Corporate Governance can be defined as following by different scholar;-

1. Corporate Governance is the government role is not concerned with the running
of the business of the company per se, but with giving overall direction to the
enterprise, with overseeing and controlling the executive actions of management
and with satisfying legitimate expectations of accountability and regulation by
interest beyond the corporate boundaries (Tricker,1984),1
2. Corporate Governance is the government of an enterprise is the sum of those
activities that make up the internal regulation of the business in compliance with
the obligations placed on the firm by legislation, ownership and control. It
incorporates the trusteeship of asset, their management and their deployment
(Cannon, 1994)2,
3. Corporate Governance is the relationship between shareholders and their
companies and the way in which shareholder act to encourage best practice (e.g.,
by voting at annual general meetings and by regular meetings with companies’
senior management). Increasingly, this includes shareholder ‘activism’ which
involves a campaign by shareholder or a group of shareholder to achieve change
in companies (the Corporate Governance handbook, 1996)3.

1
Definition from the institutional investor known as Trinker,1984
2
Definition from the institutional investor known as Cannon, 1994
3
Definition from the The Corparate Governance hand Book, 1996

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1.0 INTRODUCTION
Corporate governance may be defined as the means through which a company is
operated and managed. It concern matters such as; the role of the Board and audit
Committee, and Overall control and risk management framework.
Corporate Governance has become increasingly important to all organizations,
particularly those with stock exchange listing. For example, in UK such companies are
subject to the requirements of the combined code and Turnbull report. Management and
control is often more difficult to achieve in large, more complex organizations. In
addition, shareholder (the owners) tends to be more remote from the directors who
manage the company behalf.
The Turnbull report requires that companies have ongoing process for identifying,
evaluating, and managing the company’s key risks. Failure by the company to comply with
relevant corporate governance requirement could result in qualification in the audit could
damage the company’s image and reputation.
The King II Report on Corporate Governance for South Africa (2002) highlighted
principles of good corporate governance. Among others it included; Transparency i.e.
the ease with which an outsider can analyze the organization’s actions and performance,
Accountability which is addressing shareholders’ rights to receive information about
stewardship of the organization’s assets and its performance, and Responsibility that
relates to acceptance of all consequences for the organization behavior and actions.
The objective of corporate governance is to ensure that companies are run well in the
interest of the stakeholders (shareholders and the wider community). There has been
renewed interest in the corporate governance practices of Modern Corporation since
2001, particularly due to the high-profile collapses of a number of large United States
(US) firms such as Enron Corporation and WorldCom, Parmalant of Italy and Daimler-
Benz of Germany. In 2002 the US government passed the Sarbanes - Oxley Act,
intending to restore public confidence in corporate governance.

2.0 PROFILES AND FAILURE OF ENRON AND WORLDCOM

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 Enron Creditors’ Recovery Corporation (formerly Enron Corporation, former NYSE
ticker symbol: ENE) was an American energy company based in Houston, Texas.
Before its bankruptcy in late 2001, Enron employed approximately 22,000 people
(McLean & Elkind, 2003) and was one of the world’s leading electricity, natural gas,
pulp and paper, and communications companies with claimed revenue of $ 111
billion in 2000. Fortune named Enron “American’s Most Innovative Company” for
six consecutive years.
At the end of 2001, it was revealed that Enron’s reported financial position was
sustained substantially by institutionalized, systematic and creatively planned
accounting fraud. Enron has since become a popular symbol of willful corporate
fraud and corruption.
It was discovered that much of its profits and revenue were the results of deals with
Special Purpose Entities (SPEs), limited partnerships which it controlled. Enron
conducted much of its business in these entities that allowed them to report profits
when they were not actually making profit. It was further revealed that many of
Enron’s recorded assets and profits were inflated, or even wholly fraudulent and
non existent. Debts and losses were put into entities (SPEs) that were not included
in firm’s financial statements.
The board of director was composed of number of people who have been shown to
be poor moral character and willing to conduct fraudulent activity, this was the
genuine root of the company’s corporate governance failure.
The non executive directors were compromised by conflicts of interest,
The internal auditor did not perform its functions of internal control and of
checking the external auditing function,
The company’s accounting and financial reporting function failed miserably
Both the financial director and the chief executive were prepared to produce
fraudulent accounts for the company,
The corporate crimes perpetrated by members of the Enron hierarchy are unnerving,
how could the company survive so long with such unethical activities being carried
out at the highest level? Why did no one notice? Where they did notice problems, why
did they not report the company? How could company auditors allow such a travesty

