Chapter 1
Problem and its Background
Introduction
Corporate failure has been one of the hottest issues in the corporate world. There are corporations and organisationes which face problems and issues with regards to the principle and notion of corporate governance. Accordingly, most of the corporate failures have been able to demonstrate a failure of adhering to the concept of corporate governance and other risk management aspects in which specific internal control system are proven to be insufficient. Corporate governance best referred to the comprehension of the significance and application of sustainin good corporate relationship specifically in the global corporate setting where cultural orientation as well as political viewpoint offer and present distinctions among involved corporate organisations (Gordon, 2002). The principle and notion of corporate governance improves the confidence of foreign investors hence promoting competent market play and enhancing economic conditions. It primarily deals with the roles and accountabilities mustered by board members and directors in efficient as well as proficient corporate management and accountability. The disputes that corporate governance presents deal with sustaining balanced relationship between transacting corporations, maintaining steadiness and corporationness upon legislative as well as regulatory reforms while accounting its implications on the global corporate relationships to be able to enhance corporate activity as well as competentness and also as stimulate investment flows.
As mentioned by Oman and Blume (2005), a nation’s system of corporate governance composes the formal as well as informal rules, accepted practices and enforcement systems, public and private, which together govern the relationships among individuals who effectively control corporations on one hand, and all other who may invest capital and properties in corporations and organisationes located in the nation, on the other. They highlighted that well-governed corporations and organisationes with actively traded shares must be able to raise funds from non-controlling investors at significantly lower cost than poorly governed corporations and organisationes; because of the greater risk premium such potential investors can be expected to demand for investing – if they accept to invest at all – in less governed corporations and organisationes.
Much of the recent emphasis on corporate governance has arisen from high-profile corporate scandals and corporate failures including the so-called six major coprorate failures. Primarily, the main goal of this paper is to investigate the six corporate failures and identify how each corporate industry is able to solve the issue that the corporate industry is facing. Aside from that, this will also give emphasis on the lessons learned from these corporate failures and the similarities and differences of the approaches that each corporate industry has used.
Background of the Research
Accordingly, there are diverse factors that attributes to the failure of diverse organisations and corporations such as Health international Holdings Insurance, enron, WorldCom and also One-tel (Yakhou & Dorweiler, 2004). One of these factors or determinants is the inability of the management to adhere to the contect of corporate governance and the inability to adhere to diverse accounting process and standards. The stories of these six corporate failrues and scandards have been considered as one which have been reverberate in the international financial market. Aside from that, these have been the most talked about in civil courts and criminal courts. The failure of an organisation can be considered as common which shows one of the most thrilling event and journey in a organisation. However, most believed that even if these have been common happenings, there are still things that can be considered to avoid such things o happen.
Consequently, most of these corporate failures are because of the auditing and accounting failure in the industry leadning to bankruptcy and stock failures and issues of industries (Zellner, 2001). One of the determinants that can be seen in this corporate failure is the lack of anticipation of the management of corporations about the alleged errors and mischief in their accounting departmrn. For instance, in the case of Enron, Arthur Andersen had two major issues in line with auditing just before the time when the corporate organisation filed bankruptcy. Consequently, the honesty and reliability of the accountant shows the honesty and reliability of their work. Hence, it is essential that performance indicators compose not only the output however also the honesty and reliability of the figures and data in the output. This enable in acoiding speculations that the accounting career is plagued with corrupt practices like what has been done by diverse accountants among the six corporate failures. This is especially critical at these times when there is a great need to bring back the trust on accountants. However when seemingly reputable organisationes run afoul of legal and ethical rules, one of two things has happened (Barefoot, 2002). To be able to solve this type of issues and corporate failures, the management of corporations has been able to identify the source of the problem. After identifying the issue with regards to the management, the corporate organisation should directly seek the helped of a third party to clear the issue..
Another issues and corporate failures issue that have not been anticipated by the most management of the corporate organisations included in the corporate failure and scandal iis due to is poor corporate governance. This is the issue since the fall of corporations was due to illegal practices such as inside trading. When the story of the six corporate failures illegal operations were made public, investors became wary and as such, the inflow of capital have been closed abd stopped. It is due to corporate failures like that of the corporate organisations mentioned that shareholder activism increased (Ariff 2005). In this regard, most of the shareholders were demanding for transitions and reforms in management as well as aggressive enforcement of accounting rules and regulations. These moves by shareholders have been supported by national governments by providing more strict laws and regulation that calls for better corporate governanc within the corporate organisation.
It can be said that the absence of efficient corporate governance can lead to the worsening of conflicting interests and this had happened to the six corporate organisations which encountered failures. Because of the poor corporate governance, the corporate organisation has not been able to foresee and expect all the actions of their employees and personnel which lead to issues in terms of auditing.Consequently, there are also some asepcts of having an underground agreement between employes of the corporate organisation into other industry which lead to management collapse. Hence, the stench of distrust as well as inaccountability of the management of corporations reeks from corporate organisations with poor corporate governance. These features and attributed lead to corporate organisations paying a higher price than they expected, like what had happened with Enron and other industries.
