A study of Enron WorldCom and Satyam Scandal and corporate governance in Pakistan

Presented By :

Anum Ashraf (M06BBA004)Maryam Ijaz Perji (M06BBA018)Iram Tahir (M06BBA042)Anum Sarfarz Ali (M06BBA059)

Subject: Corporate Finance

Presented To:

Sir Shoaib

Enron ScandalThe Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.

Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through, Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy.

Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the reliability of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.The act also increased the accountability of auditing firms to remain objective and independent of their clients.

The rise of Enron

Kenneth Lay founded Enron in 1985 through the merger of Houston Natural Gas and InterNorth, two natural gas pipeline companies. In the early 1990s, he helped to initiate the selling of electricity at market prices and, soon after, the United States Congress passed legislation deregulating the sale of natural gas. The resulting markets made it possible for traders such as Enron to sell energy at higher prices, allowing them to thrive. After producers and local governments decried the resultant price volatility and pushed for increased regulation, strong lobbying on the part of Enron and others, was able to keep the free market system in place.

By 1992, Enron was the largest merchant of natural gas in North America, and the gas trading business became the second largest contributor to Enron's net income, with earnings before interest and taxes of $122 million. The creation of the online trading model, EnronOnline, in November 1999 enabled the company to further develop and extend its abilities to negotiate and manage its trading business.

In an attempt to achieve further growth, Enron pursued a diversification strategy. By 2001, Enron had become a conglomerate that both owned and operated gas pipelines, pulp and paper plants, broadband assets, electricity plants, and water plants internationally. The corporation also traded in financial markets for the same types of products and services.

As a result, Enron's stock rose from the start of the 1990s until year-end 1998 by 311% percent, a significant increase over the rate of growth in the Standard & Poor 500 index. The stock increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10% decline for the index during the same years. By December 31, 2000, Enron’s stock was priced at $83.13 and its market capitalization exceeded $60 billion, 70 times earnings and six times book value, an indication of the stock market’s high expectations about its future prospects. In addition, Enron was rated the most innovative large company in America in Fortune's Most Admired Companies survey.

Causes of downfall

Enron's nontransparent financial statements did not clearly detail its operations and finances with shareholders and analysts. In addition, its complex business model stretched the limits of accounting, requiring that the company use accounting limitations to manage earnings and modify the balance sheet to portray a favorable depiction of its performance. According to McLean and Elkid in their book The Smartest Guys in the Room, "The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control." From late 1997 until its collapse, the primary motivations for Enron’s accounting and financial transactions seem to have been to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books.

The combination of these issues later led to the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and other executives. Lay served as the chairman of the company in its last few years, and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling, constantly focused on meeting Wall Street expectations, pushed for the use of mark-to-market accounting and pressured Enron executives to find new ways to hide its debt. Fastow and other executives, "...created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people can understand them even now."

Revenue recognition

Enron and other energy merchants earned profits by providing services such as wholesale trading and risk management in addition to developing electric power plants, natural gas pipelines, storage, and processing facilities.When taking on the risk of buying and selling products,

merchants are allowed to report the selling price as revenues and the products' costs as cost of goods sold. In contrast, an "agent" provides a service to the customer, but does not take on the same risks as merchants for buying and selling. Service providers, when classified as agents, are able to report trading and brokerage fees as revenue, although not for the full value of the transaction.

Although trading firms such as Goldman Sachs and Merrill Lynch used the conservative "agent model" for reporting revenue (where only the trading or brokerage fee would be reported as revenue), Enron instead elected to report the entire value of each of its trades as revenue. This "merchant model" approach was considered much more aggressive in the accounting interpretation than the agent model.Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue. Other energy companies such as Duke Energy, Reliant Energy, and Dynegy joined Enron in the top 50 of the Fortune 500 mainly due to the revenue gained from their trading operations.

Enron’s use of distorted, "hyper-inflated" revenues was more important to it in creating the impression of innovation, high growth, and spectacular business performance than the masking of debt. Between 1996 to 2000, Enron's revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 2-3% per year to be respectable. For just the first nine months of 2001, Enron reported $138.7 billion in revenues, which placed the company at the sixth position on the Fortune Global 500.

Mark-to-market accounting

In Enron's natural gas business, the accounting had been fairly straightforward: in each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it. However, when Skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, citing that it would reflect "... true economic value." Enron became the first non-financial company to use the method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract was signed, income was estimated as the present value of net future cash flows. Often, the viability of these contracts and their related costs were difficult to judge. Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports. While using the method, income from projects could be recorded, which increased financial earnings. However, in future years, the profits could not be included, so new and additional income had to be included from more projects to develop additional growth to appease investors. As one Enron competitor pointed out, "If you accelerate your income, then you have to keep doing more and more deals to show the same or rising income."Despite potential pitfalls, the U.S. Securities and Exchange Commission (SEC) approved the accounting method for Enron in its trading of natural gas futures contracts on January 30, 1992. However, Enron later expanded its use to other areas in the company to help it meet Wall Street projections.

For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year-end. After several pilot

projects, Enron recognized estimated profits of more than $110 million from the deal, even though analysts questioned the technical viability and market demand of the service. When the network failed to work, Blockbuster pulled out of the contract. Enron continued to recognize future profits, even though the deal resulted in a loss.

Special purpose entities

Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose—to fund or manage risks associated with specific assets. The company elected to disclose minimal details on its use of special purpose entities. These shell firms were created by a sponsor, but funded by independent equity investors and debt financing. For financial reporting purposes, a series of rules dictates whether a special purpose entity is a separate entity from the sponsor. In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt.

The special purpose entities were used for more than just circumventing accounting conventions. As a result of one violation, Enron's balance sheet understated its liabilities and overstated its equity, and its earnings were overstated. Enron disclosed to its shareholders that it had hedged downside risk in its own illiquid investments using special purpose entities. However, the investors were oblivious to the fact that the special purpose entities were actually using the company's own stock and financial guarantees to finance these hedges. This setup prevented Enron from being protected from the downside risk. Notable examples of special purpose entities that Enron employed were JEDI and Chewco, Whitewing, and LJM.

JEDI and Chewco

In 1993, Enron set up a joint venture in energy investments with CalPERS, the California state pension fund, called the Joint Energy Development Investments (JEDI). In 1997, Skilling, serving as Chief Operating Officer (COO), asked CalPERS to join Enron in a separate investment. CalPERS was interested in the idea, but only if they could be removed as a partner in JEDI. However, Enron did not want to show any debt from taking over CalPERS' stake in JEDI on its balance sheet. Chief Financial Officer (CFO) Fastow developed the special purpose entity Chewco Investments L.P. which raised debt guaranteed by Enron and was used to acquire CalPER's joint venture stake for $383 million. Because of Fastow's organization of Chewco, JEDI's losses were kept off of Enron's balance sheet.

The arrangement between CalPERS and Enron was revealed in fall 2001, which then disqualified Enron's prior accounting treatment of both Chewco and JEDI. This disqualification required that Enron's earnings from 1997 to mid-2001 be reduced by $405 million. In addition, the consolidation increased the company's total indebtedness by $628 million.

White wing

The White-winged Dove is native to Texas, and was also the name of a special purpose entity used as financing vehicle by Enron. In December 1997, with funding of $579 million provided by Enron and $500 million by an outside investor, Whitewing Associates L.P. was formed. Two

years later, the entity's arrangement was changed so that it would no longer be consolidated with Enron and be counted on the company's balance sheet. Whitewing was used to purchase Enron assets, including stakes in power plants, pipelines, stocks, and other investments. Between 1999 and 2001, Whitewing bought assets from Enron worth $2 billion, using Enron stock as collateral. Although the transactions were approved by the Enron board, the assets transfers were not true sales and should have been treated instead as loans.

LJM and Raptors

In 1999 Fastow formulated two limited partnerships: LJM Cayman. L.P. (LJM1) and LJM2 Co-Investment L.P. (LJM2), for the purpose of buying Enron's poorly performing stocks and stakes to improve its financial statements. Each of the partnerships were created solely to serve as the outside equity investor needed for the special purpose entities that were being used by Enron. Fastow had to go before the board of directors to receive an exemption from Enron's code of ethics (since he was serving as CFO) in order to run the companies. LJM 1 and 2 were funded with around $390 million of outside equity contributed by J.P. Morgan Chase, Citigroup, Credit Suisse First Boston, and Wachovia. Merrill Lynch, which marketed the equity, also contributed $22 million.

