investors, employees, and suppliers. Here we should make the distinction between different types of investors. There are two major types of investors: insiders and outside investors. Insiders are the investors who know the information that is not known publicly and may benefit them in some way. Outside investors are the investors who only know publicly known information. In our case, outside investors was the group that lost the most. On the other hand, insiders, notably Mickey Monus and David Shapiro, were the one that gains millions on IPO. The group who suffered was employees of Phar-Mor. After the scandal was revealed, most of the stores were closed to cover up losses. As a result, thousands of employees got fired. Another party that was damaged by the scandal was Coopers&Lybrant, the firm that did the audit for Phar-Mor, lost its reputation as a firm who does an audit with integrity. The secondary effect of the scandal was the overall mistrust among investors. They thought that if a giant retailer can forge its accounting books, why smaller companies wouldn’t do the same. As a result, investors became reluctant in investing into businesses that caused harm to the economy as a whole. The last but not least group that was affected by the scandal is Phar-Mor’s suppliers. Mickey Monus was fiercely fighting with them to make the chipset deals to cover up his losses, sometimes using inappropriate pressure and causing suppliers making unprofitable deals. In additions, Monus forced them to pay fees and sponsor his basketball League using buyer power of his company. In addition, a lot of bills for supplies were unpaid for months by Phar-Mor. Some suppliers said that they hated doing business with Phar-Mor, but had no choice since it had an access to vast amount of customers.
Considering the above mentioned auditor’s responsibilities, they seem vague. Current requirements are not sufficient to gain back the trust of public. The bankruptcies prove that the auditor...
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Satyam and PwC paid funds equaling $125 Million and $25.5 Million respectively to settle shareholder lawsuits. Satyam and PwC each paid $17.5 Million to settle claims with the SEC and the Public Company Accounting Oversight Board. In 2013, the US lawsuit against Satyam’s Directors was
Enron Corporation was based in Houston, Texas and participated in the wholesale exchange of American energy and commodities (ex. electricity and natural gas). Enron found itself in the middle of a very public accounting fraud scandal in the early 2000s. The corruption of Enron’s CFO and top executives bring to question their ethics and ethical culture of the company. Additionally, examining Enron ethics, their organization culture, will help to determine how their criminal acts could have been prevented.
The Sarbanes-Oxley Act is a legislation aimed at increasing the accuracy of financial statements that were issued by companies that are publicly held (Livingstone, 2011). The passing of this act was a response to some of the financial malpractices that took place at companies such as WorldCom and Enron. According to Livingstone, making ethical decisions is critical because ethical lapses can lead to severe unforeseen consequences (Livingstone, 2011). This paper will discuss the effects of the Act on the audit committees of public company boards of directors as well as outside independent audit firms. The main advantages and disadvantages of the Act and recommendations of the changes that should be made to the act will also be included.
Due to such lack of monitoring, management continued to be unaware of such transactions that continued to impact the company negatively. This provided the Rigas family many opportunities to override controls since the lack of corporate governance enabled the decisions to be made by Rigas family without oversight. For example, the article “Adelphia Officials are Arrested, Charged with ‘Massive’ Fraud” discuses how Timothy Rigas had to limit himself to $1 million a month of compensation that was withdrawn from the company for personal use. All decisions were continuously made by such members of the family, in which case for Adelphia, was the team of management. With the lack of controls creating opportunity, they were free to do what they wished- which is something they took incredible advantage
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.
It is apparent that the only thing constant in business is change. Organizational change is often an overwhelming challenge for business leaders, managers and employees alike. The need for change may be the result of market shifts, economic environment, technology advancements or changing work force skill-set demands. Today Organizational change occurs for reasons that originate external to the organization (Chandler, 1996: Hannan & Freeman, 1984), as well as internal to the organization (Baker 1990: Prechel 1994). Thus, External constraints, internal constraints, resource dependency and increasingly growing competitive markets force organizations to change in order to maximize economic potential. Although organizational changes are usually a response in reaction to an event, companies and leaders should still expect to encounter issues. Organizations need to be more proactive and contingent on how to handle the problems that will inevitably come about. This will make the process of organizational change go smoothly as well as reduce resistance through proper management techniques. Resource dependency argues that both environmental and organizational constraints impact organizational change (Pfeffer & Salancik, 2003).