Enron dan Worldcom (Dot com stock market crash)- 2001

The Enron/Worldcom 'corporate collapse' were caused by executive misconduct and fraud and were directly attributable to inefficient corporate monitoring by the boards of directors. According to Haverkamp (2009,p.10), over-centralization of corporate management power to the chief executive officers have enabled them to limit supervision by the board of directors.

Enron Corporation was a Houston based company which business was centered on gas,electricity and communication sector. In 2000, its employees numbered around 21,000 people and registered a revenue of USD 101 billion. For six consecutive years, Fortune Magazine voted Enron America Most Innovative Company. It was also on Fortune's 100 best companies to work for in America list in 2000.Enron scandal involves Enron's management use of accounting strategies to misled Enron's board of directors, the companies shareholders and the general public concerning its financial status (Haverkamp, 2009,p.10).

Enron managed to appear to be much financially better off and more profitable than it really was by using several illegal accounting tactics. For example, in order to shift debts from Enron's books and to hide Enron's credit risks. Enron's management created special purpose entities (SPE). The top executives inside Enron knew about this whereas the investors and general public did not. The top executives perpetuate the fraud by engaging in insider trading. The general public were encouraged to buy Enron stock at high price while Enron's Chief Executive Officer (CEO) Kenneth Lay and other executives sold their shares.In the meantime the board of directors were oblivious on what is happening at the company (Haverkamp, 2009,p.10). In October 2001, however, the scandal was exposed. Enron had to announce a restatement of earning amounting to several billion dollars. As to who should be brought to justice, the events unfolded after the exposure of the scandals say it all. In the aftermath of the scandal, Enrons executives were charged for various offence including bank fraud, making false statements to banks and auditors, money laundering and insider trading (Haverkamp, 2009,p.11).

The WorldCom scandal was more or less the same as Enron. WorldCom management managed to carry out a cover-up of their declining financial status by means of fraudulent accounting methods. Again, the board of directors were oblivious to the happenings in the company (Haverkamp, 2009,p.11) Enron and WorldCom scandals show that companys board of directors can be manipulated by management executives either by manipulating facts or by holding back crucial information. At Enron and WorldCom, though the crimes were committed by the management executives, the boards of directors have failed in their duty of ensuring competent supervision (Haverkamp, 2009,p.12).

In the wake of Enron and WorldCom scandals, the US Congress passed the Sarbanes-Oxley Act 2002. The gist of the new legislation is to make directors more duty bound to monitor management. Among other improvement, the Act requires that companies have an audit committee consisting solely of independent directors. Every member of the audit committee has to be on the companys board of directors with the task of monitoring auditing practice and financial management of the firm (Haverkamp, 2009,p.13).