Enron transferred to "Raptor I-IV", four LJM-related special purpose entities named after the velociraptors in Jurassic Park, more than "$1.2 billion in assets, including millions of shares of Enron common stock and long term rights to purchase millions more shares, plus $150 million of Enron notes payable." The special purpose entities had been used to pay for all of this using the entities' debt instruments. The instruments' face amount totaled $1.5 billion, and the entities had been used to enter into derivative contracts with Enron for a notional amount of $2.1 billion.

Enron capitalized the Raptors, and, in a similar matter to when a company issues stock at a public offering, then booked the notes payable issued as assets on its balance sheet and increased its shareholders' equity for the same amount. This treatment later became an issue for Enron and its auditor Arthur Andersen as removing it from the balance sheet resulted in a $1.2 billion decrease in net shareholder equity.

The derivative contracts of $2.1 billion did lose value. Enron had set up the swaps just as the stock prices had hit their high points. Over five fiscal quarters, the value of the portfolio under the swaps fell by $1.1 billion as the stock prices fell (the special purpose entities now owed Enron $1.1 billion under the contracts). Enron, using "fair value" accounting, was able to show a $500 million gain on the swap contracts in its 2000 annual report, which exactly offset its loss on the stock portfolio. This gain was attributed to one third of Enron's earnings for 2000 (before it was properly restated in 2001).

Corporate governance

Healy and Palepu write that a well-functioning capital market "creates appropriate linkages of information, incentives, and governance between managers and investors. This process is supposed to be carried out through a network of intermediaries that include assurance professionals such as external auditors; and internal governance agents such as corporate boards." On paper, Enron had a model board of directors comprising predominantly outsiders with significant ownership stakes and a talented audit committee. In its 2000 review of best corporate boards, Chief Executive included Enron among its top five boards. Even with its complex corporate governance and network of intermediaries, Enron was still able to "attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels."

Executive compensation

Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the setup of the system contributed to a dysfunctional corporate culture that became obsessed with a focus only on short-term earnings to maximize bonuses. Employees constantly looked to start high-volume deals, often disregarding the quality of cash flow or profits, in order to get a higher rating for their performance review. In addition, accounting results were recorded as soon as possible to keep up with the company's stock price. This practice helped ensure deal-makers and executives received large cash bonuses and stock options.

Management was extensively compensated using stock options, similar to other U.S. companies. This setup of stock option awards may have caused management to create expectations of rapid growth in efforts to give the appearance of reported earnings to meet Wall Street's expectations. At December 31, 2000, Enron had 96 million shares outstanding under stock option plans (approximately 13% of common shares outstanding). Enron's proxy statement stated that, within three years, these awards were expected to be exercised. Using Enron's January 2001 stock price of $83.13 and the directors’ beneficial ownership reported in the 2001 proxy, the value of director stock ownership was $659 million for Lay, and $174 million for Skilling.

The company was constantly focusing on its stock price. The stock ticker was located in lobbies, elevators, and on company computers. At budget meetings, Skilling would develop target earnings by asking "What earnings do you need to keep our stock price up?" and that number would be used, even if it was not feasible.

Skilling believed that if Enron's employees were constantly cost-centered, it would hinder original thinking. As a result, extravagant spending was rampant throughout the company, especially among the executives. Employees had large expense accounts and many executives were paid sometimes twice as much as competitors. In 1998, the top 200 highest-paid employees earned $193 million from salaries, bonuses, and stock. Two years later, the figure jumped to $1.4 billion.

Risk management

Before its fall, Enron was lauded for its sophisticated financial risk management tools. Risk management was crucial to Enron not only because of its regulatory environment, but also because of its business plan. In response to price and supply volatility risks in the energy industry, Enron placed long term fixed commitments which needed to be hedged. Enron's rapid decline into bankruptcy is linked to its aggressive and questionable use of derivatives and special purpose entities. By hedging its risks with special purpose entities which it owned, Enron retained the risks inherent to the transactions. As such Enron effectively entered into hedges with itself.

Enron's high-risk accounting practices were not hidden from the board of directors. The board knew of the practices and took no action to prevent Enron from using them. The board was briefed on the purpose and nature of the Whitewing, LJM, and Raptor transactions, explicitly approved them, and received updates on their operations. Enron's extensive off the-books activity was not only well known to the board, but was made possible by board resolutions. Even though Enron was running a derivatives business, it seems that those on the Finance Committee and, more generally on the board, did not have a sufficient derivatives background to understand and evaluate what they were being told.

Financial audit

Main article: Financial auditEnron's auditor firm, Arthur Andersen, was accused of applying reckless standards in their audits because of a conflict of interest over the significant consulting fees generated by Enron. In 2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees (this amount accounted for roughly 27% of the audit fees of public clients for Arthur Andersen's Houston office). The auditors' methods were questioned as either being completed for conflicted incentives or a lack of expertise to adequately evaluate the financial complexities Enron employed.

Enron hired numerous Certified Public Accountants (CPA) as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board (FASB). The accountants looked for new ways to save the company money, including capitalizing on loopholes found in the accounting industry's standards, Generally Accepted Accounting Principles (GAAP). One Enron accountant revealed "We tried to aggressively use the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to where we did because we exploited that weakness."

Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as their credit risks became clear. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting Enron's earnings expectations, Enron would occasionally allow accounting firms Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new firm to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition,

when news of SEC investigations of Enron were made public, Andersen attempted to cover up any negligence in its audit by shredding several tons of supporting documents and deleting nearly 30,000 e-mails and computer files.

Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001): "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related-party transactions".

Audit committee

Corporate audit committees usually meet for just a few times during the year, and their members typically have only a modest background in accounting and finance. Enron's audit committee had more expertise than many. It included:

Robert Jaedicke of Stanford University, a widely respected accounting professor and former dean of Stanford Business School;

John Mendelsohn, President of the University of Texas’ M.D. Anderson Cancer Center; Paulo Pereira, former president and CEO of the State Bank of Rio de Janeiro in Brazil; John Wakeham, former U.K. Secretary of State for Energy; Ronnie Chan, a Hong Kong businessman; and Wendy Gramm, former Chair of US Commodity Futures Trading Commission.

Enron's audit committee usually had short meetings that would cover large amounts of material. In one meeting on February 12, 2001, the committee met for only one hour and 25 minutes. Enron's audit committee did not have the technical knowledge to properly question the auditors on accounting questions related to the company's special purpose entities. The committee was also unable to question the management of the company due to pressures placed on the committee. The Permanent Subcommittee on Investigations of the Committee on Governmental Affairs' report accused the board members of allowing conflicts of interest to impede their duties as monitoring the company's accounting practices. When Enron fell, the audit committee's conflicts of interest were regarded with suspicion.

Other accounting issues

Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no official letter had stated that the project was cancelled. This method was known as "the snowball", and although it was initially dictated that snowballs stay under $90 million, it was later extended to $200 million.

In 1998, when analysts were given a tour of the Enron Energy Services office, they were impressed with how the employees were working so vigorously. In reality, Skilling had moved other employees to the office from other departments (instructing them to pretend to work hard)

to create the appearance that the division was bigger than it was.This ruse was used several times to fool analysts about the progress of different areas of Enron to help improve the stock price.

Timeline of downfall

In February 2001, Chief Accounting Officer Rick Causey told budget managers: "From an accounting standpoint, this will be our easiest year ever. We've got 2001 in the bag." On March 5, Bethany McLean's Fortune article Is Enron Overpriced? questioned how Enron could maintain its high stock value, which was trading at 55 times its earnings. She pointed out how analysts and investors did not know exactly how Enron was earning its income. McLean was first drawn to the company's situation after an analyst suggested she view the company's 10-K report, where she found "strange transactions", "erratic cash flow", and "huge debt." She called Skilling to discuss her findings prior to publishing the article, but he brushed her off, calling her "unethical" for not properly researching the company.[68] Fastow cited to Fortune reporters that Enron could not reveal earnings details as the company had over 1,200 trading books for assorted commodities and did "... not want anyone to know what's on those books. We don't want to tell anyone where we're making money."

