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3Corporate
Failures
M Bhasin, author of “Corporate The case studies revealed numerous Implementing the regulatory and best
accounting scandal at Satyam: A case governance issues, including inter alia practice guidelines for good corporate
study of India’s Enron”, stated that the following: governance has been a costly and
audits would only detect approximately cumbersome exercise for most
10% of frauds. The Association of • Non-independent board and audit companies. The implementation of
Certified Fraud Examiners maintains committee members, for example “better” governance structures has
that audits are ineffective although it is where a CEO fulfilled multiple roles become a checklist exercise to ensure
the most widely used mechanism to in various committees compliance.
detect fraud and prevent losses.
• Inadequate governance structures, The major risk still being observed
Bridging the expectation gap is for example, lack of board during various forensic investigations
therefore a process of creating committees or committees indicates that the mind-sets of
awareness among investors and consisting of a single member management and those tasked with
shareholders of the scope of the governance have not really changed.
financial statement audit and the value • Inappropriately qualified members, Some members of governance
it provides as well as what it cannot for example, family members structures are not aware of the
provide. Auditors are not required holding board positions or audit onerous positions that they hold and
to analyse all non-financial data of a committee members not having the full extent of the responsibility and
company, some of which could indicate appropriate accounting and financial accountability ascribed to them.
fraud risks. qualifications or experience to
analyse key business transactions Pressures present when
Corporate governance fraud occurred
failures • Ignorance by auditors, regulators,
analysts etc of the financial results The pressure cooker syndrome
Corporate governance was also touted and red flags considers the internal and external
in many instances as the main reason pressures that the leaders of
for corporate failures. Attempts at • Management, who deliberately organisations suffering corporate
curbing these failures in the form undermines the role of the various failures endured, putting some of
of more stringent legislation and governance structures through the the responsibility at the door of each
regulation does not appear to have had circumventing of internal controls stakeholder, banking institution, analyst
the desired impact. Due to the various and making misrepresentations to and the public that missed the red flags.
causes of corporate failures, corporate auditors and the board
governance failures cannot be regarded The committing of fraud is intended to
as the sole contributing factor to It therefore appears that more benefit the organisation, for example
corporate failures. regulation has not resulted in overstating profits, but may benefit
management through bonuses based
more effective governance on profitability.
over corporates.
