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Enron scandal - reasons, discovery and implications.
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| Submitted: Mon Dec 22 2003
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Enron scandal: reasons, discovery and implications. 1.- REASONS Scandals such as Enron, Andersen and WorldCom have occurred because their managers, who should have made decisions consistent with the objective of maximising shareholders wealth1, did not act in the best interest of their shareholders. That is what is called the agency problem. Agency problems are created when there is a divergence of ownership and control in a company; shareholders appoint management (agents) to run the company. That leads to discrepancy of goals and asymmetry of information between the two parties and then agents-managers try to maximise their own wealth. Agency problems are reduced if shareholders are able to effectively monitor the activities of the company's managers (by means of an Audit Committee). Other companies may choose to include incentives in managerial contracts to encourage goal-convergence and deal with the agency problem. But the problem between managers and shareholders is not the only agency problem...
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