In a conference call on April 17, 2001, now-Chief Executive Officer (CEO) Skilling verbally attacked Wall Street analyst Richard Grubman, who questioned Enron's unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that ... asshole." This became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact, with slogans such as "Ask Why, Asshole".However, Skilling's comment was met with dismay and astonishment by press and public, as he had previously brushed off criticism of Enron coolly or humorously, and many believe that this began a downward spiral that would unravel the company's deceptive practices.

By the late 1990s Enron's stock was trading for $80–90 per share, and few seemed to concern themselves with the opacity of the company's financial disclosures. In mid-July 2001, Enron reported revenues of $50.1 billion, almost triple year-to-date, and beating analysts' estimates by 3 cents a share. Despite this, Enron's profit margin had stayed at a modest average of about 2.1%, and its share price had dropped by over 30% since the same quarter of 2000.

However, concerns were mounting. Enron had recently faced several serious operational challenges, namely logistical difficulties in running a new broadband communications trading unit, and the losses from constructing the Dabhol Power project, a large power plant in India. There was also mounting criticism of the company for the role that its subsidiary Enron Energy Services had played in the power crisis of California in 2000-2001

On August 14, Skilling announced he was resigning his position as CEO after only six months. Skilling had long served as president and COO before being promoted to CEO. Skilling cited personal reasons for leaving the company. Observers noted that in the months leading up to his exit, Skilling had sold at minimum 450,000 shares of Enron at a value of around $33 million (though he still owned over a million shares at the date of his departure). Nevertheless, Lay, who

was serving as chairman at Enron, assured stunned market watchers that there would be "no change in the performance or outlook of the company going forward" from Skilling's departure. Lay announced he himself would re-assume the position of chief executive officer.

The next day, however, Skilling admitted that a very significant reason for his departure was Enron's faltering price in the stock market. The columnist Paul Krugman, writing in The New York Times, asserted that Enron was an illustration of the consequences that occur from the deregulation and commodification of things such as energy. A few days later, in a letter to the editor, Kenneth Lay defended Enron and the philosophy behind the company.

The broader goal of [Krugman's] latest attack on Enron appears to be to discredit the free-market system, a system that entrusts people to make choices and enjoy the fruits of their labor, skill, intellect and heart. He would apparently rely on a system of monopolies controlled or sponsored by government to make choices for people. We disagree, finding ourselves less trusting of the integrity and good faith of such institutions and their leaders.

The example Mr. Krugman cites of "financialization" run amok (the electricity market in California) is the product of exactly his kind of system, with active government intervention at every step. Indeed, the only winners in the California fiasco were the government-owned utilities of Los Angeles, the Pacific Northwest and British Columbia. The disaster that squandered the wealth of California was born of regulation by the few, not by markets of the many.

On August 15, Sherron Watkins, vice president for corporate development, sent an anonymous letter to Lay warning him about the company's accounting practices. One statement in the letter said "I am incredibly nervous that we will implode in a wave of accounting scandals." Watkins contacted a friend who worked for Arthur Andersen and he drafted a memo to give to the audit partners over the points she raised. On August 22, Watkins individually met with Lay and gave him a six-page letter further explaining Enron's accounting issues. Lay questioned her as to whether she had told anyone outside of the company and then vowed to have the company's law firm, Vinson & Elkins, review the issues, although she argued that using the firm would present a conflict of interest. Lay consulted with other executives, and although they wanted to fire Watkins (as Texas law did not protect company whistleblowers), they decided against it to prevent a lawsuit. On October 15, Vinson & Elkins announced that Enron had done nothing wrong in its accounting practices as Andersen had approved each issue.

Investors' confidence declines

By the end of August 2001, his company's stock still falling, Lay named Greg Whalley, president and COO of Enron Wholesale Services and Mark Frevert, to positions in the chairman's office. Some observers suggested that Enron's investors were in significant need of reassurance, not only because the company's business was difficult to understand (even "indecipherable") but also because it was difficult to properly describe the company in financial statements. One analyst stated "it's really hard for analysts to determine where [Enron] are making money in a given quarter and where they are losing money." Lay accepted that Enron's business was very complex, but asserted that analysts would "never get all the information they want" to satisfy their curiosity. He also explained that the complexity of the business was due largely to tax strategies

and position-hedging. Lay's efforts seemed to meet with limited success; by September 9, one prominent hedge fund manager noted that "[Enron] stock is trading under a cloud." The sudden departure of Skilling combined with the opacity of Enron's accounting books made proper assessment difficult for Wall Street. In addition, the company admitted to repeatedly using "related-party transactions," which some feared could be too-easily used to transfer losses that might otherwise appear on Enron's own balance sheet. A particularly troubling aspect of this technique was that several of the "related-party" entities had been or were being controlled by CFO Fastow.

After the September 11, 2001 attacks, media attention shifted away from the company and its troubles; a little less than a month later Enron announced its intention to begin the process of shearing its lower-margin assets in favor of its core businesses of gas and electricity trading. This move included selling Portland General Electric to another Oregon utility, Northwest Natural Gas, for about $1.9 billion in cash and stock, and possibly selling its 65% stake in the Dabhol project in India.

Restructuring losses and SEC investigation

Enron announced on October 16 that restatements to its financial statements for years 1997 to 2000 were necessary to correct accounting violations. The restatements for the period reduced earnings by $613 million (or 23% of reported profits during the period), increased liabilities at the end of 2000 by $628 million (6% of reported liabilities and 5.5% of reported equity), and reduced equity at the end of 2000 by $1.2 billion (10% of reported equity). Additionally, Enron asserted that the broadband unit alone was worth $35 billion, a claim also mistrusted. An analyst at Standard & Poor's said "I don't think anyone knows what the broadband operation is worth."

Enron's management team claimed the losses were mostly due to investment losses, along with charges such as about $180 million in money spent restructuring the company's troubled broadband trading unit. In a statement, Lay revealed, "After a thorough review of our businesses, we have decided to take these charges to clear away issues that have clouded the performance and earnings potential of our core energy businesses." Some analysts were unnerved. David Fleischer at Goldman Sachs, an analyst called previously 'one of the company's strongest supporters' asserted that the Enron management "... lost credibility and have to reprove themselves. They need to convince investors these earnings are real, that the company is for real and that growth will be realized."

Fastow disclosed to Enron's board of directors on October 22 that he earned $30 million from compensation arrangements when managing the LJM limited partnerships. That day, the share price of Enron fell to $20.65, down $5.40 in one day, following the announcement by the SEC that it was investigating several suspicious deals struck by Enron, pronouncing "some of the most opaque transactions with insiders ever seen".Attempting to explain the billion-dollar charge and calm investors, Enron's disclosures spoke of "share settled costless collar arrangements," "derivative instruments which eliminated the contingent nature of existing restricted forward contracts," and strategies that served "to hedge certain merchant investments and other assets." Such puzzling phraseology left many analysts feeling ignorant about just how Enron ran its business. Regarding the SEC investigation, chairman and CEO Lay said, "We will cooperate

fully with the S.E.C. and look forward to the opportunity to put any concern about these transactions to rest."

Liquidity concerns

Concerns about Enron's liquidity prompted Lay to participate in a conference call on October 23, in which he attempted to reassure investors that the company's cash resources were ample and no further "one-time charges" loomed. Secondly, Lay adamantly insisted there were no improprieties regarding Enron's transactions with partnerships run by Fastow and emphasized his support for the CFO. David Fleischer, the analyst at Goldman, was again skeptical, telling Lay and Fastow, "There is an appearance that you are hiding something." Nevertheless, Fleischer persisted in recommending the stock, arguing that he didn't "think accountants and auditors would have allowed total shenanigans." Lay also attempted to reassure the conferees by stressing that all of Enron's financial and accounting maneuvers had been scrutinized by their auditor, Arthur Andersen. After several questioners pressed the issue, Lay stated Enron management would "look into providing" more detailed statements for the end of better understanding the company's relationship with the special entities as those run by Fastow.

Two days later, on October 25, despite his reassurances days earlier, Lay removed Fastow from his position, citing "In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as C.F.O." However, with Skilling and Fastow now both departed, some analysts feared that shedding light on the company's practices would be made all the more difficult. Enron's stock was now trading at $16.41, having lost half its value in a little over a week.

On October 27 the company began buying back all its commercial paper, valued at around $3.3 billion, in an effort to calm investor fears about Enron's supply of cash. Enron financed the re-purchase by depleting its lines of credit at several banks. While the company's debt rating was still considered investment-grade, its bonds were trading at levels slightly below, making future sales problematic.

