This report discuses about the Enron scandal of Enron corporation which is an American energy company based in Houston, Texas. It was basically publicized in October 2001 which resulted in bankruptcy of the company and the defacto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. Also along with being the largest bankruptcy reorganization in American history it was also cited as the biggest audit failure. This report also discusses the recognition and respond in a mature reflective manner to the ethical conflict and turbulence in their professional career and the workplaces and to understand the philosophical theories and professional body.
Enron was formed in 1985 by Keneth Lay after merging the Houston natural gas and inter north. Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high of US $90.75 per share in the mid 2000. Then as a result the US Securities and Exchange Commission started investigation, and a rival Houston competitor Dynegy dealt to buy the company at a very low price. The deal was a failed and on December 2, 2001, Enron filed for a bankruptcy under the chapter 11 in US bankruptcy code. The assets of $63.4 billion made Enron the largest corporate bankruptcy in US history (Sale, 2004).
Rise of Enron: Enron’s stock increased from the start of the 1990 s until the year end 1998 by 311%, only higher than the average rate of growth in the standard and poor 500 index. Then the stock was increased by 56% in 1999 and more 87% in 2000. By the December 31, 2000, Enron’s stock was at a price of $83.13 and its market capital also exceeded up to $60 billion, 70 times the earnings and 6 times the book value. In addition, Enron was rated as the most innovative largest company in America.
Causes of downfall Enron’s complex financial statements were confusing to shareholders and analysts. Also its complicated business model and unethical practices required that the company use accounting limitations to misrepresent earnings and to modify the balance sheet to indicate favorable performances. Moreover some business ventures proved to be disastrous. The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or the actions of lay. However in practices being ethically is not just about giving large number of charity’s money but recognizing and acting on potential ethical issues before they become legal problems are more important aspects to taking care of them. Enron collapsed and it was due to the unethical practices such as equivocation of taxes and fraud accounts practices. The Enron scandal fraud was one of the most significant collapse in the US because the failures of many savings and loan banks during the 1980s. This scandal facilitates the requirements for a close look at an ethical quality of the culture of business and of the business corporations in the united states. Various organization are needed to implement the ethics and integrity their corporates cultures and also into their definition of success. The unethical and illegal business practices at Enron resulted to the formulation of Serbanes Oxley act of 2002. This report will describe the illegal and unethical practices its impact on the stakeholders and lessons from the Enron case.
When the business ethics is replaced by the desire to get whatever ahead it takes, the good of the company suffers later on. Enron lastly brought down due to the constant allegations surrounding it. The practices of few people who are deprived of virtual ethics destroyed the name of Enron. Despite of behaving in unethical ways, the top executives who are engaged in the fraud should have the highest good sense to realize doing right thing which almost always bring about a drastic change in the long run. The right act is actually the one doing the most good. Also, in addition those with good character care equally for themselves and for others. But this behavior was nonexistent for the top level of executives. They definitely care much more about themselves than they cared about any other employee of Enron, or about Enron as a whole. This also evaluates that accounting a fraud is very unethical behavior and it was being engaged in by many top level of executives lacking the ethical behavior. They should have the moral character to run the business in an ethically proper way that was self-serving. Then as a result both the actions and consequences of the fraud have important implications for the failure of Enron. (Gledhill, Schneider, Schneider, Aiyer, and Shore, 2003).
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The main approaches for development and in acquiring relevant system for organization can be done by the management control this report focuses on the cultural environment surrounding Enron’s management control systems, and the influence of the powerful risk-taking culture on Enron’s controls. Robert Simons working on management control system, highlights on the needs to incorporate culture in understanding management control systems. A leading organizational psychologist Edgar Schein researched which suggests a strong link between executive leadership actions and the nature of an organization’s culture. Enron provides a copy of how insufficient attention to changes in leadership and culture can determine. While many companies might claim to have sophisticated management controls, the final effectiveness of such kind of controls is dependent completely on the organization’s culture and leadership.