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of justice? The questions raised by the Enron saga are far more numerous than the
solutions offered. (Jill Solomon and Aris Solomon , 2004 pg 41)
Enron filed its bankruptcy on December 2, 2001. In addition, the scandal caused the
dissolution of Arthur Andersen, which at the time was one of the world’s top
accounting firms. The firm was found guilty of obstruction of justice in 2002 for
destroying documents related to Enron audit, and was forced to stop auditing public
companies.
The executives and insiders at Enron knew about the off shore account that were
hiding losses for the company. However, the investors knew nothing of this. Jeffrey
Skilling, the former Enron chief executive admitted that when a company’s success is
measured by agreeable financial statements emerging from a black box, actual
balance sheet prove inconvenient.
2.2 WORLDCOM
Long Distance Discount Services Inc (LDDS) began in Clinton, Mississippi in 1983. In
1985 LDDS selected Bernard Ebbers to be its Chief Executive Officer (CEO). The
company went public in August, 1989 when it merged with Advantage Companies
Inc. the company name was changed to LDDS World Com in 1995, and later to just
World Com.
Bernard Ebbers became very wealthy from the rising price of his holdings in
WorldCom’s stock. However, shortly after the MCI acquisition in 1998, the
telecommunication industry entered a downturn. The WorldCom growth strategy
suffered a serious blow when it was forced to abandon its proposed merger with
sprint in late 2000. By that time, WorldCom’s stock was declining and Ebbers came
under increasing pressure from banks to cover margin calls on his WorldCom stock
that was used to finance his other businesses. During 2001, Ebbers persuaded
WorldCom’s board of directors to provide him corporate loans and guarantees in
excess of $ 400 million to cover his margin calls. But this strategy ultimately failed and
Ebbers was ousted as CEO in April, 2002.
Beginning in 1999 and continuing through May 2002, the company [under the
direction of Scott Sullivan (CFO), David Myers (Controller) and Bufford “Buddy”
Yates (Director of General Accounting)] used fraudulent accounting method to mask

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 its declining financial condition by painting a false picture of financial growth and
profitability to prop up the price of WorldCom’s stocks.
The fraud was accomplished primarily in two ways;
 Underreporting “line costs” (interconnection expenses with other
telecommunication companies) by capitalizing these costs on the balance
sheet rather than properly expense them, and
 Inflating revenue with bogus accounting entries from corporate unallocated
revenue accounts.
WorldCom Internal Audit department uncovered approximately $ 3.8 billion of the
fraud in June, 2002 during a routine examination of capital expenditures and alerted
the company’s new auditors, KPMG (who had replaced Arthur Andersen,
WorldCom’s external auditors during the fraud).
Shortly thereafter, the company’s audit committee and board of directors were
notified and acted swiftly, Sullivan was fired, Myers resigned, Arthur Andersen
withdrew its audit opinion for 2001, and US Security and Exchange Commission
(SEC) launched an investigation into these matters. By the end of 2003, it was
estimated that the company’s total assets had been inflated by around $ 11 billion.
On July 21, 2002 WorldCom filed for chapter 11 bankruptcy protection in the largest
such filing in United States history. WorldCom changed its name to MCI and moved
the corporate headquarters from Clinton, Mississippi to Dulles, Virginia on April 14,
2003. Under the bankruptcy reorganization agreement, the company paid $ 750
million to the SEC in cash and stock in new MCI, which was intended to be paid to
wronged investors
3.0 PROBLEMS OF CORPORATE GOVERNANCE THAT LEAD TO
COLLAPSE OF ENRON AND WORLDCOM
When critically analyzing the fall of Enron and WorldCom as explained above, one
could come up with number of corporate governance issues that were not well
addressed. Some of those issues can be pointed out as follows;
 Ineffectiveness of the Board of Directors in pursuing its responsibilities.
Board of Director as a major tool to oversee and control performance of management,
is responsible to ensure effective controls are designed and operated by the
management. In both cases effective internal controls were not in place to the extent