As the month came to a close, serious concerns were being raised by some observers regarding Enron's possible manipulation of accepted accounting rules; however, some claimed analysis was impossible based on the incomplete information provided by Enron.[90]

Some now openly feared that Enron was the new Long-Term Capital Management, the hedge fund whose collapse in 1998 threatened systemic failure in the international financial markets. Enron's tremendous presence worried some about the consequences of Enron's possible collapse. Enron executives were tight-lipped, accepting questions in written form only.

Credit rating downgrade

The central short-term danger to Enron's survival at the end of October 2001 seemed to be its credit rating. It was reported at the time that Moody's and Fitch, two of the three biggest credit-rating agencies, had slated Enron for review for possible downgrade.Such a downgrade would force Enron to issue millions of shares of stock to cover loans it had guaranteed, a move that

would bring down the value of existing stock further. Additionally, all manner of companies began reviewing their existing contracts with Enron, especially in the long term, in the event that Enron's rating were lowered below investment grade, a possible hindrance in future transactions.

Analysts and observers continued their chorus of complaints regarding Enron's difficulty or impossibility of properly assessing a company whose financial statements were so mysterious. Some feared that no one at Enron apart from Skilling and Fastow could completely explain years of mysterious transactions. "You're getting way over my head," said Lay in late August 2001 in response to detailed questions about Enron's business, a reaction that worried analysts.

On October 29, responding to growing concerns that Enron might in the short-term have insufficient cash on hand, the news spread that Enron was seeking a further $1–2 billion in financing from the banks.The next day, as feared, Moody's lowered Enron's credit rating, or senior unsecured long-term debt ratings, to Baa2, two levels above so-called junk status, from Baa1. Standard & Poor's also lowered their rating to BBB+, the equivalent of Moody's rating. Moody's also warned that it might downgrade Enron's commercial paper rating, the consequence of which might be preventing the company from finding the further financing it sought to keep solvent.

November began with the disclosure that the SEC was now pursuing a formal investigation, prompted by questions related to Enron's dealings with "related parties". Enron's board also announced that it would commission a special committee to investigate the transactions, headed by William C. Powers, the dean of the University of Texas law school. The next day, an editorial in The New York Times called for an "aggressive" investigation into the matter. Enron was able to secure an additional $1 billion in financing from cross-town rival Dynegy on November 2, but the news was not universally admired in that the debt was secured with the company's valuable Northern Natural Gas and Transwestern Pipeline.

Proposed buyout by Dynegy

Sources claimed that Enron was planning to explain its business practices more fully within the coming days, as a confidence-building gesture. Enron's stock was now trading at around $7, as investors worried that the company would not be able to find a buyer.

After it received a wide spectrum of rejections, Enron management apparently found a buyer when the board of Dynegy, another energy trader based in Houston, voted late at night on November 7 to acquire Enron "at a fire-sale price" of about $8 billion in stock. Chevron Texaco, which at the time owned about a quarter of Dynegy, agreed to provide Enron with $2.5 billion in cash, specifically $1 billion up front and the rest when the deal was completed. Dynegy would also be required to assume nearly $13 billion of debt, plus any other debt hitherto occluded by the Enron management's secretive business practices, possibly as much as $10 billion in "hidden" debt. Dynegy and Enron confirmed their deal on November 8, 2001.

Commentators remarked on the different corporate cultures between Dynegy and Enron, and on the "straight-talking" personality of the CEO of Dynegy, Charles Watson. Some wondered if Enron's troubles had not simply been the result of innocent accounting errors. By November,

Enron was asserting that the billion-plus "one-time charges" disclosed in October should in reality have been $200 million, with the rest of the amount simply corrections of dormant accounting mistakes. Many feared other "mistakes" and restatements might yet be revealed.

Another major correction of Enron's earnings was announced on November 9, with a reduction of $591 million over the stated revenue of years 1997–2000. The charges were said to come largely from two special purpose partnerships (JEDI and Chewco). The corrections resulted in the virtual elimination of profit for fiscal year 1997, with significant reductions every other year. Despite this disclosure, Dynegy declared it still intended to purchase Enron. Both companies were said to be anxious to receive an official assessment of the proposed sale from Moody's and S&P presumably to understand the effect on Dynegy and Enron's credit rating the completion of any buyout transaction would have. In addition, concerns were raised regarding antitrust regulatory hurdles leading to possible divestiture, along with what to some observers were the radically different corporate cultures of Enron and Dynegy.

Both companies pushed aggressively for the deal, and some observers were hopeful; Watson was praised for his vision in attempting to create the biggest presence on the energy market. At the time, Watson said "We feel [Enron] is a very solid company with plenty of capacity to withstand whatever happens the next few months." One analyst called the deal "a whopper [...] a very good deal financially, certainly should be a good deal strategically, and provides some immediate balance-sheet backstop for Enron."

Credit issues were becoming more critical, however. Around the time the buyout was made public, Moody's and S&P both lowered Enron's rating to just one notch above junk status. Were the company's rating to fall below investment-grade, its ability to trade might be severely limited subsequent to a curtailment or elimination of its credit lines with competitors. In a conference call, S&P affirmed that, were Enron not to be taken over, S&P would cut its rating cut to low BB or high B, ratings "not even at the high end of junk". Furthermore, many traders had limited their involvement with Enron, or stopped doing business altogether, fearing more bad news. But Watson again attempted to re-assure, affirming during a presentation to investors in New York that there was "nothing wrong with Enron's business". He also acknowledged that remunerative steps (in the form of more stock options) would have to be taken to redress the animosity of many Enron employees for management after it was revealed that Lay and other top officials had sold hundreds of millions of dollars worth of stock in the months leading up to the crisis. The situation was not helped by the disclosure that Lay, his "reputation in tatters",stood to receive a payment of $60 million as a change-of-control fee subsequent to the Dynegy acquisition, while many Enron employees had seen their retirement accounts, which were largely based on Enron stock, decimated as the price fell 90% in a year. An official at a company owned by Enron stated "We had some married couples who both worked who lost as much as $800,000 or $900,000. It pretty much wiped out every employee's savings plan."

Watson assured investors that the true nature of Enron's business had been made clear to him: "We have comfort there is not another shoe to drop. If there is no shoe, this is a phenomenally good transaction."Watson further asserted that Enron's energy trading part alone was worth the price Dynegy was paying for the whole company.

By mid-November, Enron announced it was planning to sell about $8 billion worth of underperforming assets, along with a general plan to reduce its scale for the sake of financial stability. On November 19 Enron disclosed to the public further evidence of its critical state of affairs. Most pressingly that the company was facing debt repayment obligations in the range of $9 billion by the end of 2002. Such debts were "vastly in excess" of its available cash. Also, the success of measures to preserve its solvency were not guaranteed, specifically as regarded asset sales and debt refinancing. In a statement, Enron revealed "An adverse outcome with respect to any of these matters would likely have a material adverse impact on Enron's ability to continue as a going concern."

Two days later, on November 21, Wall Street expressed serious doubts that Dynegy would proceed with its deal at all, or would seek to radically renegotiate. Furthermore Enron revealed in a 10-Q filing that almost all the money it had recently borrowed for purposes including buying its commercial paper, or about $5 billion, had been exhausted in just 50 days. Analysts were unnerved at the revelation, especially since Dynegy was reported to also have been unaware of Enron's rate of cash use. In order to walk away from the proposed buyout, Dynegy would need to legally demonstrate a "material change" in the circumstances of the transaction; as late as November 22, sources close to Dynegy were skeptical that the latest revelations constituted sufficient grounds.

The SEC announced it had filed civil fraud complaints against Andersen. A few days later, sources claimed Enron and Dynegy were now actively renegotiating the terms of their arrangement. Dynegy now demanded Enron agree to be bought for $4 billion rather than the previous $8 billion. Observers were reporting difficulties in ascertaining whether or which of Enron's operations, if any, were profitable. Reports described an en masse shift of business to Enron's competitors for the sake of risk exposure reduction. Finally, a new report from Moody's made Wall Street nervous.

