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FIN101 – Discussion 1

“Enron of Saudi Arabia: Corporate Accounting and Auditing Failures”

– Ayman Mohamed Zerban

Accounting Department, College of Business Administration, University of Business and Technology, Jeddah, Saudi Arabia

Article: https://www.scirp.org/pdf/OJAcct_2017111715153275….

Key Points in the Article:

The effects of misleading financial information are tremendous. In Saudi Arabia, MMG (Mohammad Al Mojil Group) stock was offered in the stock market at 20 dollars, and a few years later, it is 30 cents while Etihad Etisalat, known as (Mobily) was nearly 20 dollars in 2012 and it reaches nearly 5.3 dollars on 12th January 2017.  Managers sometimes try to get maximum benefits by presenting false information related to the financial performance and financial position of companies.

Recently scandals shed light on the applications of corporate governance rules and whether accounting is a tool for decision making that helps investors, or it is enhancing the greed of management by presenting misleading financial numbers. Fraudulent financial information can impact users of financial information to make wrong financial decisions.

The devastating results of Enron’s improprieties affected employees’ jobs, retirement funds as well as complete destruction of share values. Subsequently, the former Treasurer, Ben Glisan, pled guilty to criminal conspiracy and for which he received a prison sentence (Enron, 2006). Mr. Fastow, CFO, also pled guild to “fraud, money-laundering and conspiracy,” for which he received a 10-year prison sentence and was forced to pay $24 million. Roughly twenty other Enron executives have been charged with felonies, including Kenneth Lay, former CEO.

Corporate financial scandals have a negative impact on the value of organizations that are committing fraud.

Questions:                                                                                           3 Marks

The Author states, “Strengthening corporate governance, as well as more restriction to managers, will help in regaining the confidence of stakeholders.”

1. As a manager, do you agree with the above statement? Why?
2. Explain why ethics is an appropriate topic in the study of corporate finance?

replay 1 : I agree with what was said above, as good corporate governance has become a major focus area for companies to position themselves positively in order to withstand the challenging economic climate, some of the benefits of good corporate governance include:

Builds Morale, Reputation and Legacy: Implementing actions that support good governance enhances corporate identity as your stakeholders and potential investors trust increases levels of trust in you, which in turn allows you to develop stronger, long-lasting relationships.

Increases the success rate of financial performance and enhances sustainability: Implementation of a good governance protocol aims to assist in the ability to quickly identify problems as well as make quick decisions to solve these potential problems and thus reduce the possibility of a crisis and the cost that you bear.

Creates a Greater Ability to Attract and Retain Talent: Great emphasis has been placed on culture as a major contributing factor to the company’s success. Maintaining transparency surrounding fairness, accountability, and operations, gives your employees a greater sense of responsibility and awareness of where they are to create value within the organization.

Create an effective framework aimed at achieving business objectives: Decision making that takes into account key stakeholders such as employees, suppliers and society alike, has created a broader vision of successful outcomes. Providing a percentage of valuable participation to each stakeholder creates a more accountable culture, which generates a higher potential for reaching goals within the organization.

It creates more opportunities to gain a competitive advantage: each industry is either constantly developing or has the ability to develop at a certain point; Adopting good governance and creating an environment in which its practices can be sustained is vital to ensuring your organization is able to adapt to change, thus providing a greater competitive advantage and opportunity for survival.

Creates Investment Opportunities: An organization that represents stability and reliability increases their chances of attracting high-end investors, as well as increasing their chances of borrowing money at a better rate.

It provides a practical way to guide decision-making at all levels: The ability to make informed decisions can quickly improve performance and reduce the effects of potential failure. One way to enhance this type of decision-making power is to ensure that information is readily available to key stakeholders, i.e. a culture of transparency.

From the above it can be concluded that strong corporate governance practices can increase the effectiveness and efficiency of business operations by instilling values that stem from leadership throughout and that have the potential to bring significant benefits to the organization.

I think ethics is one of the most important criteria that must be taken into account when studying corporate finance

To ensure that companies and professional investors have the right intentions and new or established regulations are implemented, companies nowadays have to undergo annual or periodic due diligence monitoring and need to record all the transactions they have made. The company needs to have open books and be able to explain how their assets are earned and why they have debts. Looking at the professional investor side, most investing companies require their employees to attend an ethical class, to teach them how to invest ethically and to show the consequences of unethical behavior. Also, investors can’t invest in whatever they want anymore. There are new rules for different types of shares. Before the financial crisis, investors could invest in stocks without having the funds to cover their investment. When the crisis erupted, investors could no longer repay their debts, which led to a huge loss for banks and customers. For this reason, investments must have a guarantee. There are still types of stocks that have less restrictions, such as hedge funds, but are only traded by a limited number of investors. Currently, the CFA Institute maintains and enhances the Code of Ethics and Standards of Professional Conduct in the financial industry.

replay 2: The Author states, “Strengthening corporate governance, as well as more restriction to managers, will help in regaining the confidence of stakeholders.”

• As a manager, do you agree with the above statement? Why?

depending on the total subject and specially the statement above ,as a manager i’m totally agree with the author. strengthen the corporate governance leads to get more stakeholders in my company because i’m really provide a clear vision of my financial performance to make them predictable in their own earnings as smooth as possible and build a strong trust between my company and stakeholders when its built at the base of monitoring by the board of directors and accounting information ,that’s what the corporate governance does ,is to increase the disclosure of the corporation activities and help the investors to not fall in a fraud or a risky experience .at the framework of the corporate governance is to provide the foundation in managing companies and its relations with stakeholders at the principle of transparency that maintains the essential trust for business success.

• Explain why ethics is an appropriate topic in the study of corporate finance?

we all know that ethics must be exist in every manger because it’s the factor that affects the reflects the way you implementing your corporate finance and without it will be hard to deal with any corporate .a good intends make the manager see the life in a right way that enhances the stakeholders’s confidence of investing with credibility, transparency , and legally environment that results a positive range to attract them depending on the good reputation and be far distance away from troubles. manager’s ethics can save the stakeholders rights of being fraud or stolen or using in unprotected way. with ethics ,managers will deals with issues and make the right decision rely on ethical judgement.