Integrity is of utmost importance for a successful career in business and finance in the long run. Some believe that the world of finance lacks ethical considerations. Whereas the truth is that such issues are prevalent in all areas of business.
The business environment in much of the world is reeling from the revelation of several financial scandals in the past few years. The optimism of the turn of the century has been replaced by scepticism and distrust. It will be discussed as to how we landed ourselves in this situation, what is being done to correct it, and what the future holds for us. Though Enron has been used as the poster-child for this purpose, breakdowns in accounting and corporate governance in Enron as well as in other companies will be discussed.
Some companies that have encountered financial reporting problems will be discussed along with the role of auditors (including Andersen’s role in Enron), the regulatory environment, some of the causes of the problems, and the current and possible future outcomes.
Ethics and Accounting
Ethics (maintaining fair and true statements) is a key part of financial reporting. For shareholders to trust a company with money, they must feel confident in the company’s financial reporting. Financial reporting presents all data relating to the entity’s current, historical and projected health meaning investors and shareholders rely upon the financial data available for making informed and educated decisions. To help entities comply with business regulations and maintain financial reporting, shareholders can trust the existing organizations designed to monitor different aspects of the accounting world.… Read the rest
Lehman Brothers Inc operated at a wholesale level, dealing with governments, companies and other financial institutions. Its core business included buying and selling shares and fixed income assets, trading and research, investment banking, investment management and private equity.
In September 2008, Lehman Brothers filed for chapter 11 bankruptcy protection. The company became insolvent with finances totalling $639 billion in assets and debt worth $619 billion; it became the largest bankruptcy in history. The company employed 25,000 employees worldwide including 5,000 and was the fourth largest US financial bank at the time of the bankruptcy. It also became the biggest victim of the subprime mortgage disaster that had put the global financial sector into meltdown.
In 1844 23 year old Henry Lehman the son of a cattle merchant immigrated to the United States from Rimpar, Bavaria. He set up home in Montgomery, Alabama where he opened a dry-goods shop. In 1847, following the arrival of his brother Emanuel Lehman, the firm became “H. Lehman and Bro.” With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and “Lehman Brothers” was founded.
The brothers expanded their dry goods store into a cotton business after noticing the potential the highly valued cotton had, even accepting cotton as a payment for products within their shop. Cotton trading became a key part of their business and they eventually relocated to New York, there Lehman became a member of the Coffee Exchange and then on to the New York Stock Exchange in 1887.… Read the rest
Early Days of Sunbeam
Sunbeam was formed in 1897 as the Chicago Flexible Shaft Company. The company originally manufactured and sold agricultural tools. By 1910 the company introduced the iron as its first electrical home appliance. Later other appliances such as mixers, toasters and coffeemakers were introduced. Sunbeam came to be known as a recognized designer, manufacturer and marketer of innovative consumer products aimed at improving lifestyle. In 1946, the company changed its name to Sunbeam Corporation. In 1960, Sunbeam acquired Oster which allowed Sunbeam to expand into other home products such as hair dryers and health and beauty appliances. The company later added electric blankets, mattresses, humidifiers, vaporizers and thermostats, among other innovations. Sunbeam soon became the leading manufacturer of electric appliances. The company survived the 1980’s as the US economy suffered, and many companies underwent acquisitions, restructuring, and closings. In 1981, Allegheny International acquired Sunbeam, and the company retained its name. In this acquisition, John Zink, manufacturer of air pollution-control devices and Hanson scale, manufacturer of bathroom scales, were added to the business. Unfortunately the undertow of the economy consumed the company as well, and Allegheny was forced into bankruptcy in 1988.
