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 Scandal
The 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 agains
the 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.