Governance, Ethics, Risk, Control & Enron

• These study notes cover governance, business ethics, risk management, internal control, and the Enron Scandal.

Governance

• The process of decision-making and implementation (or non-implementation).
• In business, it is a structured process to identify the best employee for a role and the organization.

Business Ethics

• Applying ethical values to business behavior
• Relevant to individual and organizational conduct.
• Applies to all business aspects like boardroom strategies, employee/supplier treatment, sales, and accounting.

Risk Management

• Identifying, assessing, and mitigating organizational threats or uncertainties
• Analyzes risks' likelihood and impact, develops harm-minimization strategies, and monitors measures' effectiveness.

Internal Control

• Practices that act as organizational checks and balances to mitigate risk
• Ongoing system of policies and procedures directed by Management.
• Examples of internal controls are the physical securing of assets like equipment, inventories, or cash, and the segregation of work duties among different people to reduce the risk of error or inappropriate actions.

Relationship of Governance, Business Ethics, Risk Management, and Internal Control

• Highly interconnected, each element supporting and reinforcing others.
• Ensures organizations operate effectively, ethically, and sustainably.

Real-World Scenario: Grab Motorcycle Rider

• Highlights the concepts of Governance, Business Ethics, Risk Management, and Internal Control in business operations.
• Grab App: This sets the destination, expected delivery time, and strategy.
  • Governance ensures the rider follows policies, delivering orders accurately and maintaining customer satisfaction.
• Business Ethics: The rider follows traffic rules, respects pedestrians, communicates courteously, and avoids shortcuts that compromise safety or quality.
• Business Ethics ensures the rider acts responsibly, prioritizes safety, and maintains customer trust.
• Risk Management: The rider prepares for and manages potential hazards.
• Risk Management prepares the rider for handling uncertainties like traffic, weather, or accidents, minimizing disruptions.
• Internal Control: the motorcycle is well-maintained, and has a fully functional dashboard.
  • Internal Controls ensure the motorcycle operates efficiently and provides timely feedback to avoid operational failures.
• Successful delivery requires good planning, ethical behavior, risk preparation, and operational efficiency.
• Organizations rely on governance, ethics, risk management, and internal control to achieve objectives effectively and responsibly.
• Failure in any component can lead to customer dissatisfaction and loss of trust.

Importance in Professional Settings and Career Growth

• Skills Framework for Accountancy guides individuals in career choices and skill upgrades.
• Solid knowledge impacts various professional roles, from entry-level to senior leadership

Financial Accounting

• Involves maintaining accurate financial records and statements.
• Includes recording and processing business transactions.
• Other activities include closing activities and corporate reporting.

Job level requirements

• Associates/Executive: Internal Controls Level 2; Professional and Business Ethics Level 3
• Senior/Senior Executive: Internal Controls Level 3; Professional and Business Ethics Level 4
• Manager: Internal Controls Level 4; Professional and Business Ethics Level 5; Management Decision Making (Governance) Level 5; Regulatory Risk Assessment Level 5

Governance and its Importance to Business

• the process of decision-making and the process by which decisions are implemented.
• Protecting stakeholder interests is a cornerstone of good governance and helps to avoid reputational damage, lawsuits, or operational disruptions.

Good Governance

• The process of directing a firm's affairs to uphold standards and protect stakeholder interests.

Corporate Governance

• The system of rules, practices, and processes by which corporations are directed and controlled.

Possible Stakeholders

• Owners/Investors
• Managers
• Leaders/Creditors
• Suppliers
• Government
• Employees
• Customers

Importance of Good Governance in Protecting Stakeholders’ Interest

• Stakeholders contribute to the organization's success (capital, labor, market support).
• Continued support, trust, and contributions influence sustainability and growth.
• Strengthen relationships with a fair treatment that leads to employees staying loyal and contributing to the organization.

Relationship of Bad Governance and Downfall of a Business

• Bad governance is a catalyst for business downfall.
• Issues like greed, fraud, and poor decision-making covered fraudulent reports.

Shares/Stocks

• Stocks/shares represent company ownership.
• Companies issue /shares to raise capital for expansion, research, or debt payoff.
• Stock price fluctuates based on company performance and supply/demand.

Case of Enron Corporation Scandal (2001)

• The Enron scandal resulted in billions of dollars in losses for investors, the bankruptcy of the company, and the end of many careers.
• A significant corporate scandal with far-reaching consequences for the energy industry, accounting profession, and corporate governance.
• Named "America's Most Innovative Company,” its stock price soared in the 1990s.
• Faced increased competition and relied on accounting practices to hide troubles as profits shrank. Arthur Andersen served as both auditor and consultant showing the conflict of interest.
• Arthur Andersen was guilty of shredding evidence and lost its license to engage in public accounting.
• Andrew Fastow was fired as CFO, stock plummeted from high of $90 per share to less than $12 per share

Key Contributing Factors to Enron's Downfall

Legal and Regulatory Structure:

• Enabled Arthur Andersen to consult and audit, built-in conflict of interest led to biased evaluation of their work.