Bankruptcy

Enron's stock price (former NYSE ticker symbol: ENE) from August 23, 2000 ($90) to January 11, 2002 ($0.12). As a result of the drop in the stock price, shareholders lost nearly $11 billion.[

On November 28, 2001, Enron's two worst-possible outcomes came true. Dynegy Inc. unilaterally disengaged from the proposed acquisition of the company and Enron's credit rating

fell to junk status. Watson later said "At the end, you couldn't give it [Enron] to me."The company, having very little cash with which to run its business, let alone satisfy enormous debts, imploded. Its stock price fell to $0.61 at the end of the day's trading. One editorial observer wrote that "Enron is now shorthand for the perfect financial storm."

Systemic consequences were felt, as Enron's creditors and other energy trading companies suffered the loss of several percentage points. Some analysts felt Enron's failure highlighted the risks of the post-September 11 economy, and encouraged traders to lock in profits where they could. The question now became determining the total exposure of the markets and other traders to Enron's failure. Early figures put the number at $18.7 billion. One adviser stated, "We don't really know who is out there exposed to Enron's credit. I'm telling my clients to prepare for the worst."

Enron was estimated to have about $23 billion in liabilities, both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron's fall. Additionally, many of Enron's major assets were pledged to lenders in order to secure loans, throwing into doubt what if anything unsecured creditors and eventually stockholders might receive in bankruptcy proceedings.

Enron's European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. two days later on December 2. It was the largest bankruptcy in U.S. history (before being surpassed by WorldCom's bankruptcy the following year), and it cost 4,000 employees their jobs.[2][117] The day that Enron filed for bankruptcy, the employees were told to pack up their belongings and were given 30 minutes to vacate the building. Around 15,000 employees held 62% of their savings in Enron stock, purchased at $83.13 in early 2001; when it went bankrupt in October 2001, Enron's stock later plummeted to below a dollar.

On January 17, 2002 Enron fired Arthur Andersen as its auditor, citing its accounting advice and the destruction of documents. Andersen countered that they had already severed ties with the company when Enron entered bankruptcy.

Trials

Fastow and his wife, Lea, both pleaded guilty to charges against them. Fastow was initially charged with 98 counts of fraud, money laundering, insider trading, and conspiracy, among other crimes. Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years with no parole in a plea bargain to testify against Lay, Skilling, and Causey. Lea was indicted on six felony counts, but prosecutors later dropped them in favor of a single misdemeanor tax charge. Lea was sentenced to one year for helping her husband hide income from the government.

Lay and Skilling went on trial for their part in the Enron scandal in January 2006. The 53-count, 65-page indictment covers a broad range of financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, conspiracy, and insider trading. U.S. District Judge Sim Lake had previously denied motions by the defendants to hold separate trials and to move the case out of Houston, where the defendants argued the negative publicity surrounding Enron's demise would make it impossible to get a fair trial. On

May 25, 2006, the jury in the Lay and Skilling trial returned its verdicts. Skilling was convicted of 19 of 28 counts of securities fraud and wire fraud and acquitted on the remaining nine, including charges of insider trading. He was sentenced to 24 years and 4 months in prison.

Lay pleaded not guilty to the eleven criminal charges, and claimed that he was misled by those around him. He attributed the main cause for the company's fall to Fastow. Lay was convicted of all six counts of securities and wire fraud for which he had been tried, and he faced a total sentence of up to 45 years in prison. However, Lay died on July 5, 2006, before sentencing was scheduled. At the time of his death, the SEC had been seeking more than $90 million from Lay in addition to civil fines. The case surrounding Lay's wife, Linda, is a difficult one. She sold roughly 500,000 shares of Enron ten minutes to thirty minutes before the information that Enron was collapsing went public on November 28, 2001.[ Linda was never charged with any of the events related to Enron.

Although Michael Kopper worked for Enron for over seven years, Lay did not know of Kopper even after the company's bankruptcy. Kopper was able to keep his name anonymous in the entire affair, as the spotlight remained on Fastow. Kopper was the first Enron executive to plead guilty. Chief Accounting Officer Rick Causey was indicted with six felony charges for disguising Enron's financial shape during his tenure. After pleading not guilty, he later switched to guilty and was sentenced to seven years in prison.

All told, sixteen people pleaded guilty for crimes committed at the company, and five others, including four former Merrill Lynch employees, were found guilty at trial. Eight former Enron executives testified, the star witness being Fastow, against Lay and Skilling, his former bosses.

Another was Kenneth Rice, the former chief of Enron Corp.'s high-speed Internet unit, who cooperated and whose testimony helped convict Skilling and Lay. In June 2007, he received a 27-month sentence.

Arthur Andersen

Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. The conviction was later overturned by the U.S. Supreme Court due to the jury not being properly instructed on the charge against Andersen. Despite the reversal, Andersen had already lost the majority of its clients and had been barred from auditing public companies. Although only a small amount of Arthur Andersen's employees were involved with the scandal, the firm was closed and resulted in the loss of 85,000 jobs.

NatWest Three

Giles Darby, David Bermingham, and Gary Mulgrew worked for Greenwich NatWest. The three British men had worked with Fastow on a special purpose entity he had started called Swap Sub. When Fastow was being investigated by the SEC, the three men met with the British Financial Services Authority (FSA) in November 2001 to discuss their interactions with Fastow. In June 2002, the U.S. issued warrants for their arrest on seven counts of wire fraud, and they were then extradited. On July 12, a potential Enron witness scheduled to be extradited to the U.S., Neil

Coulbeck, was found dead in a park in north-east London.The U.S. case alleged that Coulbeck and others conspired with Fastow. In a plea bargain in November 2007, the trio plead guilty to one count of wire fraud while the other six counts were dropped. Darby, Bermingham, and Mulgrew were each sentenced to 37 months in prison.

Aftermath

Employees and shareholders

Enron's headquarters in Downtown Houston was leased from a consortium of banks who had bought the property for $285 million in the 1990s. It was sold for $55.5 million, just before Enron moved out in 2004.

Enron's shareholders lost $74 billion in the four years before the company's bankruptcy ($40 to $45 billion was attributed to fraud). As Enron had nearly $67 billion that it owed creditors, employees and shareholders received limited, if any, assistance aside from severance from Enron. To pay its creditors, Enron held auctions to sell its assets including art, photographs, logo signs, and its pipelines.

More than 20,000 of Enron's former employees in May 2004 won a suit of $85 million for compensation of $2 billion that was lost from their pensions. From the settlement, the employees each received about $3,100 each. The following year, investors received another settlement from several banks of $4.2 billion. In September 2008, a $7.2-billion settlement from a $40-billion lawsuit, was reached on behalf of the shareholders. The settlement was distributed among the lead plaintiff, University of California (UC), and 1.5 million individuals and groups. UC's law firm Coughlin Stoia Geller Rudman and Robbins, received $688 million in fees, the highest in a U.S. securities fraud case. At the distribution, UC announced "We are extremely pleased to be returning these funds to the members of the class. Getting here has required a long, challenging effort, but the results for Enron investors are unprecedented."

Sarbanes-Oxley Act

In the Titanic, the captain went down with the ship. And Enron looks to me like the captain first gave himself and his friends a bonus, then lowered himself and the top folks down the lifeboat and then hollered up and said, 'By the way, everything is going to be just fine.'

U.S. Senator Byron Dorgan.

Between December 2001 and April 2002, the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services held numerous hearings about the collapse of Enron and related accounting and investor protection issues. These hearings and the corporate scandals that followed Enron led to the passage of the Sarbanes-Oxley Act on July 30, 2002.The Act is nearly "a mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the Act."

The main provisions of the Sarbanes-Oxley Act included the establishment of the Public Company Accounting Oversight Board to develop standards for the preparation of audit reports; the restriction of public accounting firms from providing any non-auditing services when auditing; provisions for the independence of audit committee members, executives being required to sign off on financial reports, and relinquishment of certain executives' bonuses in case of financial restatements; and expanded financial disclosure of firms' relationships with unconsolidated entities.

On February 13, 2002, due to the instances of corporate malfeasances and accounting violations, the SEC called for changes to the stock exchanges' regulations. In June 2002, the New York Stock Exchange announced a new governance proposal, which was approved by the SEC in November 2003. The main provisions of the final NYSE proposal are:

All firms must have a majority of independent directors. Independent directors must comply with an elaborate definition of independent directors. The compensation committee, nominating committee, and audit committee shall consist

of independent directors. All audit committee members should be financially literate. In addition, at least one

member of the audit committee is required to have accounting or related financial management expertise.

