Corporate Governance Analysis Essay Example

entering into long-term fixed rate leases for network capacity that resulted in hefty termination fees to avoid lease payments.

World faced challenges in the telecommunication industry, with high competition and low demand, leading to a decrease in prices and the company struggling to maintain E/R ratio. In an effort to increase revenues, World faced pricing pressures and high committed line costs, possibly making it less attractive to investors. CEO Beers gave an emotional speech to senior managers about the company's dire situation and the potential loss of everything. This motivated managers to boost revenues and stay in their jobs. As a result, Sullivan decided to make strategic entries to achieve targeted performance while also paying for unused line capacity if customer expectations were not met.

Sullivan and his two staff members utilized accounting tactics such as accrual releases and capitalization of line costs to manipulate figures and create the appearance of a stronger company position. This is due to pressures such as market expectations, economic recession, and industry competition leading executives and managers to resort to "cooking the books." The BASAL 3063 Integrated Case Study 3 examines the boundary between earnings smoothing/management and fraudulent reporting. Earnings management involves the use of specific accounting methods such as accelerating expenses or deferring revenue transactions, while fraudulent financial reporting is an intentional act by executives to conceal financial information and deceive others about the company's wealth. Income smoothing is a primary goal of fraudulent reporting. Earnings management is legal whereas fraudulent reporting is not.Fraud reporting is when management manipulates or omits important financial figures to artificially increase or decrease revenues, profits, or earnings per share. Fraud usually involves

substantial mistakes that can drastically change the bottom line or stock price of a company. According to BEAK_ 3063 Integrated Case Study, fraudulent reporting occurs when managers use financial structuring transactions and alter financial reports to mislead stakeholders about a company's economic performance or influence contractual outcomes. Both income smoothing and fraudulent reporting can prevent investors and creditors from receiving consistent and reliable financial information, leading to misleading results. If caught committing fraudulent reporting, companies may have to pay substantial fines and compensate their shareholders. The line between income smoothing and fraudulent reporting can be blurred. It is unclear why the actions taken by World managers were not detected earlier.What measures can be implemented to prevent or promptly identify the types of misconduct that occurred at World? The reasons why the actions of World's managers went undetected can be divided into internal and external factors. The top management, including the CEO, CUFF, and controller, were involved in fraud, and as the heart of the company, they could leverage their authority to serve their self-interests and cover up their tracks. Additionally, subordinates had limited avenues to report fraudulent activities if top management was involved. The corporate culture at World played a role in fostering fraudulent behavior due to its flawed nature. Employees were not allowed to question their superiors and were required to follow instructions without fail. Furthermore, every department had its own set of rules and management style, making it challenging to have a consistent operation. In order for a company to function effectively, communication is crucial as it allows different departments to exchange information, gather new updates, and make decisions.The poor and inadequate communication

in World is illustrated by the problematic relationships between employees and supervisors, departments, internal and external auditors, and boards of directors. Information was withheld, leading to a lack of transparency within the company. Additionally, the mindset and awareness of employees played a significant role. Employees were hesitant to challenge their supervisors or report suspicious activity due to a fear of consequences. Furthermore, their understanding of fraud was limited, making them vulnerable to manipulation by management.

External factors, such as the role of the auditor, are also important in a company. An auditor is responsible for scrutinizing financial reports and upholding principles such as independence, objectivity, integrity, and competency. However, Arthur Anderson, the auditor for World, failed to detect signs of fraud despite their responsibilities. They issued unqualified audit reports for several years despite indications of wrongdoing.Arthur Anderson's incompetence during audit work highlights their ignorance. To prevent the types of actions seen in the World case, it is recommended to establish processes or systems that can detect or prevent them quickly. This includes implementing a code of corporate governance, proactive auditing, whistle blowing policies, enhancing internal communication, and conducting annual performance auditor reviews. It is important for the company to comply with and improve its corporate governance code as it serves as a mechanism for monitoring corporate actions, policies, and decisions. This will enhance overall efficiency and transparency. By implementing a whistle blower policy, the company can minimize misconduct and fraud risks. Employees are often well-informed and sensitive to company changes. Confidentiality must be maintained for whistle blowers, and rewards should be given for credible information.

The complex nature of the company may lead to

requesting quarterly or half yearly proactive audits in order to prevent and detect fraud at an early stage. Enhancing communication between the audit committee, internal auditor and external auditor would also aid in exchanging information, expressing opinions and preventing third party interference. Board meetings should involve outside directors who can question management decisions. An annual review of the company auditor should be conducted by the audit committee based on their fundamental competencies and performance. If the auditor is deemed unfit for the position, their service should be terminated and another appointed in the board meeting. A flawed company culture, employee mindset, poor communication and collusion with auditors were contributing factors to fraudulent actions by managers going undetected earlier.

To prevent or quickly detect types of actions that occurred in World, actions such as enhancing and complying with corporate governance, implementing and encouraging whistle blowing policies, enhancing immunization, annually reviewing auditors' performance, and conducting proactive audits should be taken. In the case of World, it is questioned whether the external auditors and board of directors were blameworthy. According to SIS 200, an audit should be designed to detect both material errors and fraud in financial statements. However, Arthur Andersen, as World's external auditor, failed to carry out its duties properly due to a lack of professional skepticism. They did not question the validity of the information recorded by General Accounting and relied on World's perceived strong internal control environment, which was actually inefficient. Therefore, Andersen overlooked serious deficiencies in the internal environment that made it difficult to detect fraudulent activity.