Brief Background on Arthur Andersen

• Became one of the Big Five accounting firms by 2001.
• Reputation was shattered following involvement in the Enron scandal. A consultant provides advice and assistance while auditors examine financial statements for accuracy.

Conflict of Interest Emerges Providing Both:

• Consulting and auditing services makes the auditing firm has a financial incentive to overlook problems.
• Incentive to Overlook Problems: The incentive is to maintain future consulting business by keeping and covering problems
• Compromised Objectivity: Auditing firm objectiveness is compromised as they evaluate their own consulting.
• Pressure to Please the Client the firms fee pressure to retain both the lucrative consulting and auditing contracts.

Integrity

• Threat that a financial interest will influence a professional accountant's judgment or behavior.

Self-Review Threat

• The threat that a review of auditing the consulting is a compromised objectivity is hard to identity own errors and weaknesses
• Advocacy Threat:* Promotes clients and positions on accounting with personal feelings.
• Familiarity Threat: too sensitive or accepting based on the length and close relationship with clients leads to loss in professional skepticism.
• Intimidation Threat: The threat deters from objective acting as attempts to exercise undue influence over the accountant. Corporate Governance involves mind and persona the state of mind and personal relationships of managers, not a list of empty procedures and rules. Enron case was resulted result is the result of a growing and pervasive winking at the letter of the law Phrase "winking at the letter of the law" means to comply with wording law with disregarding their intent. Enron's downfall is the corporate culture for the separation of ethics associated from the individual ones. Employees lost jobs and retirement which caused distress in financial hardships. Investors stock became worthless the market and financial reporting. Creditors banks and financial institution suffered as the defaulted debts and Enron scandal was the affected business.

Accountancy Profession

• Highlighted the damages in accounting, highlighted standards and regulations ethical for stronger.

Enron Scandal in the Financial Reporting and Corporate Governance

• Sarbanes-Oxley Act of 2002 was the most significant regulatory.

Public Company Accounting Oversight Board (PCAOB)

• Creation provides the oversights the audits of public companies.

Increased and improved other regulations

• UK Corporate Governance Code accountability and transparency.
• EU Governance Initiatives: Implemented measures to improved risk.
• International Financial Reporting Standards standards greater on globe

Characteristics of Good Governance

• Participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and the rule of law.

Participation

• Key aspect is equal people are treated fairly.
• Collaboration of scientists, leaders, and stakeholders which allows to develop responses.

Rules of Law

• The new code of Philippines listed company was established to strengthen governance in invest.

Transparency

• Available information must be able access freely and affect other decisions and their enforcement.

Responsiveness

• Processes of service have to try for all stakeholders in short times.
• Example, Amazon, multiple access channels for their services and questions that will provide support.

Consensus Oriented

• Agreement between understanding of the historical.
• Infrastructure projects that affect benefit companies often get for agreements with benifits.

Equity and Inclusiveness

• Society is a good stake and not a part where society will not exclude.
• Ben and Jerry: Justice, social equity and justice which make them vocal and had an impact on the company.

Effectiveness and Efficiency

• Resources meet society needs as they meet resources.

Accountablity

• Accountability requires organizations including to public for stakeholders.
• It provides ensure all products and brands that consumers and environment meet the requirements.

Business Ethics

• Ethics is business becomes important on board which comes with organizational and global explosion. Globalization can bring different business ethics and cultures.

Application of Moral in Business

• Whether business practices and policies accepts
• Dilemma*
• Questions should omitted salesperson products client?
• Report account should accountants audit?
• To omit concealed manufacture tire safety cost?
• Resolution there is on business at end.

Student Reason

• The ability to deal with issues ethical in twenty first century for improved laws
• Help improve effects thinking maker decisions. Recognize organization and resolve fail people are recognized unethical.

Performance Stakeholder

• Exist because with relation who develop attain community, investor and employee.
• Trader was good ethical but insisted action was be done
• Balance of shareholders should be profit and benefit.
• The business recognition will then be ethical* • Factors affect business recognition after which have no standard and ethical Enron.

Practical Basis of Deicision

• Laws and regulations resolve issues standard government of responsible. Civil are duties and theft specific right breaking law actions.
• Business will avoid and resolve business.

Code of ethics

• Standards behaviour outlines by organization in context.

Precedents

• Often Legal alignment of ethics stands and right outlines.

Ethical Frameworks

• Universal Declaration of Human Rights is some ethical frameworks

Sustainable Development Goals (SDGs)

The 2030 Agenda:

• Blueprint and shared development
• Sustainable goals all states of united development economic to achieve. • Resolve ethics issues for relevant facts then apply questions.

Issues/Dilemma

Ethical:

Issue:

• Organization issues individual to be chosen ethical or in moral.

Determine

• Group who affect.
• Organizations code for consults code and conduct of ethics.

Example of Application of Basic Approach in resolving Ethical Issues/Dilemma

Accountant consultant client for services also.

1. Identitiy confidential and deliver ethical client ethical Business and Code of Ethics for this scenario