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 that it allowed improper accounting practices and fraud to be unnoticed during its
initial stage. For instance, in case of WorldCom the CEO, Bernard Ebber was not ready
to see the effectiveness of internal control.
 Lack of Good Corporate Governance Principles
As it was stated earlier in the introduction, corporate governance are processes by
which corporations are directed, supervised and held to account through the principles
of integrity, transparency and accountability. In case of Enron and WorldCom,
management and those charged with governance lacked those key principles of good
corporate governance. Lack of integrity, transparency and accountability resulted into
improper recognition of revenue, capitalization of expenses, valuation of assets and
hide out of losses and debts.
 Absence of Clear Line of Reporting
Good corporate governance is achieved through division of duties within the company
and clear chain of reporting between organs established for various purposes.
Improper reporting lines of authority create communication breakdown between
management and those charged with governance. For example in WorldCom, the Vice
President of Internal Audit was directly reporting to WorldCom’s Chief Financial
Officer (CFO) who was among the cook of the scandal, instead of reporting to the
Audit Committee.
 Improper Composition of Members of Audit Committee
Audit committee were not strong and effective as required by good corporate governance for
example audit committee in WorldCom delay taking actions based on report of internal auditor
as whistleblower
 The abuse of trust and self interest
The management of WorldCom show the abuse of trust when they have taken $400 million out
of divisions reserve account to boost WorldCom consolidated income. When internal auditor
and her team pursued the matter, Scott Sullivan chief financial officer (CFO) informed the
internal audit unit that there was no problem and they shouldn’t focus on the issue. In case of
Enron, Kenneth Lay (CEO) was managed to sell a significant portion of his stock before the
stock price collapsed completely. In August 2001, he sold 93,000 shares for a profit of over $ 21
million. Sadly most Enron employee did not have the same chance to liquidate their Enron
investment.

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  Irresponsibility of employee
For example in late 1990’s Enron entered into a number of aggressive transaction
involving special purpose entities (SPEs) some of these transactions essentially
involved Enron receiving borrowed fund that were made to look like revenue, without
recording liabilities on the company balance sheet.
4.0 THE WAYS THAT INTERNAL AND EXTERNAL AUDITORS COULD HAVE
DONE TO PREVENT ENRON AND WORLDCOM FROM FALLING
4.1 INTERNAL AUDITORS
The internal auditor should;-
 Asses the framework for complying with corporate governance guidelines within
the company, including the risk assessment procedures,
 Review regular major risks identified including their chances of occurring and their
likely impact
 Require regular reporting from internal and external auditor and any other review
bodies, showing how the risk are being managed
 Receive and review internal audit assignment report and follow up information
 Discuss and consider any concerns of directors and internal audit staff
 Review annual financial statements and the results of the external auditors’
examination to ensure that the auditor have performed an efficient and independent
audit
 Receive and deal with the external auditors’ comments on management and ensure
that recommendations of internal and external auditors have been implemented.

4.2 EXTERNAL AUDITORS

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 Integrity means Auditor should be fair intellectually, honest and truthful in all
professional, financial and business dealings and relationships, also auditor should
strive for objectivity in all professional and business judgment
 The Auditor should be straightforward and honestly in performing professional
work, should be fair and should not allow prejudice or bias or influenced by others
to override objectivity, should maintain an impartial attitude and both appear to be
free of any interest that might be regarded, whatever its actual effect as being
incompatible with integrity, objectivity and independence.
 Professional competence and due care and technical standards auditor should carry out
professional service in accordance with the relevant technical and professional standard.
Auditors have a duty to carry out with care and skill the instruction of the client or employer
as far as they are compatible with the requirement of integrity, objectivity and independence.
 Auditors have the responsibility of reviewing a corporate governance statement for any
inconsistencies with other information contained in the annual report. If any inconsistencies
found the auditor may either issuing a qualified audit report or unqualified audit report but
with emphasis of matte paragraph.
 Auditor should have an extensive understanding of client business, industry and knowledge
about the company operation is essential for doing an adequate audit. Obtain knowledge of
clients business its financial transaction(complexity of transaction) review the company
policies; these include authorization for disposal of a portion of the business, credit policies,
loan to affiliates and accounting policies for recording assets and recognition of revenue,
basic policy decision must always be carefully evaluated as part of the audit to determine
whether management has authorization from board of director to make certain decision and to
be sure the decision of the management are properly reflected in the statement. Identify
related parties that are important to auditor because they will be disclosed in the financial
statement if they are material. General accepted accounting principles require discloser of the
nature of the related part relationship, description of transaction.
 Also auditor should evaluate the need for outside specialist and obtain information about
client legal obligation. Auditor should review internal control of the client to find out how the
internal controls operate. The review is done by interviewing client personnel, examine
procedure manual, the flow of document and record by the use of flow chart and narrative
description and using an internal control questionnaire.

