Agency Problems, Forecasting, and Corporate Governance
Week 7: Agency Problems, Forecasting, and Corporate Governance
Q.1 Do some research and find some historical or current real-life examples of agency problems. Will the measures discussed in the text help to prevent problems like your examples in the future? What else would you advise? You may provide examples of agency problems from your own experience. If you do that, be careful to provide enough anonymity so that you won’t get in trouble.
Q.2 write a reply for this article
I am a native Houstonian and I was 16 when the fall of Enron happened. I remember how huge this scandal was and personally knew families that were effected, and so my example of agency problems is Enron.
A little bit of a back story first. Agency Problems, Forecasting, and Corporate Governance
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Enron was a Houston based energy company that was founded in Omaha, Nebraska in 1985 by Kenneth Lay. The company was born after merging Houston Natural Gas and Internorth companies.
The Enron scandal was fraudulent accounting practices by the upper management that led to the bankruptcy of the company, basically they were “cooking the books”. By making the company look successful on financial statements the CEO, CFO, president of the company, and other top executive were continuing to get huge bonuses. These executives were using mark-to market accounting which is when you report your assets based on future value versus the historical value. This allows you to determine your own profit and basically there is no one to verify this.
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In the end Enron went bankrupt and thousands of hard working families lost everything that they had worked for over the years.
This scandal led to the Sarbanes-Oxley Act which was put into place to protect investors by making sure corporate disclosures are accurate and reliable based on the securities laws. This is one way to prevent future scandals. Agency Problems, Forecasting, and Corporate Governance
Also limiting bonuses to high executives can prevent future fall outs such as Enron.
Agency Problems, Forecasting, and Corporate Governance