In 1990, Michael Price, manager of Mutual Shares, corporate turnaround executive Paul Kazarian, and hedge fund manager Michael Steinhardt purchased the bankrupt Sunbeam. Under their leadership, Sunbeam went public as Sunbeam-Oster in 1992. Despite these obstacles, the board at Sunbeam felt that a profitable future was ahead, and they just had to search for someone to lead them in the right direction.… Read the rest
The Body Shop (TBS) has developed 2500 stores in 60 countries with a range of over 1,200 products in approximately 30 years, and is the second largest cosmetic franchise in the world. After the first TBS’s outlet founded in 1976, the company has experienced rapid growth and with expanding rate of 50% annually. When its stock first obtained a full listing on the London Stock Exchange, its price increased by more than 500%. In 1999, TBS was even voted as the second most trusted brand in UK by the Consumers Association. The founder, Anita Roddick had received numerous awards including Dame Commander of the British Empire for her contributions. TBS’s success is hard to observe from the extrinsic value but the ethical value which make the success of TBS so legendary and inspiring.
Anita Roddick, founder of TBS first entered the industry by using £4,000 to open a small stand-alone shop of natural ingredient cosmetics and skincare products. Through her early travel experience, she had seen the potential of those natural ingredients being produced as cosmetic and skincare products commercially. Due to the budget constraint, Roddick used the urine sample containers purchased from local hospital as the containers of her products. The shop’s walls are painted with dark green to cover the damp. To save cost on advertisement, Roddick spread aroma in front of her shop to gain attention of the patrons. The strategy pursued was a huge success and another shop was able to be opened before the first year ended.… Read the rest
Founded initially as a small company named Long Distance Discount Services in 1983, it merged with Advantage Companies Inc to eventually become WorldCom Inc, naming its CEO as Bernard Ebbers.WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions spending almost $60 billion between 1991 and 1997, whilst also accumulating $41 billion in debt. During the Internet boom WorldCom’s stock rose from pennies per share to over $60 a share as ‘Wall Street investment banks, analysts and brokers began to discover WorldCom’s value and made “strong buy recommendations” to investors.’ During the 1990’s WorldCom evolved into the ‘second-largest long distance phone company in the US’ mainly due to its aggressive acquisition strategy.
A cycle became apparent in the marketplace where an acquisition was seen as a positive move by the analysts leading to higher stock prices of WorldCom. Consequently this allowed WorldCom to gain greater financing and backing for further acquisitions repeating the cycle. One of the most significant and largest acquisitions was that of MCI Communications Inc in 1998, becoming the largest merger in US history at that time. British Telecommunications were also in the running for the takeover of MCI Communications making a $19 billion bid, when Bernard Ebbers the CEO of WorldCom decided to place a counter bid 1.8 times higher than that of what BT had placed, at $35 billion. Evidently this takeover was agreed and the merger between the two brought MCI WorldCom into second position behind that of AT&T in the telecommunications market.… Read the rest
Public Company Accounting Reform and Investor Protection Act of 2002 commonly known as Sarbanes-Oxley Act or SOX Act was enacted by US Congress to handle concerned issues surrounding business management and financial reporting as a way to restore and maintain investor confidence in the US capital market grappling with corporate scandals and accounting irregularities. With the integrity of the market further compromised by the failures of Enron’s bankruptcy and WorldCom, the act considered as the most significant corporate regulatory reform since the Securities and Exchange Act of 1934, sought to curb the ongoing-spectacular corporate failures and scandals occurring in North America. The WorldCom’s failure was the last straw, prompting the speed passage of most drastic legislation to affect the accounting profession since 1933.
The major purpose of this act is to provide reliable and accurate information to the investors. The formation of this act had to undergo a detailed process of iteration and redaction to ensure its comprehensiveness. This act deters reporting misleading and fraudulent financial information of corporations, by establishing increased sense of responsibility on the administrative bodies and directly to the management. Although prior to the act, the financial statements of some companies were perceived to be sceptic by a few, but the significance of the inception of an act was prompted by the implausible failure of Enron and WorldCom. They were the leading companies in their respective industry and in early 2000s; they filed bankruptcy on divulgence of their accounting fraud. The divulgence of their accounting fraud raised questions over the credibility and reliability of the financial statements of the companies that existed in the market.… Read the rest