Internal Auditing Paper

BUAC 786

Internal Auditing I: Conceptual and Institutional Framework

Presentation Paper Work

Corporate Governance and External and

Internal Controls: The Case of the

Baltimore and Ohio Railroad, Circa 1831

Professor Elizabeth Folsom

Professor Alan Siegfried

Group C

Xintong Wang

Yi Li

Jing Liu

Ziyu Han

Anand Rakesh

Guoxin Zhou

Wenyang Cao

February 8, 2014

Introduction

The case talks about Baltimore and Ohio railroad Company and the agency and corporate governance problem faced by this “public-private” enterprise.

During early 1800s Baltimore enjoyed a unique geographical advantage of being the closest port to the Ohio and Mississippi river Valley . Goods were also transported across the United States through east-west road, which further magnified Baltimore’s importance. However with the opening of Erie Canal in 1825, Baltimore’s advantage weakened since Erie canal connected Ohio and Mississippi river Valley to New york city. Further, transporting goods through water was much cheaper than transporting goods through east-west road. Baltimore’s position was further threatened by the opening of Chesapeake and Ohio Canals.

To counter these threats, Baltimore decided to come up with an ambitious idea of connecting Baltimore to Ohio river through a railed road. Since much was at stake for Baltimore and a large sum of money was needed to achieve this vision, State of Maryland and City of Baltimore provide 50% of financing and thus owned 50% of Baltimore and Ohio Railroad. The remaining 50% of stake was owned by individuals. It was also agreed upon that the State of Maryland will retain the right to set rates for passengers and cargo. In return the State will not tax the railroad.  Locomotive technology was new, terrain was difficult and this kind of venture was never tried before. All of these things made this project a risky but necessary venture.

Question 2

In Joshua’s initial assessment of the B&O investment, what factors should he...