Incident Command System - Enron - Assignment Example

Running Header: Incident Command System Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Table of Contents Q1. ANALYSIS OF ENRON CORPORATE CULTURE AND MANAGEMENT BEHAVIOR 3 RELEVANT NORMATIVE THEORY OF ETHICS 7 Q2. ANALYSIS ON PROFESSIONAL INDEPENDENCE OF ARTHUR ANDERSEN TO ENRON 7 Q3. STAGES ON KOHLBERG’S THEORY OF COGNITIVE MORAL REASONING AND DEVELOPMENT FOR; 11 JEFF SKILLING 11 KEN LAY 12 SHERRON WATKINS (whistle-blower) 13 CONCLUSION 14 Q1. ANALYSIS OF ENRON CORPORATE CULTURE AND MANAGEMENT BEHAVIOR Corporate culture is organizational norms in carrying out its activities, it is evident that Enron corporate culture kept changing so fast to a point that employees could not easily adapt, the key contribution to changing corporate culture was stimulated by changing line of business for Enron since they were previously majoring on tangible asset but gradually adopts intangible asset dealings (Derivatives assets) which turned corporate culture into aggressive short term growth emphasis rather stable and long term growth. This practice increased company volatility since they were depending on marking to market approach which profit recorded today might turn to huge losses in future because of their performance unpredictability. Management behavior is the conduct of company’s administration in conducting company business. It is notable that there was a great change in management behavior on both the audit and Enron, for example Andersen changes from its professional mandate of giving an independent opinion to stakeholders such as shareholders to providing consultancy service which is a threat to auditor’s independence due to self-review threats (Arthur, J. B. 1994). Therefore, corporate structure and management behavior changed turned employees of Enron to be aggressive on profits rather than understanding on risk attached to aggressive use of intangible assets. On the other hand, Andersen team failed to understand effect of engaging more on consultancy to its clients to development of an audit opinion. Below are various corporate culture and management behavior that led to collapse of Enron in 2001; Directors of any company act as agent to shareholders/investors therefore, it is mandatory for the agent (directors) to act for the best of the principle (investors) leaving behind their personal interest. Thus there is trustee-beneficiary relationship between Enron board of directors and stakeholders (Investors, employees, Creditors, debtors and government). Enron board of directors therefore, shows failure on their side to carry out fiduciary duties given to them by the company stakeholders in four ways; use of skills and prudence in administration, maintenance of diversified investment portfolio, non-adherence to written guideline of the company and “executive benefit rule” (Arthur, J. B. 1994). Firstly, Enron directors failed to exercise skills and prudence in their practices since we are able to notice that they engaged in activities that were considered to be risky regardless of fact they didn’t have skills in managing business of such complication for example they engaged in derivative market where its financial employees had little or no knowledge at all on the running and recording of such transaction. Directors failed to apply their skills on analysis of viable investment before channeling funds and therefore, gave false perception of company performance in order to have shareholders buy more of its shares in order to retire some shares and pay debt it was having with its creditors. Secondly, directors failed to diversify company’s portfolio in order to reduce impact of risk since investment on opportunities which are not correlated ensures that loss made in one sector is offset by the profit made on the other sector of company’s investment. Though directors tried to diversify by engaging on various types of investments such as offering natural gas, electricity and internet broadband, it failed on analyzing the nature of investment it was making since it concentrated more on intangible assets which turned the company to an investment fund making it so different from its core business. This didn’t affect company investment soundness alone but also affected the culture and employees expertise because employees were forced to do something very different from what they are trained to do. It should have been right if directors engaged on both tangible and intangible assets to show accomplishment of its fiduciary duties in diversification of investment portfolio (Arthur, J. B. 1994). Thirdly, directors showed non-compliance to the written guidelines of the company for example it used its retirement benefit scheme for employees to hide its losses and deceive public that the company was performing well, this resulted to employees losing their retirement scheme funds thus forcing employees to file law suit against the company (Arthur, J. B. 1994). Lastly, directors failed to exercise fiduciary duties on executive benefit rule since on knowledge of failure of the company, they developed offshore accounts in order to guarantee themselves a lot of money with expense of the employees and investors of the company thus enabling executive to benefit but shareholders, employees and creditors suffer losses realized after its bankruptcy (Arthur, J. B. 1994). The company had a culture of engaging in high risk accounting practices which include aggressive derivative market which involves marking to market accounting since it used to trade on futures contract by entering to a contract to supply e.g. gas at a fixed price in future while on suppliers side they enter similar contract to buy gas a fixed price in futures. The company accounted for gains associated to such contract since it showed growth on company reported revenue in the eyes of investors and general public but they didn’t take into close consideration the volatility of such practices since it can turn out to be loss in future due to lack of regulation on derivative market during that period (Anscombe, E. 1958). This kind of corporate culture and management behavior therefore, led to collapse of Enron Company in 2001. It is evident that conflict of interest existed within the corporate of governance of Enron