In the following questions, carefully study the cases presented and then answer the questions that follow:
Mr. X started as an energy producer in 1990 and later on moved into energy trading. The company that was making huge profits by the year 2000 and was also rated as one of the largest company on the Fortune 500, unexpectedly collapsed in 2008. Mr. X had impressed the public by entering into a unique concept of trading energy, and it deceived the public with false profits.
Also, the company had huge debts, all of which were not shown on the company accounts. To hide these large amounts of debt and losses, Mr. X had made many partnerships with companies that were run by Mr. X’s executives who profited from this deal and deceived the public. It used creative accounting techniques and manipulated its books which kept the investors in dark and led to an all time rise in its stock prices.
But by August 2008, the existing CEO of the company resigned, and it reported huge losses in October 2008. By late 2008, it admitted that the company had been manipulating its books and showing inflated profits. Mr. X in December 2008, filed for bankruptcy and later the matter was investigated and within a short span of time, the company had large amounts of unpaid debt and worthless shares. It was also revealed that the top executives of the company made huge profits by selling Mr. X’s shares at the right time, thereby leaving all the losses to be borne by other investors.
(a) Analyse the above case in terms of importance of corporate governance.
(b) Suppose you have been appointed for the task of auditing the account books of the company, what should be your course of action?
(c) What are the factors you would consider in reaching to the course of action?