The Relation Of Corporate Governance And Financial Crisis--The Case Study Of Enron

Enron crisis had happened during 2001, and the financial crises of many companies and conglomerates in Taiwan, which were uncovered in turn since the middle of 1998, are still not quite at rest of yet to date. Due to the Asian financial crisis from mid-1998 a series of severe financial difficulties have hit enterprises in Taiwan, including those listed on the Taiwan Stock Exchange and Over-the Counter Stock Exchange (OTCSE). This situation created a severe impact on Taiwan's economy. The research conducts the case study to discuss and to analysis the related financial crisis issues. This research was made to survey the cause of Enron crisis with key businesspersons as well as CPAs, pinpoints corporate governance factors. The goal is to explore the relation of financial crisis and corporate governance factors. In addition, it further explores the cause of the making of financially distressed companies and comments on relevant suggestion. For practical purpose, the related reports and documentation for the crisis are collected and analyzed. We find that the reasons for the crisis are related to the issues of corporate governance, especially the abnormal relationship between the boards and executive team and management corruption or moral hazard. The financially distressed companies' internal and external supervising mechanisms, namely, the Supervisors and accounting auditor all fail to function effectively. The critical causes of the resent year's corporate financial distress included improprieties taken by high-level management, overinvestment with excessive financial leverage, improper investment, misappropriation of corporate funds, and attempts to manipulate stock value. This situation implies the lack of sound corporate governance in various enterprises. Their causes are primarily due to ineffectiveness of corporate governance factors as well as dysfunction of Directors and Supervisors. Based on the findings of this study, as to the structure of corporate governance factors, this study suggests what can be done to prevent these difficulties. The research points out that the principles and spirits of corporate governance are very important to avoid the financial crisis. The principles of corporate governance included the responsibility of boards and more transparency of business. Government agencies should increase the efficiency in taking investigative actions against the person who is responsible for the crisis, and preventing or punishing those guilty of mismanagement that leads to financial distress. CPAs should possess sufficient ability and capability to detect the factors leading to the corporate crisis.