In addition to its regular sessions, the board should hold additional sessions without management.

Satyam scandal

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.

Details

On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.12 billion) as against Rs 5,361 crore (US$ 1.2 billion) crore reflected in the books.

an accrued interest of Rs. 376 crore (US$ 83.85 million) which was non-existent.

an understated liability of Rs. 1,230 crore (US$ 274.29 million) on account of funds was arranged by himself.

an overstated debtors' position of Rs. 490 crore (US$ 109.27 million) (as against Rs. 2,651 crore (US$ 591.17 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues. He claimed that none of the board members had any knowledge of the situation in which the company was placed.

He stated that

"What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs 11,276 crore (US$ 2.51 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crore (US$ 1.87 billion)). As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas

acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.

Aftermath

Raju had appointed a task force to address the Maytas situation in the last few days before revealing the news of the accounting fraud. After the scandal broke, the then-board members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer." said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody

On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

Analysts in India have termed the Satyam scandal India's own Enron scandal. Some social commentators see it more as a part of a broader problem relating to India's caste-based, family-owned corporate environment (http://kafila.org/2009/02/13/the-caste-of-a-scam-a-thousand-satyams-in-the-making/).

Immediately following the news, Merrill Lynch Now with Bank of America and State Farm Insurance,USA terminated its engagement with the company. Also, Credit Suisse suspended its coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked.[8][9][10]

[11][12] Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues,[13] which was stripped from them in the aftermath of the scandal.[14] The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009.[15] India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index on 12 January.[16] The founder of Satyam was

arrested two days after he admitted to falsifying the firm's accounts. Ramalinga Raju is charged with several offences, including criminal conspiracy, breach of trust, and forgery.

Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008.In New York Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80.

The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the company. However, whether employment will continue at pre-crisis levels, particularly for new recruits, is questionable.

On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers, announced that its reliance on potentially false information provided by the management of Satyam may have rendered its audit reports "inaccurate and unreliable"

On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees,

Roots

Prof. Sapovadia, in his study, shows that in spite of there being a strong corporate governance framework and strong legislation in India, top management sometimes violates governance norms either to favour family members or because of jealousy among siblings. He finds that there is a lack of regulatory supervision and inefficiency in prosecuting violators. He investigates in detail the recent governance failure at India's 4th largest IT firm, Satyam Computers Services Limited, and considers possible reasons underlying such large failures of oversight.

New CEO and special advisors

On 5 February 2009, the six-member board appointed by the Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical engineer, has been with Satyam since January 1994 and was heading the Global Delivery Section before being appointed as CEO of the company. The two-day-long board meeting also appointed Homi Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered Accountant as special advisors .

Worldcom scandal

WorldCom, now named MCI, recently emerged from bankruptcy protection after reporting accounting irregularities of $11 billion (Young, 2004). These accounting irregularities have resulted in many of WorldCom's previous executives being prosecuted on securities charges. This article will summarize many of WorldCom's shortcomings and evaluate how the company is moving forward in light of their past. In the past 18 months MCI has fired the CEO, COO, CFO, controller, general counsel, the entire board of directors and over 400 finance and accounting employees. In addition to establishing a code of conduct and guiding principles, Michael Capellas, MCI's current CEO, has established an ethics office, hired a Chief Ethics Officer, and required all MCI employees to have extensive ethics training. However, it remains unclear if these actions are enough. This article also suggests some additional actions MCI can take to better establish a culture of ethical values.

WorldCom, now named MCI, recently emerged from bankruptcy protection after reporting accounting irregularities of $11 billion (Young, 2004). As part of their emergence settlement, MCI paid the securities and Exchange Commission (sec) fines totaling $750 million and former bondholders received 36 cents on the dollar in stock in the new company (Young, 2004). These accounting irregularities have resulted in many of WorldCom's previous executives being prosecuted on securities charges. On March 2,2004 Bernie Ebbers, WorldCom's ex-Chief Executive Officer, was charged with conspiracy to commit securities fraud, securities fraud, and falsely filing with the sec and on May 24,2004 six additional counts were filed against him (Davidson, 2004; Moritz, 2004). On March 15,2005 Ebbers was found guilty on all nine counts (Crawford, 2005) and faces a maximum penalty of 85 years in prison and an $8.25 million fine (Davidson, 2004). On the same day the additional charges were filed against Ebbers, Scott Sullivan, WorldCom's ex-Chief Financial Officer, according to Reuters television stated that "as CFO at WorldCom I participated with other members of WorldCom to conspire to paint a false and misleading picture of WorldCom's financial results."

Scharff (2005) posited that much of WorldCom's unethical behaviors may have been caused by groupthink. Groupthink is caused when concurrence seeking becomes paramount in team decision-making. Janis (1982) defined groupthink is a "mode of thinking that people engage hi when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action" (p. 9). Janis (1982) maintained that some popular examples of groupthink included President Kennedy's decision to invade Cuba at the Bay of Pigs or America's decision to escalate to war in Vietnam. Whyte (1989) suggested that the space shuttle Challenger disaster and President Reagan's Iran-Contra arms for hostages dealings be added to Janis' (1982) examples of groupthink. The characteristics of groupthink include a feeling of invulnerability, ability to rationalize events and

decisions, moral superiority within the group, group pressure on dissenters, use of stereotypes, self-censorship within the group, and unanimity (Janis, 1971, 1982). While groupthink may have contributed to the number of people involved in the unethical behaviors as well as the length of time over which WorldCom's fraud occurred, groupthink does not resolve the ethical concerns with the senior level executives or the board of directors responsible for creating the culture which led to these events.

WorldCom has been just one of many companies caught in ethical quandaries and predicaments over the past few years. It appears that while some companies and their executives have maintained a strong focus on ethical behavior regardless of economic conditions, others have not. This article will review the major theories of ethical behavior followed by an assessment of WorldCom's executive management hi light of the theories of ethical behavior. Finally, this article will analyze the need for a corporate code of ethics and ethics training and evaluate how MCI is moving forward after emerging from bankruptcy while attempting to create a culture of ethical values.

WorldCom Fraud

Executives at telecommunications giant WorldCom perpetrated accounting fraud that led to the largest bankruptcy in history. The fraud was revealed to the public in June 2002 and WorldCom filed for bankruptcy in July 2002.

Evidence shows that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs, and backdating contracts. However, WorldCom's board of directors did not investigate these claims. In June 2001, a shareholder lawsuit was filed against WorldCom, but it was thrown out of court due to lack of evidence.

When the Securities and Exchange Commission (SEC) launched its own investigation in March 2002, it was discovered that the prior claims were valid. As a result, the SEC filed a civil fraud lawsuit against WorldCom and federal charges were filed against several executives.

WorldCom Investigation

The SEC’s investigation into the accounting fraud at WorldCom turned up several key players. The following is a list of high-ranking WorldCom executives and other employees who are implicated in the accounting fraud:

Bernard Ebbers – former CEO of WorldCom. Ebbers is suspected in the accounting fraud but no charges have been filed against him.

Scott Sullivan – former CFO of WorldCom. Sullivan was indicted on charges of securities fraud, conspiracy, and false statements to the SEC.

David Myers – former controller of WorldCom. Myers is charged with securities fraud, conspiracy, and false statements to the SEC.

Buford Yates Jr. – former director of general accounting. Yates pled guilty to charges of securities fraud and conspiracy.

Betty Vinson – former director of management reporting. Vinson pled guilty to charges of conspiracy to commit securities fraud.

Troy Normand – director of legal entity accounting. Normand pled guilty to securities fraud and conspiracy charges.

CORPORATE FAILURES IN PAKISTAN DUE TO LACK OF CORPORATE GOVERNANCE PRACTICES

Taj Company

The Taj Company was involved in poor corporate governance practices. The company was running a scheme through which it was able to receive huge amounts of deposits illegally. What was far more disappointing was the religious affiliation the company had attached with its name. Even 15 years after their fraudulent practices have been stopped; the company still owes heavy liabilities to over 25000 people.

Crescent Bank Fraud

The entire board of directors and CEO Anjum Saleem of Crescent Standard investment bank were legally stopped from running their offices on evidences of suspected fraud and irregular accounting. External Auditors had predicted a missing amount of over Rs.6 Billion, apart from illegal maintenance of parallel accounts, concealment of bank assets, un-authorized massive funding of group companies, unlawful investments in real estate and stock market, etc. the SECP took legal action against the companies officers, although much of the actions taken were criticized as insufficient.