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 Also the auditor should evaluate the existence of control and weakness then if there
any weakness, to comment/advise the client to the problem. Auditor should
maintain an altitude of professional skepticism throughout the audit (ISA 240). This
means that the auditor needs to recognize the possibility that a material
misstatement due to fraud could exist.

5.0 CONCLUSION

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Once the principle of Corporate Governance under Organization for Economic Co
operation and Development (OECD, 1999), and many of the principles displayed
similararities to the Cadbury Code (1992) will be adhere such as ensuring the basis for
an effective Corporate Governance framework; clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement authorities;
the right of shareholders and key ownership function, the equitable treatment of
shareholders; the role of stakeholders in corporate governance and disclosure and
transparency and disclosure in terms of corporate reporting and audit, the role and
responsibilities of company boards of directors. If it has been followed will improve
good corporate governance hence the collapse of Enron and WorldCom and other
company in the world will not occurred.
The following are the some of the code of best practice of Corporate Governance:-
Sect 1(A.1) The Board (Main principle)
Every company should be headed by an effective board, which is collectively
responsible for the success of the company. (Jill Solomon and Aris Solomon , 2004 pg
251)
Sect 1 (A.2) Chairman and chief executive (Main principle)
There should be a clear division of the responsibilities at the head of the company
between the running of the board and the executive responsibility for the company’s
business. No one individual should have unfettered power of decision. (Jill Solomon and
Aris Solomon, 2004 pg 252)
Sect C.2 Internal Control (main principle)
The board should maintain a sound system of internal control to safeguard shareholder’
investment and company’s asset. (Jill Solomon and Aris Solomon, 2004 pg 261)
Sect C.3 Audit Committee and Auditors (main principle)
The board should establish formal and transparent arrangement for considering how
they should apply the financial reporting and internal control principles and for
maintaining an appropriate relationship with the company’s auditors. (Jill Solomon and
Aris Solomon, 2004 pg 261)

References:

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1. Cadbury, A. (2002) Corporate Governance and Chairmanship; A personal View,
Oxford University press, Oxford.
2. Cadbury Code, The (December 1992) report of the committee on the financial
aspect of Corporate Governance; The code of Best Practice, Gee Professional
Publishing, London
3. ACCA (2000) Turnbull, Internal Control and Wider Aspect of risk
(commissioned by the Association of Chartered Certified Accountants’
Educational Trust, London.
4. CEPS (1995) Corporate Governance In Europe (CEPS Working Party report
No.12) Brussels
5. Corporate Governance Forum of Japan (1999) ‘Corporate Governance Principles
– a Japanese view’, Corporate Governance; An international Review.7 (2), April.
6. Corporate Governance Handbook, The (1996) ‘Supplement 1 on operating and
financial review ‘Gee Professional Publishing, London
7. Greenburg Report, The (July 1995) Directors’ remuneration (report of study
group chaired by Sir Richard Greenburg), Gee Professional Publishing London
8. Hampel report, The (1998) the final report, The committee on the Corporate
Governance and Gee Professional Publishing, London.
9. Solomon, A. and Solomon J (2004) Corporate Governance and Accountability,
John Wiley & Sons Ltd, The Atrium, Southern Gate, West Sussex PO198SQ,
England.

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