Company since we note that top directors such as CEO and CFO kept manipulating financial accounts in order to keep the company a going concern in order to continue benefiting from it while the shareholder value keeps on dropping which is against the fiduciary duties accorded to them by shareholders (Atwood, Br. 1998). We are able to note that CFO controlled fully one of the Special vehicle entities thus making him to be more oriented on deals directed to the SPE rather than the performance of the company as a whole for the benefit of the beneficiary who entrusted him with the duties of CFO in the company. Directors’ fraudulent behavior is also noted in there move to create off-shore entities with the aim of hiding losses, planning and avoidance of tax since they failed to disclose such transaction on books of accounting by not complying with the principles of group accounting and equity method accounting since they viewed principles as just rules which they might conform to or not. SPE therefore, enable them to report huge profit but in actual sense the company was making losses. Despite Sherron warning, Lay’s team dismissed that the practice didn’t have serious impact on company. The company was latter declared bankrupt due to failure to address such inefficiencies (Aupperle, Carroll, Hatfield & John. 1985). Enron’s directors based executive compensation on company performance and therefore, they focused themselves more on securing such contracts since they reported their accounting performance basing on marking to market accounting thus failure to emphasis on performance of the contract resulting to losses due to failure to fulfill contract requirements. Despite such losses directors were compensated for the ‘great’ performance which affected company financial soundness negatively due to reward of inefficient management (Austin, J. E. 1990). Enron’s audit committee behavior showed high level of incompetence in practice of the duties accorded to them since they were not able to detect and eliminate threats that would impair independence of the external audit team (Andersen) since they allowed Andersen to carry out consultancy and audit duties in the company thus interfering with the independence of the opinion due to self-review threats associated to such practice (Avishai, B. 1994). Another instance of audit independence impairment is fact that Ben Gilsan, treasure of Enron was once Andersen employee thus threats of familiarity might exist between Enron and Andersen audit team that might give them opportunity to collude and hide accounting malpractices. RELEVANT NORMATIVE THEORY OF ETHICS The making decision on Enron Company by directors should be based on agent-centered theories since fiduciary relationship exist between the directors and shareholders where directors need to keep in mind shareholder value in making their decisions by following the guidelines and responsibilities accorded to them by the shareholders therefore, trustee-beneficiary relationship exists between the two (Anscombe, E. 1958). One of the examples utilized in this concept is virtue and care theory where one need to making quality decision and be concerned with the duties and trust accorded to him. Q2. ANALYSIS ON PROFESSIONAL INDEPENDENCE OF ARTHUR ANDERSEN TO ENRON Arthur Andersen didn’t maintain professional independence in the engagement between Andersen and Enron Company. Audit is independent review of an entity’s financial accounts in order to give a true and fair opinion on how the accounts were prepared, if the standards were followed in their preparation and report on going concern of client company. Therefore, audit profession put high emphasis on independence of the audit team by minimizing or eliminating threats to its independence (Bach, S. 1995). It is evident that Arthur Andersen didn’t maintain his professional independence in carrying out Enron’s audit because of existence of the following threats that impaired its independence; Self-interest threats is evident from the engagement since are able to note that Andersen cooperated with Enron company in hiding its losses due to the fear that Andersen will lose a lot of revenue since it had few but big client which it offered its audit expertise therefore, failing to avoiding such risky engagement for the love of his own interest (Badaracco, J. L. 1995). It is evident that Enron Company was the second largest client of Arthur Andersen, where it earned approximately $52,000,000 from all engagement that is consultancy and audit thus giving them enough reason to protect their interest in the company. Self-interest also arise in instance that Andersen shredded Enron audit report in order to hide evidence as advised by David Duncan who headed audit of Enron company since they were interested on protecting their reputation rather than acting as a watchdog of shareholders in overseeing the practice of the directors in the company thus self-interest impaired Arthur Andersen professional independence in giving a true and fair opinion to the users of Enron financial accounting statements. It is role of the audit committee and Audit Company to detect and eliminate such threats in their engagement but Enron and Arthur Andersen failed to do so. It can be eliminated by avoiding receipt of favors from client in order to hide disclosure of accounting malpractices, avoiding engagement where self-interest exist or reducing dependence on client as major source of revenue to audit company. Secondly, Self-review threats existed between Arthur Andersen and Enron since Arthur carried out internal audit and consultancy services therefore, audit team was giving a report of their own work thus failing to be independent opinion since you cannot disapprove what you did to be wrong since external observer will note faults easily than you carrying review. It is evident from records that Arthur Andersen received consultancy fee of $27,000,000 which raises more questions on the relationship that it had with Enron. Therefore, self-review is an evident to itself that Arthur Andersen failed to maintain his professional independence in carrying out Enron engagement. It is mandatory to an audit company to eliminate such threats in order to maintain their independence. Self-review threats can be eliminated by