The systemes used by the corporate industry aims on balancing sheet with different intellectual assets including trademarks and patents, and that the actual assets were not efficient and should be irrelevant when evaluated to the intangibles. Consequently, majority of the tangible assets and debts of those corporate industry that fail were on the balance sheets of partnerships which were operated as well as controlled by high-ranking officials and top management of the corporate organisation (Sellner, 2001). With this kind of management system, the organisation operations of the corporate organisation rapidly started to falter. For instance, in Enron, realising the issues and corporate failures of their mischief, the ex-CEO of Corporations (Kenneth Lay), announced to the public on October 16, 2001 that the corporation would have to reduce the equity of the shareholders by $1.2 billion. In November 19, 2001, the corporate organisation also announced a $700 million charge to buy out a note payable. With these consecutive announcements, Dynergy has set out a deal to buy the corporation on November 28, 2001. Such events have only proven the defining moment of corporation which led the management to realise that their longing for having sustainability have become hopeless and one December 2, 2001, the corporate organisation (enron) finally filed for bankruptcy. Scuh issue also happened in other corporate industry, specifically those which are included in the 6 corporate failure and scandals. As mentioned, the main goal of this paper is to investigate the six corporate failures and to identify the lessons learned with these corporate failures.
Corporate governance
The concept of corporate governance is principally utilised for the narrow rules, the regulations and policies, and the processes which operated, governed, as well as regulated by the corporate organisation. This can also give emphasis to the internal determinants defined by the stockholders, shareholders, corporate boards and officials, or the constitution and involving the external determinants as the government regulations, client, and the consumer groups (Chaganti and Sherman, 1998). The well structured and well defined corporate governance presents and gives the structural theory which purpose for the benefit of each member which is concerned for assuring which corporate organisation adheres for the acceptance of the best approaches and practices, the ethical standard, as well as the formal regulations. This indicates that a corporate organisation had started forming for the national, regional, as well as the global levels. This indicates that all of the three major players in the corporate governance that involves the shareholders, the board, and the management require motivating and acting as well as informing effectivey. Nonetheless, there is nothing perfect model of corporate governance as well as having no perfect financial structure. This principal goal of the structure of corporate governance is the notion and principle that it must continually re-evaluate to be able for the governance structure can adapt for the needs of changing needs and times (Monks & Minow, 2003).
Throughout the years, the concept of corporate governance had stolen its limelight for having been part of the high profile corporate failures and scandal which involves in the abuses as well as improper use of the corporate power. For some of the corporate failures, there is also some of the alleged criminal activiies which had been done by the corporate officers. Which involved in the integral part for the effective and efficient regime of corporate governance involves all of the provisions for the criminal as well as civil prosecution for the individuals which are conducting the illegal as well as unethical acts for corporation’s sake. In this manner, there are now explicitly contracts amid the rewards and rights as well as accountability for the stakeholders and to the corporate organisation. There must also be reconciliation in line with their interest, roles, privilege, and accountabilities (Corporate governance, 2010)
Research Objectives
Aforementioned, the main objective of this paper is to analyse the lessons learned from the six corporate failures that happened in the global market. In this regard, this paper aims on achieving the following aims and objectives:
Research Questions
To be able to answet the objectives, this paper will consider the following queries:
Significance of the Research
Organisation challenges and issues which include corporate failures, and inability to adhre to the context of corporate governance and accounting standards, continue to rise in today’s industrial environment. With this kind of scenario, corporate organisations must employ different strategies to be able to stabilise their status and overcome both present as well as future crisis. As corporate governance is one of the viable preferences and selections for the industrial sector the global market, it is significant to determine the efficacy of this practice. In this regard, analysing the lessons learned from the corporate industry that encountered corporate failures is deemed significant because of the approaches and strategies that can be considered from each corporate industry.
Aside from that, conducting this research will help in determining whether corporate governance and adhering to accounting standards and rules and risk management approach can help the corporate industry solve the issue of corporate failure. This is highly significant at the present period considering that crisis in economy as well asconstant rise of market issues are being encountered worldwide. If this research will conclude that corporate governance is beneficial for the corporate industry that encountered corporate failure, then it can indicate that advocating on corporate governance can greatly help the corporate industry in overcoming future economic transitions as well as issues and challenges. In addition to that, the negative impact of corporate failures and scandals to corporation value and operating performance among the corporations may also be identified through this research. Approaches on how these corproate failure can be considered from other industries to adhere to corporate governance approach, accountign standards adherence and efficient use of risk management.
In general, this research will be conducted for the purpose of benefiting the corporations in the global market. This research will also be of use to other corporations that have or have not applied corporate governance into their operational systems. In addition, to that, this research will also be significant in providing a partial overview on the lessons that can be learned from the major corporate failure in the global market.
Scope and Limitation
This research dissertation will discuss issues involving the six corporate failure and other issues involving corporate governance and the lessons learned from the corporate scandals. Related literature as well as studies cited for this study came from diverse parts of the globe so as to draw information about to corporate governance, risk management as well as accounting standards. Other corporation swith similar experience will also be cited as well asdiscussed briefly. The outcome of this study will be limited only to the data gathered from journals and articles about corporate failures.
Projected time period for the implementation of this study will be at least three to five months, or if plausible even shorter than three months, as long as all the objectives of the study have been met. This research work was limited financially due to other expenses and projects/activities outside this study. Time was limited, too, due to other obligations apart from the study. The research design chosen both qualitative and quantitative research, which uses explanatory methods in describing the variables wherein the data, situations, or other facts collected will be explained or correlated with other data. It is especially useful when conducting a study wherein the data are immeasurable, such as feelings, beliefs, thoughts, and others (Mays & Pope, 2000). Furthermore, the study will be descriptive as it will give emphasis on the conditions set and the nature that surrounds the data and does not focus on the correlation with other collected facts.
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