PTCL

The privatization of PTCL was also a big corporate scandal. An ex-Senior Vice President has claimed the privatization as Pakistan¶s Biggest Financial fraud. PTCL former official further commented that the deal was closed on 2.6 billion dollars including U-fone & Paknet, however only U-fone had enterprise value of more than 6 billion dollars which does not include assets of U-fone. Moreover, pricing decisions were made through old records instead of determining current market value, which means, it was like Buy One Get 2 Free offer. It has been reported further that in September 2006, when Etisalat had refused to honor the deal, they were offered a secret price discount of 394 million dollars along with commitment to lay off 20,000 employees and to bear the 50% cost of layout. Supreme Court of Pakistan has already given decision againsthe privatization of PSO and Pakistan Steel and if PTCL¶s privatization gets challenged on true facts, it will bring horrifying results.

ENGRO Group of Companies

SECP was at the receiving end of immense criticism once it had allowed Fertilizer giant ENGRO to establish its subsidiary ENGRO Foods. Critics believed that the company was associated with the urea business and were tremendously concerned about the extent to which hygiene requirements for the industry would be met by ENGRO foods. However SECP counter argument was based on the fact that ENGRO has had a rich history of sound corporate governance which satisfied SECP that ENGRO will be responsible in regards to hygiene issues associated with ENGRO foods. Time proved that Engro¶s corporate governance was in good practice and has led to the success of ENGRO food¶s with products such as Olper¶s Milk.

Mehran Bank

The National Accountability Bureau (NAB) has recovered Rs1.6 billion in the famous Mehran Bank scandal case by selling Benami property of defunct bank¶s chief Younus Habib in Islamabad. The amount is stated to be the country¶s biggest-ever single cash recovery in a wilful loan default case. In addition, the Younus Habib Group will also pay Rs420 million.

According to the NAB, Younus Habib, former chief operating officer of the defunct bank, had offered to settle his liability through the sale of his Benami property and accordingly entered into a settlement agreement of Rs1.6 billion with the National Bank of Pakistan.

The Mehran Bank had been doing badly since its very beginning in January 1992, and banking experts attributed this poor performance to Younus Habib's penchant for `extra-curricular banking activities.

2. EVOLUTION OF CORPORATE GOVERNANCE IN PAKISTAN

Corporate governance is at the centre of attention in today¶s business world. This is greatly due to the large number of stakeholders whose wealth and interests are at stake in the business. What has further highlighted corporate governance today has been the increasing influence and awareness of these stake holders. With out sound corporate governance a business cannot survive.

Corporate governance is not just related to core business activities. Good corporate governance caters to various other issues present in the society. Corporations today have developed a concept of corporate social responsibility. The major components of corporate governance comprise of

company policies, Board of Directors, the role of the CEO, creditors, Stockholders, regulators, reporting and maintaining overall transparency about the business operations.

In March 2002, the Securities and Exchange Commission of Pakistan issued the Code of Corporate Governance to establish a framework for good governance of companies listed on Pakistan's stock exchanges. In exercise of its powers under Section 34(4) of the Securities and Exchange Ordinance, 1969, the SEC issued directions to the Karachi, Lahore and Islamabad stock exchanges to incorporate the provisions of the Code in their respective listing regulations. As a result, the listing regulations were suitably modified by the stock exchanges.

The Code is a compilation of ³best practices´, designed to provide a framework by which companies listed on Pakistan's stock exchanges are to be directed and controlled with the objective of safeguarding the interests of stakeholders and promoting market confidence; in other words to enhance the performance and ensure conformance of companies. In doing this, the Code draws upon the experience of other countries in structuring corporate governance models, in particular the experience of those countries with a common law tradition similar to Pakistan's. The Code of Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance published in December 1992 (U.K.), the Report of the Hampel Committee on Corporate Governance published in January 1998 (U.K.), the Recommendations of the King's Report (South Africa), and the Principles of Corporate Governance published by the Organization for Economic Cooperation and Development in 1999 have been important documents in this regard.

The Code is a first step in the systematic implementation of principles of The Code is a first step in the systematic implementation of principles of good corporate governance in Pakistan. Further measures will be required, and are contemplated by the SEC, to refine and consolidate the principles and to educate stakeholders of the advantages of strict compliance. Corporate governance is a relatively new term used to describe a process, which has been practiced for as long as there have been corporate entities. This process seeks to ensure that the business and management of corporate entities is carried on in accordance with the highest prevailing standards of ethics and efficacy upon assumption that it is the best way to safeguard and promote the interests of all corporate stakeholders.

3. THE CORPORATE GOVERNANCE SYSTEM

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

The process of corporate governance does not exist in isolation but draws upon basic principles and values which are expected to permeate all human dealings, including business dealings principles such as utmost good faith, trust, competency, professionalism, transparency and accountability, and the list can go on Corporate governance builds upon these basic assumptions and demands from human dealings and adopts and refines them to the complex web of relationships and interests which make up a corporation. The body of laws, rules and practices which emerges from this synthesis is never static but constantly evolving to meet changing circumstances and requirements in which corporations operate. From time to time, crisis of confidence in effective compliance with, or implementation of, prevailing corporate governance principles act as a catalyst for further refinement and enhancement of the laws, rules and practices which make up the corporate governance framework. The result is an evolving body of laws, rules and practices, which seeks to ensure that high standards of corporate governance continue to apply.

Some examples of corporate governance issues arising are the circumstances surrounding the collapse of the South Sea Company (frequently referred to as the ³South Sea Bubble´) in England in 1720. The famous Enron case in 2002 and more recent examples are the Taj Company Scandal in Pakistan.

4. NEED FOR CORPORATE GOVERNANCE

Good and proper corporate governance is considered imperative for the establishment of a Competitive market. There is empirical evidence to suggest that countries that have implemented good corporate governance measures have generally experienced robust growth of corporate sectors and higher ability to attract capital than those which have not.

The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development. After East Asian economies collapsed in the late 20th century, the World Bank's president warned those countries, that for sustainable development, corporate governance has to be good. Economic health of a nation depends substantially on how sound and ethical businesses are.

Upon independence, Pakistan inherited the Indian Companies Consolidation Act, 1913. In 1949, this Act was amended in certain respects, including its name, where after it was referred to as the Companies Act, 1913. Until 1984, when the Companies Ordinance, 1984 (the Companies Ordinance) was promulgated, following lengthy debate, Pakistani companies were established and governed in accordance with the provisions of the Companies Act, 1913.

Corporate entities in Pakistan are primarily regulated by the SEC under the Corporate entities in Pakistan are primarily regulated by the SEC under the Companies Ordinance, the Securities and Exchange Ordinance, 1969, the Securities and Exchange Commission of Pakistan Act, 1997, and the various rules and regulations made there under. In addition, special companies may also be under special laws and by other regulators, in addition to the SEC. In this way, listed companies

are also regulated by the stock exchange at which they are listed; banking companies are also regulated by the State Bank of Pakistan; companies engaged in the generation, transmission or distribution of electric power are also regulated by the National Electric Power Regulatory Authority; companies engaged in providing telecommunication services are also regulated by the Pakistan Telecommunication Authority; and oil and gas companies are also regulated by the Oil and Gas Regulatory Authority.

5. CORPORATE GOVERNANCE IN PAKISTAN

The SEC, since it took over the responsibilities and powers of the Corporate Law Authority in 1999, has been acutely alive to the changes taking place in the international business environment, which directly: and indirectly impact local businesses. As part of its multi- dimensional strategy to enable Pakistan's corporate sector meet the challenges raised by the changing global business scenario and to build capacity, the SEC has focused, in part, on encouraging businesses to adopt good corporate governance practices. This is expected to provide transparency and accountability in the corporate sector and to safeguard the interests of stakeholders, including protection of minority shareholders' rights and strict audit compliance.

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.

In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organization¶s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.

A key factor in an individual's decision to participate in an organization e.g. through providing financial capital and trust that they will receive a fair share of the organizational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.