THE ASSOCIATION OF ENRONS SCANDAL WITH ETHICAL CORPORATE GOVERNANCE AND THE SABANE OXLEY ACT -2002
After the prolonged periods of corporate scandals in the united states from 2000 to 2002 the Sarbanes Oxley act was enacted in July 2002 to restore investors’ confidence in the financial market and close loopholes that allowed public companies to defraud investors. This act had a profound effect on corporate governance in the US. The Sarbanes Oxley act needs the public companies to make their audit committees strong and to perform the internal controls tests, make directors and officers personally liable for the accuracy of financial statements and to strengthen disclosure. The Sarbanes Oxley act also establishes tight criminal penalties for securities fraud and changes how public accounting firms are operated. The Sarbanes Oxley act of 2002 was passed by congress in response to widespread corporate of fraud and failures. The act establishes new rules for corporations, such as setting new auditor standards to reduce conflicts of interest and to transfer responsibility for the complete and accurate handling of financial reports. For the frauds and misappropriation of corporate assets, this acts imposes cruel penalties for the rule breaker. To increase the transparency, this act enhances the disclosure requirements like disclosure of material off balance sheet arguments. Now what does the Sarbanes Oxley act do?
A direct effect of Sarbanes Oxley act on corporate governance is the strengthening of public company’s audit committees. The audit committee takes wide leverage in top management accounting decisions. The audit committee is a subset of board of directors consisting of non-management members who gained new responsibilities such as approving numerous audit and non-audit services and selection and looking out for external auditors and handling the complaints regarding the management’s accounting practices. (Li, 2010).
The Sarbanes Oxley act changes management’s duty for the financial reporting. This act basically needs the top of the managers personally certifies the accuracy of financial reports. If any one of these top managers makes a false certification purposely or knowingly, he or she can face a prison for 10 to 20 years. If the company is forced to make the accounting restatement due to management’s misconduct, top managers can be asked to give up their bonuses or the profits make from selling the company’s stock. Or a condition in which the director or the officer is convicted of a security law violation, he can be prohibited from serving in the same role at public company. The Sarbanes Oxley act possess harsher punishments for obstructing justice, security fraud, mail fraud, and the wire fraud. The maximum sentence termed for the securities fraud has increased to 25 years and the maximum prison time for the obstruction of justice is about 20 years. The act increase the maximum prison for the mail and wire fraud from 5 to 20 years. It also significantly increases fines for public companies committing the same offense. Lastly the Sarbanes Oxley act established the public company accounting the oversight board, which promotes the standards for the public accountants, limits their conflicts of interest and requires lead audit partner rotation every five years for the same public company. (Bhasin, 2013).
Revenue recognition: Enron and other energy suppliers gets the profits by giving services like wholesale trading and risk management in order to build and maintain electric power plants, natural gas, pipelines, storage and processing facilities. While accepting the risk of buying and selling the merchants are allowed to report the selling price as the revenues and the product costs as the cost of goods sold. In reverse the agent provides the customer a service but does not take the same risks as merchants for buying and selling. When these service providers are been classified as the agents might report the trading and brokerage fees as revenue. Enron used some special purposes entities limited partnerships or companies created to fulfill a temporary or particular purpose to manage the risks associated with specific assets. The company selected to disclose minimal details on its usage of special purpose entities. These companies were elected by the sponsor, but these are funded or managed by the independent investors. For the financial reporting purposes, a series of rules are made whether the special purpose entity is a separate entity from the sponsor.
At the end this scandal was concluded as it was a mixture of audit failure, accountant deceptions, the absence of operational audit and it was deprived of internal control insufficiencies. With the enforcement of Sarbanes Oxley act, the organization will be able to identify the internal weakness, develop new policies and formulation of new procedures and have a more complaint culture within the organization. Along with this, the requiring corporate governance more independent audits, as well as operational audits which would require testing the systems of internal control.it also draws attention to accounting and corporate fraud as its shareholders lost $74 billion in the four years leading up to its bankruptcy and its employees lost billions in their pension benefits.
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