MSc Accounting Sem 2 2003-)4
Corporate governance has become the corporate buzzword since the last two decades (Chapra and Ahmed, 2002). Not until the recent corporate scandals involving gigantic corporations such as Enron, WorldCom, Global Crossing and so forth, the response of corporate entities as well as amongst the public themselves towards the significance of corporate governance are very disappointing. Nevertheless, increasing number of collapses have made public especially investors more aware of the importance to demand high level of corporate governance practices from business entities which they have entrusted their money in them.
The bankruptcy of Enron Corp. has evolved into a scandal of enormous proportions involving allegations of fraud, corruption and unethical practices such as financial manipulation and questionable accounting practices on the part of Enron’s corporate executives, members of its board of directors, external auditors and high government officials in the USA (Baker, 2002 and Chatzkel, 2003). The weaknesses in US Generally Accepted Accounting Principles (GAAP) and Financial Accounting Standard Board (FASB) gave enough room to the Enron’s management to get an advantage from it by inflating income. Enron had “legally” hide substantial amount of its cost and liabilities into its “special purpose entity (SPE)”. The company that uses this practice explicitly has an intention to confuse the public and investors. This is done with the help of its close “business partner”, Arthur Andersen that collapse together with Enron. The conflicts between Enron and its auditors are too obvious because the ties between these two gigantic companies went even deeper when Arthur Andersen was not just appointed as an external auditor but also as an internal auditor in the mid-1990s. The auditors had been in conflict to act independently and at this situation auditors have always been in the uncomfortable position of having to judge the financial integrity of the companies that pay them. Arthur Andersen had begun to be a business partner of Enron instead of the auditor that governed by professional ethic.
A more recent case involves Parmalat, an Italian dairy-products group. Parmalat used its subsidiaries to hide the declining in its finance. It has been said that Parmalat was simply created “artificial” assets to offset as much as $16.2 billion in liabilities and falsified account over a 15 year period and using complex financial transaction to shore up its balance sheet, forcing it into bankruptcy on December 2003 (Edmondson, 2004). Such case was really giving some blows to the international accounting industry.
Meanwhile, Malaysia, the most developing country in the area of South-East Asia also has its very own classical example. Its Malaysian Airlines System (MAS) was the victim in that case. Even though it was managed by the Muslim, it can prevent the company from involving in fraudulent activities. The independence of its auditors, Arthur Andersen was really questionable as it has failed to issue unqualified report for the financial accounts ended 2000 and 2001 although there are indications that the company was having problem with the going concern problem. MAS was under the mountain of debts especially after 1997 due to its high operation costs and related transaction with the company that owned by the directors at that time. As a consequence, MAS’s share prices had dropped significantly. Nevertheless, the government of Malaysia had become the savior of the century by buying back the stake from Naluri Sdn. Bhd at RM8 which was double of current market price. In this case, not only MAS has the problem with its corporate governance, but also the government of Malaysia.
All the above are examples of the failure in the corporate governance. Such failures might result from the failure in the current...