When Enron failed in 2001 and Lehman Brothers went bankrupt in 2008, it brought to light the issue of financial accountability and management. The actions of these two companies caused a negative ripple effect across the United States and worldwide. So it may be of value to analyze the need for financial accountability and management, and to learn to whom companies are accountable, and why.
“Financial accountability and management” refers to the rules that businesses (both large and small) must follow to be accountable to their stockholders and stakeholders and the general public. In recent times, the issue of financial accountability has come to the forefront due to a number of high-profile scandals.
The Enron Scandal
In 2001, the accounting practices of Enron, a major U.S. firm, came into question, and it was revealed that the company and its accounting firm, Arthur Andersen, had been fudging numbers for years. Many of the company’s debts and losses were not being reported. Enron went bankrupt and brought a lot of people down with it. The Enron scandal caused millions of dollars in losses and thousands of lost jobs. Employees lost their pensions, their savings and their kids’ college funds, not to mention their jobs.
The fallout from the Enron scandal also reached to other companies. Arthur Andersen, one of the top five accounting firms in the world at the time, folded. The telecommunications giant Worldcom went bankrupt, and was later acquired by Verizon. The effects of the lack of financial accountability and management at Enron were far-reaching, and devastating for many.
In 2008, Lehman Brothers, a global financial-services company, went bankrupt. This came as a huge shock to shareholders and the general community, who falsely believed that the multibillion-dollar company was financially solid. The company’s stocks declined sharply when people started to hear of its troubles.
The subprime mortgage crisis was a major factor in the failure of Lehman Brothers, as was poor financial management and accountability on the part of Lehman Brothers’ management. Managers refused to forgo multimillion dollar bonuses, even as the company was tanking. The business managers at Lehman managed the company’s finances very poorly. The entire situation was a testament to the need for financial accountability and management in major corporations.
To Whom Are Companies Accountable?
Financial accountability and management is necessary because of the number and variety of people who are affected by the behaviors and actions of businesses. One group of people who need to know what is going on are the employees. People who worked 10, 20 and 30 years or more for Enron and Lehman Brothers were blindsided by the failures of these companies. Most lost their entire life savings. Employees deserve to know what is going on in upper management, and with the company as a whole, well in advance of serious problems.
Shareholders also need to know what is going on with a company in which they are investing. Their money depends on the financial strength of the company. Finally, the general public also has a right to know the dealings of a publicly traded company, because in the case of failure, they could be responsible for bailing out the company with taxpayer money.
It’s clear that the issue of financial accountability and management is of paramount importance in today’s society due to a number of high-profile businesses failures. In the long run, poor financial accounting and management practices hurt the company, the employees, the shareholders and the general public. In the future, it is likely that the government will more closely regulate major corporations that are similar to the now-defunct Enron and Lehman Brothers, by establishing more rules about financial accountability to avoid future problems.