1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. Briefly justify each of your choices.
a) With Enron, the responsibility and blame started with Enron’s executives, Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. Their goal was to make Enron into the world’s greatest company. To make this goal a reality, they created a company culture that encouraged “rule breaking” and went so far as to “discourage employees from reporting and investigating ethical lapses and questionable business dealings” (Knapp, 2010, p. 14). They insisted the employees use aggressive and illegal
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For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen’s involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.
a) General Standard #2: The auditor must maintain independence in mental attitude in all matters relating to the audit (AICPA, 2012). Anderson did not practice independence from the company they were auditing. They were too involved in too many of Enron’s activities.
b) General Standard #3: The auditor must exercise due professional care in the performance of the audit and the preparation of the report (AICPA). They failed to act in a professional manner and to practice due care when they violated any of the standards.
c) Field Work Standard #2 : The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures (AICPA). Enron had no procedure for internal controls. Therefore, Anderson could not have sufficient understanding of the internal controls.
d) Reporting Standard #3: When the auditor determines that informative disclosures are not
Control of the internal audit unit and of individual assignments is needed to ensure that internal audit objectives are achieved and work is performed effectively. The most important elements of control are the direction and supervision of the internal audit staff and review of their work. This will
How much reliance should Enron’s corporate BOD have placed on the Andersen in understanding the company’s accounting decisions and policies?
The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.
Enron made greater use of social control as a means of guiding employee action, however, the company did have limited methods of formal control in place. By using social influence tactics, limiting dissenting opinion, and inflicting a sense of high cohesion among employees, Enron deceived millions into believing the company was more profitable than it actually was. Because Enron’s values and norms were not conducive to a successful, ethical company, the employee’s targets, attitudes, and behaviors led to Enron’s undesirable outcomes. (O’Reilly and Chatman 165) Enron’s downfall can be largely contributed to its norms and values, of which were not strategically appropriate. Enron valued money above all else, which was
The Security Exchange Commission found that The Enron corporations CEO’s and executives hindered the company’s research methods by using information to reveal how the top leaders of the organization assisted and supported the unethical behaviors in the accounting and finance departments. These acts deteriorated the integrity of excellence professionals, associates, and employees who were associated with the Enron Corporation. On behalf of the entire organization, the Enron Corporation’s poor business practices gross standards that pertain to unethical behavior.
Enron’s ride is quite a phenomenon: from a regional gas pipeline trader to the largest energy trader in the world, and then back down the hill into bankruptcy and disgrace. As a matter of fact, it took Enron 16 years to go from about $10 billion of assets to $65 billion of assets, and 24 days to go bankruptcy. Enron is also one of the most celebrated business ethics cases in the century. There are so many things that went wrong within the organization, from all personal (prescriptive and psychological approaches), managerial (group norms, reward system, etc.), and organizational (world-class culture) perspectives. This paper will focus on the business ethics issues at Enron that were raised from the documentation Enron: The Smartest Guys
Arthur Andersen was Enron’s auditor. There were no checks and balances to ensure that Mr. Andersen’s financial statements and bookkeeping were correct. Enron and potential investors were drawn in by Mr. Andersen’s reports reflecting that Enron was a financially stable and investors should invest with Enron. Andersen’s integrity had not come into question in regards to accuracy and accounting procedures.
Enron was a U.S. based energy-trading company. At its height of operation in the early part of 2001, it was booking revenues of about $140 billion (Enron Ethics). At the end of 2001 it declared bankruptcy. The Enron bankruptcy was the largest corporate economic failure at that time, and still remains an example of how corrupt practices magnify in the long run. What led to Enron’s failure was primarily a lack of ethics, and poor accounting practices. This scandal was one of the reasons that new regulations were passed for financial reporting standards, the Sarbanes-Oxley Act was passed in 2002 as a means of stopping such a collapse in the future.
If the most troubling aspect of Enron was the way in which its employees were treated losing jobs, stocks, health and retirement benefits in the wake of its dissolution, then it is possible to backtrack from this event to list the many problems provided by the men that ran the company that allowed for such a travesty to happen. The duplicitous, and in some cases outright iniquitous business practices of this
Enron was a Houston based energy, commodities and services company. When people hear the name Enron they automatically associate their name with one of the biggest accounting and ethical scandals known to date. The documentary, “Enron: The Smartest Guys in the Room,” provides an in depth examination of Enron and the Enron scandal. The film does a wonderful job of depicting the downfall of Enron and how the corporate culture and ethics were key to Enron’s fall. As the movie suggests, Enron is “not a story about numbers, it is a story about people.”
Corporate malfeasance has earned a place among the defining themes of the last decade and a half, helping to give birth to the global recession and the Occupy Wall Street movement. Enron, a Houston based commodities, energy, and service corporation, created arguably one of the worst scandals of the past two decades. Due to reporting tactics implemented by Chief Executive Officer Ken Law and Chief Executive Officer Jeff Skilling, which hid huge debts from the company’s balance sheet, the company filed for bankruptcy, shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. Before the accounting scandal became public in 2001 due to whistleblower and Vice President
In the case against Enron, one of the most influential accounting scandals, investors sued the corporation and its external auditor Arthur Andersen LLP (Andersen). The collapse of Enron at the end of 2001 revealed that accounting fraud sustained its reported financial health and consequently Andersen’s validation of Enron’s financial statements covered up the fraud. Further investigation uncovered large amounts of revenues from consulting fees paid to Andersen by Enron; parallel to a long-standing business relationship between Andersen and Enron that fundamentally robbed the auditor of its independence. In turn nullifying the highest role, Andersen supposedly played as Enron’s external auditor, delivering strong independent verification of its financial reports. Subsequently, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) mandating reform in the accounting profession, to protect investors. While SOX, is vital to fraud deterrence, audit failure attributed to the lack of independence is still at large. Two distinguishable components yield auditor independence. One, “the auditor must maintain independence in mental attitude” (AU 202.01) known as possessing independence in fact and two, “Independent auditors (…) should avoid situations that may lead outsiders to doubt their independence” (AU 202.03) referred to as independence in appearance. This raises the question, is auditor independence authentic? No- the reforms made by SOX is deficient in ensuring auditors’ independence in fact, the structure of the auditor client relationship neglects auditors’ independence in appearance, and a psychological element exists that challenge auditors’ independent opinion.
Respect, integrity, communication and excellence are the ethics code of Enron. These four aspects have a crucial impact on business ethics. “Ethics requires respect. One cannot exist without the other. Ethical success depends on understanding the profound impact that respect has on your ethics and character.” As Mark S. Putnam said in his article “Respect: The Starting Point for Good Ethics”(2003), we need to make respect our obligation and show everyone a certain degree of respect. All the top executives did not show respect to lower level employees. The only thing they did is
Congress should have adhered to SEC’s proposals for auditor independence and stricter rules on separating consulting with audit services. As in the Waste Management Inc’s scandal, we see that Arthur Andersen helped them to cook their books and inflate earnings, due to a discrete arrangement of which the SEC was unaware. This “cozy” relationship led Waste Management to inflate earnings for five years, while Anderson kept issuing clean opinions on misstated financial statements.
Subject: Enron top management, Arthur Andersen auditors, Qwest top management, creditors of Enron, employees and shareholders