This essay seeks to contrast the difference between agency theory and stewardship theory in a corporate governance. Agency theory is defined as the relationship between shareholders and managers where the manager is expected to represent the shareholders’ best interest without regard for self-interest (John, Makhija, Ferris, 2014). An example of this would be a home owner who advertised property for rent. In this situation the shareholder would be the property owner. The property owner then hired a property management company. The property management company would serve as the manager. In order for this relationship to be successful, the shareholder and the manager would share the same agenda. When shareholders and managers desires are …show more content…
The managers act as responsible stewards because they are personally invested in the company. The organizations core values are theirs and because they are aligned they become stewards of their profession ensuring they leave the organization in better state than when they joined. This mentality ensures the success and longevity of the organization. The board of director’s differs in the stewardship theory. They play more of a support role and assist the CEO and management. The downfall to stewardship theory is that lines of responsibility are not clear between the Board of Directors and management. This makes it difficult to hold someone accountable when an issue occurs. The ability to determine who will be held accountable for actions of the company because of the Sarbanes-Oxley (SOX) …show more content…
Enron and others exercised their stock options for personal gain, the senior management and executives contributed to the collapse of their companies, and left shareholders with empty pockets (Holt, 2007). The purpose of the SOX Act is to hold top management and leaders responsible for corporate financial fraud with strict prison sentences, forfeiture of bonuses or profits, and removal from positions of trust. The end state is to restore investors’ trust in markets and deters the defrauding of investors by public companies. The SOX Act has a serious impact on corporate governance because it forced public companies to enact stern accounting practices and would hold violators liable. Once the contents of the Act became known, shockwaves travelled throughout the boardrooms of corporations, not only in the United States, but around the world (Holt, 2001,
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
Dodd-Frank and Sarbanes-Oxley Acts are important legislations in the corporate world because of their link to public and privately held companies. Sarbanes-Oxley Act was enacted to enhance transparency and accountability in publicly traded companies. On the contrary, Dodd-Frank Act was enacted to disentangle the confused web of financial service company valuations. Actually, these valuations are usually hidden by complex and unclear financial instruments. The introduction of Sarbanes-Oxley Act was fueled by recent incidents of accounting frauds by top executives of major corporations such as Enron. In contrast, Dodd-Frank Act was enacted as a response to the tendency by banks, insurance companies, hedge funds, rating agencies, and accounting companies to serve up harmful offer of ruined assets and liabilities brought by systemic non-disclosure (Anand, 2011, p.1). While these regulations have some similarities and differences, they have a strong relationship with the financial markets.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
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 contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
Corporate governance implies governing a company/organization by a set of rules, principles, systems and processes. It guides the company about how to achieve its vision in a way that benefits the company and provides long-term benefits to its stakeholders. In the corporate business context, stake-holders comprise board of directors, management, employees and with the rising awareness about Corporate Social Responsibility; it includes shareholders and society as well. The principles which...
...The Sarbanes-Oxley Act deals with the proper filing of financial paperwork along with rules and regulations to follow while working as a top business (The Sarbanes-Oxley Act, 2002). Some of the consequences that derived from the Act include fines and possible imprisonment up to 20 years for destroying documents. It also made it a crime to destroy corporate audit records. Since the Sarbanes-Oxley Act was in place at the time Bernie Madoff was charged with security fraud, he received 25 years in prison for his wrong-doings (Bernard Madoff, 2014). These crimes by Madoff and Enron have made for safer business practices and stricter laws. However, to ensure cases of this magnitude do not occur again, companies must not only abide by mandated law, they must develop a culture deeply rooted in strong ethics. Character matters in a business just like it does in people.
The end of 2001 and the start of 2002 saw the end of a period of magnified share prices and booming businesses. All speculations of misrepresentation came to light and those firms which once seem unconquerable were now filing for bankruptcy. Within this essay, I shall discuss the corporate governance mechanisms and failures which led to the Enron scandal resulting in global corporate governance reforms being encouraged.
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
Through an organizational culture that focused on financial greed for self, illegal accounting practices, conflicts of interest partnerships, illegal business dealings, fraud, negligence, and massive corruption at all levels, the Enron scandal help to create new laws and regulations with stiff penalties if violated (Ferrell, et al, 2013). The federal government implemented the Sarbanes Oxley Act (SOX) (Ferrell, et al, 2013).
Stewardship extends far beyond knowing how to spend your money wisely and how one can best care for the earth. Being a Christian steward, and thus having stewardship, allows Christians and those alike to make life choices that advance His kingdom and live into what He has entrusted His followers to. Economics is one of the first things people start to study in order to fix this fiscally and environmentally broken world. George Monsma asserts that stewardship is the foundation of economic life, and it is because of this, people need to use their resources not only for the benefit of themselves, but those in need.
K, . N., ER, w., DAVID, K., PAUL, M., WALTER, O., & EVANS, A. (2012). Corporate governance theories and their application to boards of directors: A critical literature review . Prime Journal of Business Administration and Management (BAM), 2(12)(2251-1261), 782-787.
According to Carol Padgett (2012, 1), “companies are important part of our daily lives…in today’s economy, we are bound together through a myriad of relationships with companies”. The board of directors remain the highest echelon of management in any company. It is the “group of executive and non-executive directors which forms corporate strategy and is responsible for monitoring performance on the behalf of shareholders” (Padgett, 2012:1). Boards are clearly critical to the operation of companies and they are endowed with substantial power in the statute (Companies Act, 2014). The board is responsible for directing and steering the company. The board accomplishes this by business planning and risk management through proper corporate governance.