Legal Issues In The Recent Financial Crisis
Question: Corporate Governance Has Been The Mantra For Good Business Practice. Discuss The Legal Issues In The Recent Financial Crisis Of The Major Rollback Of Corporate Governance. Does ‘Best Practice' Corporate Governance Deliver ‘Best Practice'?
What is corporate governance? Corporate governance is defined to be “the system by which business corporations are directed and controlled.” Following many prominent and well-publicised business failures such as Enron, WorldCom and Tyco, corporate governance issues have become more and more important to safeguard investors' interest as well as to increase the public's confidences in the financial sector.
One of the factors that contributed to the global financial crisis was the systemic crisis of capitalism, where John C. Bogle wrote that “corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long.” In other words, the lack of corporate governance over the extent of the powers allowed to managers played a part contributing to the collapses of many large corporations which in turn led to the global financial crisis.
The OECD published a report in 2009 explaining the lessons learnt from the financial crisis and the article concluded that the financial crisis could actually be attributed to failures and weaknesses in corporate governance. When these regulations were tested, the OECD found that these regulations did not actually serve their purpose to maintain a healthy level of risk undertaken by finance companies. This was very true and reflected by many corporate scandals and downfalls of large companies from the beginning of the millennium.
One of the infamous cases was the Enron scandal which also implicated one of the largest audit firms in the world at the time: Arthur Andersen. Enron created offshore entities to avoid taxes and hide losses as well as not reporting many of its debts and losses in the financial statements; allowing Enron to ‘dress itself up' to look profitable and to push up stock prices when in fact, the company was making losses which investors knew nothing about. The issue was that top executives took advantage of high share prices and their insider information to encourage investors and the public to buy Enron shares on the basis that they would keep rising in price. The executives then sold shares that they secretly held to make secret profits for themselves. In Arthur Andersen LLP v. United States, Andersen was convicted of witness tampering for instructing employees to destroy audit documents related to Enron before an investigation was done by the Securities and Exchange Commission into the relationship between Andersen and Enron. Although charges were later overturned, the court case shattered the reputation of the respected audit firm. Arthur Andersen never recovered and went through dissolution. The Enron scandal exhibited the failure of corporate governance within the company in which “internal control mechanisms were short-circuited by conflicts of interest that enriched certain managers at the expense of shareholders.”
Another recent financial scandal as a result from poor corporate governance was the collapse of Lehman Brothers. In March 2010, a court-appointed examiner published a report detailing the causes of the company's bankruptcy and discovered that the company had used an accounting procedure known as ‘repo 105' to hide its excessive debt and “window-dress” its financial statements. Again implicated in the matter are the company's auditors: Ernst & Young, who ‘failed' to question the company's suspicious accounting procedure.
As Mats Isaksson of OECD says, “the most obvious lesson [from the recent financial crisis] is that corporate governance matters. Company executives, policymakers, regulators and shareholders need to pay more attention to corporate governance.”
This essay has been written by a student and kindly submitted in order to help you with your studies.
If you would like your own custom written law essay then you can find out more here...
Was this useful to you?
Did you find this article useful? Was the content up-to-date or do you have something to add? Give us your feedback and we'll make this site even better for you to use!