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Auditors conflict of interest
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Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron. The first issue that makes the fall of Enron was special-purpose entities problem. Between 2008, the mark-to-market practice led to schemes that …show more content…
Some economist argues that conflict of interest arises (Healy & Palepu 2003, p. 15). Although Arthur Andersen spokesman argues that “It’s not an issue that is addressed in one of our standard agreements with a client” (Herrick & Barrionuevo 2002, para 6), it is quiet unusual that consulting fees that Arthur Andersen earned is higher than audit fees ($27 million in consulting fees and $25 million in audit fees). It is understood that this problems cannot be determine whether financial incentives is arose or not. However, $25 millions of audit fees must have a vital impact on negotiations with Enron’ management. Therefore, Arthur Andersen is liable on providing poor accounting information. Arthur Andersen failed to exercise their professional accounting judgment in reviewing Enron’s accounting transaction that was clearly designed for financial purpose rather than business purposes. When the credit risks requires Enron take a write-down, auditor’s permitted to defer recognizing the charges (Healy & Palepu 2003, p. 15). Pervious example makes Anderson cannot provide any excuses for their poor Enron’s external auditing, which also make Enron’s prevent its demise. From the Enron case, there are lots of breaches of accounting and ethical conduct occurred. For example, it breaches “The Securities Act 1933” to make …show more content…
Leaders not only fostered a wrong sense of security for employees, paying high wages to keep workers dependent on the system via golden handcuffs, but also may allows employees did unethical behaviors. This repressive and illegal corporate would eventually make company lost creditability, or else, make company collapse. iii. Accountants needs to maintain reliable professional judgment At Enron case, none of any executives or high level of managers report the actual problem arise in company. No matter employees or manager, they tend to be quiet or continuous hide the information from the company. Illegal activities always eventually shown and people who are involved would liable for those illegal activities. For example, Jeffrey Skilling is sued for conspiracy, securities fraud, false statement and insider trading in high court, and eventually was sentenced to 24 years and 4 months in prison. iv. Executives
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
Corporate culture refers to an organization that shares the same values or beliefs that are usually instilled or passed down by example from the upper level executives throughout the organization (Thorne, O. Ferrell, & L. Ferrell, 2011, p. 191). Most organizations are molded from ideals set in place by the founders or upper level executives of an organization. In Enron’s case, they believed in doing whatever it took and unfortunately it bread competitiveness throughout the company, which forced employees into making unethical decisions in order to save their jobs. The CEO, Jeffrey Skilling, decided to implement a program that evaluated employees every six months and the bottom twenty percent of employees would be terminated. This created a
A documentary film released in 2005 called the Smartest Guys in the Room reveals the shocking collapse of Enron. The Smartest Guys, Kenneth Lay, Jeff Skilling, Andrew Fastow, Lou Pai, Clifford Baxtor, and Arthur Anderson, were all involved with America’s ultimate Corporation Scandal. But who do we blame? Enron had over 20,000 employees and was founded by Kenneth Lay, CEO of Enron, in 1985. Lay wanted to push his views of deregulation which pushed him to start the company (SGR). The first event that happened leading up to the downfall was the president, Mr. Borget, and his traders manipulating the company’s earnings and exporting the profits to their personal account. When Lay made the decision to not fire them, it definitely raised the
The Enron Corporation was founded in 1985 out of Houston Texas and was one of the world 's major electricity, natural gas, communications, and pulp and paper companies that employed over 20,000 employees. This paper will address some of the ethical issues that plagued Enron and eventually led to its fall.
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.”
Enron was the model for rapid growth in the 1990’s but part of the culture and ethics of Enron was disturbing. Falsified documents, cutthroat competitiveness among employees and accounting schemes that hid the truth of the company’s indebtedness were just a few examples of the lack of business ethics within the organization. Perhaps a more virtuous management team could have saved Enron from collapse.
The film Enron: The Smartest Guys in the Room was a great film loaded with examples of unethical behavior with Enron being an unethical corporate culture. The film portrays the rise and fall of Enron, one of the most corrupt corporations this country has seen. Enron had started off as a promising energy company with a vision to do good, which quickly turned sour when top executives torn the company down while stealing millions of dollars from people. A reason for the downfall of Enron was the deregulation of the electric power markets, which fueled the greed of Enron’s officials. They were the ones that transformed Enron from a traditional energy company into an energy broker.
the social world of Enron. The fact that they took the form they did and to such a pronounced degree are certainly troubling and perhaps surprising. What should not be surprising is the role such ritualization processes played in the development of this type of deviance, given recognition of their importance in social relationships and organizations.
Enron was in trouble because of something that almost every major corporation during this time was guilty of. They inflated their profits. Things weren't looking good for them at the end of the 2001-year, so they made a common move and they restated their profits for the past four years. If this had worked to their like they could have gotten away with hiding millions of dollars in debt. That completely admitted that they had inflated their profits by hiding debt in confusing partner agreements. Enron could not deal with their debt so they did the only thing that was left to do, they filed for chapter 11 bankruptcy. This went down as one of the largest companies to file for bankruptcy in the history of the United States. In just three months their share price dropped from $95 to below $1.
2. The challenges faced were those of a changing workforce, competitiveness, and globalization, as well as ethics and social responsibility. While many companies were downsizing in the mid-1980s, Enron continued to grow and expand despite their lofty goals. They ventured out into foreign markets to be more competitive. The workforce also became more diverse and the characteristics changed. Employees during Enron’s tenor were less devoted to long-term career prospects; instead they were more interested in financial gain at any cost. Ethics seemed to be a secondary thought for most people during Enron’s time. To meet these challenges Enron executives had to make working for their company more attractive and lucrative.
Enron was a company founded in the year 1985 based in Houston, USA. It was one of the world's largest energy trading and Distribution Company having an income of nearly hundred billion dollars during 2000 and was also regarded as America’s most Innovative companies for 6 consecutive years by the fortune magazine. In the last quarter of 2001, it was exposed that it’s declared financial condition was maintained significantly by systematized and skillfully premeditated accounting fraud, known thereafter as the Enron scandal. They hid major debts and did not book them in the balance sheet. The inflated figures in their balance sheet shot up their stock price to unprecedented levels, taking advantage of the situation executives with insider information traded in millions of dollars of Enron stocks. The senior executives and insiders were aware of the offshore accounts that were covering up losses for the Organization; the investors were kept in the dark. This sent across a domino effect which resulted in shareholders losing seventy four billion dollars, loss of hundreds of jobs and thousands of investors and employees losing their retirement accounts.
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
Through an organizational culture that focused on financial greed for self, illegal accounting practices, conflicts of interest partnerships, illegal business dealings, fraud, negligence, and massive corruption at all levels, the Enron scandal help to create new laws and regulations with stiff penalties if violated (Ferrell, et al, 2013). The federal government implemented the Sarbanes Oxley Act (SOX) (Ferrell, et al, 2013).
In the 1990’s after the United States Congress approved legislation that deregulated the sale of natural gas, Enron was able to sell energy at much higher prices and to gain higher revenues. This is when Enron’s engagement in criminal activity is considered to have begun. While most companies’ activities regarding commercial business are regulated and watched over by the government, deregulated companies “are not subject to government mandating and oversight; as a result, the executives of ENRON were able to misrepresent their respective earnings reports and stock activity in a fraudulent manner” (Finance Law) by misrepresenting their earnings therefore falsely inflating the prices of their sto...