Internal controls and fraudulent business practice

After Enron, WorldCom, and other major corporate scandals that rocked America in the recent past, it seemed that nothing would surprise investors or regu-lators. However, almost everyone was shocked by reve-lations that as many as 20 percent of all public corporations may have allowed their officers and direc-tors to “ backdate” their stock option awards and ac-count for the awards improperly. Hardly a day goes by without another public company- fraudulent stock option practices being revealed. A stock option is an award granted under which key employees and directors may buy shares of the company- stock at the market price of the stock at the date of the award. As an example, assume that Company A- stock price is $ 15 per share on January 1, 2007. Further assume that the company- CEO is awarded 200,000 stock options on that date. This means that after a certain holding ( vesting) period, the CEO can buy 200,000 shares of the company- stock at $ 15 per share, regardless of what the stock price is on the day he or she buys the stock. If the stock price has risen to, say $ 35 per share, then the CEO can simultaneously buy the 200,000 shares at a total price of $ 3 million ( 200,000 times $ 15 per share) and sell them for $ 7 million ($ 35 per share times 200,000 shares), pocketing $ 4 million. Stock options are a way to provide incentives to executives to work as hard as they can to make their companies profitable and, there-fore, have their stock price increase. Until 2006, if the option granting price ($ 15 in this case) were the same as the market price on the date the option was granted, the company reported no compen-sation expense on its income statement. ( Under new accounting rule FAS 123R, effective in 2006, the re-quired accounting changed.) However, if the options were granted at a price lower than the market share price ( referred to as “ in- the- money” options) on the day the options were granted, say $ 10 in this example, then the $ 5 difference between the option granting price and the market price had to be reported as com-pensation expense by the company and represented taxable income to the recipient. The fraudulent stock option backdating practices involved corporations, by authority of their executives and/ or boards of directors, awarding stock options totheir officers and directors and dating those options as of a past date on which the share price of the com-pany- stock was unusually low. Dating the options in this post hoc manner ensures that the exercise price will be set well below market, thereby nearly guarantee-ing that these options will be “ in the money” when they vest and thus will provide the recipients with windfall profits. In doing so, many companies violated account-ing rules, tax laws, and SEC disclosure rules. Almost all companies being investigated “ backdated” their options so that they would appear to have been awarded on the low price date despite having actually been authorized months later. 
1. Would a good system of internal controls have pre-vented these fraudulent backdating practices? 
2. Why would executives and directors of so many companies have allowed this dishonest practice in their companies?
 3. Would a whistle- blower system have helped to pre-vent or reveal these dishonest practices?
In your text at the end of Chapter 11, you are to read Short Cases: Case 2. This case deals with management motivation and related-party transaction in the Enron case.
Read the following article: http://edition.cnn.com/2002/LAW/02/03/enron/index.html

Explain how this article illustrates that management motivation and related-party transactions are indicators of this fraud. 
Your essay must be at least 200-300 words in length. If using outside sources all source citation should adhere to the guidelines of the APA style guide.