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 SarbanesOxley 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).