6. BENEFITS OF CORPORATE GOVERNANCE

The popularity and development of corporate governance frameworks in both the developed and developing worlds is primarily a response and an institutional means to meet the increasing demand of investment capital. It is also the realization and acknowledgement that weak corporate governance systems ultimately hinder investment and economic development. In a McKinsey survey issued in June 2000, investors from all over the world indicated that they would pay large premiums for companies with effective corporate governance. A number of surveys of investors in Europe and the US support the same findings and show that investors eventually reduce their investments in a company that practices poor governance.

Corporate governance serves two indispensable purposes.

It enhances the performance of corporations by establishing and maintaining a corporate culture that motivates directors, managers and entrepreneurs to maximize the company's operational efficiency thereby ensuring returns on investment and long term productivity growth

Moreover, it ensures the conformance of corporations to laws, rules and practices,

which provide mechanisms to monitor directors' and managers' behavior through corporate accountability that in turn safeguards the investor interest. It is fundamental that managers exercise their discretion with due diligence and in the best interest of the company and the shareholders. This can be better achieved through independent monitoring of management, transparency as to corporate performance, ownership and control, and participation in certain fundamental decisions by shareholders.

Dramatic changes have occurred in the capital markets throughout the past decade. There has been a move away from traditional forms of financing and a collapse of many of the barriers to globalization. Companies all over the world are now competing against each other for new capital. Added to this is the changing role of institutional investors. In many countries corporate ownership is becoming increasingly concentrated in institutions, which are able to exercise greater influence as the predominant source of future capital. Corporate governance has become the means by which companies seek to improve competitiveness and access to capital and borrowing in a local and global market.

Effective corporate governance allows for the mobilization of capital annexed with the promotion of efficient use of resources both within the company and the larger economy. It assists in attracting lower cost investment capital by improving domestic as well as international

investor confidence that the capital will be invested in the most efficient manner for the production of goods and services most in demand and with the highest rate of return. Good corporate governance ensures the accountability of the management and the Board in use of such capital. The Board of directors will also ensure legal compliance and their decisions will not be based on political or public relations considerations. It is understood that efficient corporate governance will make it difficult for corrupt practices to develop and take root, though it may not eradicate them immediately. In addition, it will also assist companies in responding to changes in the business environment, crisis and the inevitable periods of decline.

Corporate governance is the market mechanism designed to protect investors' rights and enhance confidence. Throughout the world, institutions are awakening to the opportunities presented by governance activism. As a result, Boards and management are voluntarily and proactively taking steps to improve their own accountability. Simply put, the corporations, including Pakistani corporations, have begun to recognize the need for change for positive gain. Along with traditional financial criteria, the governance profile of a corporation is now an essential factor that investors and lenders take into consideration when deciding how to allocate their capital. The more obscure the information, the less likely that investors and lenders would be attracted and persuaded to invest or lend. The lack of transparency, unreliable disclosure, unaccountable management and the lack of supervision of financial institutions (all of which are the consequences of inadequate corporate governance) combine to infringe investors' rights. Poor corporate governance has a tendency to inflate uncertainty and hamper the application of appropriate remedies.

Transparency can be achieved through three key market elements:

1. Openness 2. Accounting standards 3. Compliance reporting. Efficient markets depend upon investor confidence in the accuracy and openness of information provided to the public. Also, compliance with internationally recognized accounting standards is necessary to ensure that investors can effectively analyze and compare company data. With incorporation of the Code in the listing regulations of the Pakistan's stock exchanges, listed companies are now under an obligation to act transparently.

Initially, principles of corporate governance were more specifically framed to facilitate the so called ³agency problems´ that were a consequence of the separation of ownership and management in publicly owned corporations. As the ownership of corporations is widely dispersed, management of the corporation is vested in directors who act as agents for the owners, (the shareholders). From this stems the theory that the interest of the shareholder is not determined or protected by any formal instrument, unlike the interest of most stakeholders and investors which can generally and adequately be protected through contractual rights and obligations with the company. It is, for this reason, that corporate governance is primarily

directed at the effective protection of shareholder interests The corporate governance system specifies the rights of the shareholder and the steps available if management breaches its responsibilities established on equitable principles from this springs the ³equity contract´. In addition to the applicable general law, the equity contract is created under Section 31 of the Companies Ordinance.

The inability or unwillingness to make credible disclosure constitutes a bad equity contract which potentially makes it difficult for the market to distinguish good risk from bad resulting in an inability to attract investors. The long term consequences of such inabilities prove to have a crippling effect, not only on corporations, but also on the stock market as it blocks crucial liquidity of the stock market, with the resultant weakening of the entire financial system. Consequently, the increased cost of capital reallocates financing and the capital market towards debt. A distinctive characteristic of the Pakistani corporate culture, however, is the pyramidal ownership structure and corporations with concentrated ownership enabling large shareholders to directly control managers and corporate assets. Thus the need for corporate governance should not, perhaps, arise under the prevailing structure as the conflict of interest that emerges gives rise to the ³expropriation problem´ as opposed to the ³agency problem´. It is imperative, however, at this stage, to acknowledge the rapid developments that are taking place within the Pakistan corporate culture and the fading out of the traditional and more conventional corporate formation. Furthermore, a good governance system is required for such institutions as the success of any institution is a combined effort comprising of contributions from a range of resource providers including employees and creditors. It is for this reason that the role of the various stakeholders cannot go ignored and their rights and the corporations' obligations must be determined. Financing of any kind, whether for publicly traded companies or privately held and state owned companies, can only be made possible through the exercise of good corporate governance

7. CORPORATE STAKEHOLDERS

A corporation enjoys the status of a separate legal entity; however, the formation of a public listed company is such that its success is dependant upon the performance of a contribution of factors encompassing a number of stakeholders. A ³stakeholder´ is a person (including an entity or group) that has an interest or concern in a business or enterprise though not necessarily as an owner. The ownership of listed companies is comprised of a large number of shareholders drawn from institutional investors to members of public and thus it is impossible for it to be managed and controlled by such a large number of diversified minds. Hence, management and control is delegated by the shareholders to agents called the Board of directors. In order to achieve maximum success, the Board of directors is further assisted by managers, employees, contractors, creditors, etc. Therefore it is imperative to recognize the importance of stakeholders and their rights.

Communication with stakeholders is considered to be an important feature of corporate governance as cooperation between stakeholders and corporations allows for the creation of wealth, jobs and sustain ability of financially sound enterprises. It is the Board's duty to present a balanced assessment of the company's position when reporting to stakeholders. Both positive and negative aspects of the activities of the company should be presented to give an open and transparent account thereof.

The annual report is a vital link and, in most instances, the only link between the company and its stakeholders. The Companies Ordinance requires directors to attach in the annual report a directors' report on certain specific matters. The Code expands the content of the directors' report and requires greater disclosure on a number of matters that traditionally were not reported on. The aim is for the directors to discuss and interpret the financial statements to give a meaningful overview of the enterprise's activities to stakeholders and to give users a better foundation on which to base decisions. Specific emphasis has been placed upon the fiduciary obligations of directors and hence the need to understand the implications of such obligations also arises.

Apart from the above, stakeholder communication should consist of a discussion and interpretation of the business including

Its main features; Uncertainties in its environment;Its financial structure and the factors relevant to an assessment of future prospects Other significant items which may be relevant to a full appreciation of the business.

WHAT ARE THE RULES OF CORPORATE GOVERNANCE?

Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders:

Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.

Interests of other stakeholders:

Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

Role and responsibilities of the board:

The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person.

Integrity and ethical behaviour:

Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

Disclosure and transparency:

Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

8. CONCLUSION

Corporate governance is the mechanism by which the agency problems of corporation stakeholders, including the shareholders, creditors, management, employees, consumers and the public at large are framed and sought to be resolved.

Corporate governance is an inevitable phenomenon of corporate businesses. Whether it is good or bad is determined by the performance of the components. Good corporate governance is being promoted in almost all parts of the world.

Corporate governance is at the evolutionary stage in developing countries. However that does not mean that poor corporate governance is not present in the developed world. With cases such as the Enron bankruptcy, it is quite evident that corporate governance mal-practices are present everywhere. Major issues in corporate governance are Ethical dilemmas, Window Dressing, Board Composition, and interaction with minority shareholders.

The following of corporate governance principles is not that common in Pakistan and it is still ignored by companies because the market is not aware of it. But the short benefits should not be given more importance than long term benefits that Corporate Governance brings with it. If a company wants to establish a long term loyalty base relationship with stakeholders than there is no other way but to adopt good Corporate Governance ideals.