improving on internal control of the organization and separation of consultancy department with the audit department in order to enable audit team to give true and fair opinion with aim of upholding audit professional ethics and enabling investors to make sound decision (Balabanis, Philips, Lyall, J. 1998). Arthur also promoted Enron directors opinion to extend of impairing with subsequent objectivity. This results to advocacy threat which affects audit independence in carrying out audit exercise since one is not concern or keen on the fact that they should give their opinion basing on the facts laid on the financial statements of the company rather than what the directors wants (Barnett, Buchanan, Patrickson, Maddern, J. 1996). Advocacy threat therefore, affects the opinion adversely since they are suppose to exercise their independence ascertaining to the shareholders that directors prepared financial statement using right standards and it gives a true and fair position of the company but instead, they accepted to report according to how directors want the account to be reported. It is noted in Joseph Bernardino, CEO Andersen assertion that he supported that the audit opinion was true and fair despite Carls Bass advice against accepting such poorly reported financial statement to give disqualified report to the shareholders. Presence of advocacy threat therefore, is a guarantee evidence for the existence of failure in maintenance of professional independence in his engagement with Enron Company. This can be eliminated by ensuring that audit team maintain high standards of objectivity in giving their opinion and have minimal interaction with the company directors or executives (Barry, N. P. 2000). Familiarity threat is evident that Arthur Andersen failed to maintain professional independence in carrying out Enron Company engagement since we are able to note that Arthur Andersen and Enron had close relationship in many ways. First, Arthur Andersen and Enron shared employees at one point of time for example Ben Gilsan had worked for Arthur Andersen before being a treasure to Enron Company while Sherron worked for Arthur previously too, this ties therefore, enable Arthur Andersen audit team to collude with Ben mischief or be on better grounds to negotiate with audit team to hide certain account malpractices noted in financial statements. Consultancy service and internal audit provided by Arthur also increase familiarity threats since it increases closeness of the management with audit team to a point that they will develop kind of sympathy in disclosing some of contentious issues in accounting practices of the organization to the interest of those stakeholders who the audit report was meant to (Barry, V. 1979). This aspect therefore, is a solid evidence of Arthur failure to maintain professional independence in carrying out its duties in the audit engagement. This kind of threat can be eliminated through avoiding private meeting with company’s directors, rotation of audit staff, external review on audit report and avoiding engagement where there is familiarity threat exist. Arthur Andersen engagement with Enron shows existence of intimidation in two forms, Arthur intimidating his junior audit team to hide the frauds in company books of accounts and on the other hand intimidation by Enron to Arthur not to disclose any material errors in preparation of the company books of accounts. It is noted that CEO of Andersen dismissed Carls Bass advice against manner in which it gave its audit opinion regardless of accounting practices exercised in preparation of financial statements of the company, this is clear evidence that Bass was silenced for him not to report to higher authorities on what it was going on in Enron and Andersen company. On the point of Enron Company, we are able to note that it intimidated Arthur Andersen that failure to report according to their requirements might lead to termination of engagement and being second largest client, Arthur Andersen feared losing major source of his earning therefore, forced to conform with Enron directors demands to falsify position of financial statement in arriving at their final opinion. This therefore, proves beyond doubt Arthur Andersen negligence in exercising professional independence in carrying out the engagement. This threat can be solved by reporting to higher authorities or terminating engagement (Bass, Steidlemeier, P. 1998). Q3. STAGES ON KOHLBERG’S THEORY OF COGNITIVE MORAL REASONING AND DEVELOPMENT FOR; Kohlberg’s theory of moral reasoning explains levels in which one gives right or moral decision when faced with dilemma. The levels of moral reasoning are in three levels, each having two characteristics used to identify or categorize level of reasoning that one has in making decision when faced with challenge (Bast, M. R. 1999). Therefore, in Enron Company we can classify Jeff, Ken and Sherron as shown below; JEFF SKILLING Jeff Skilling is at conventional level according to his way of reasoning in making his decision in Enron Company (Baumhart, R. 1961). At this level Jeff Skilling shows the following characteristics that make him fit in conventional level; His resignation was a sign of pleasing others but it was not genuine since he played a role in Enron bankruptcy though he didn’t have direct link, it was alleged that he contributed to a greater extent. His resignation was then seen to remove himself from blame and seen to be ‘good’ in the eyes of shareholders due to reasoning that he didn’t have anything to do with the collapse of Enron Company or He thought Enron will collapse long after his resignation therefore, he will not be blamed on the failure of the company. He asserted that his resignation was based on his personal decision since he had worked for the company in the last 10 years. This shows that Jeff has been promoted consistently to the point of CEO of the company which signifies that Jeff had low cognitive skills since those with high cognitive skills always leave the company in search of employment in other organization. On reaching the top level of management, Jeff realized the responsibilities that he will have the moment the company will collapse therefore, forcing him to resign within very short period of company leadership (Elliott, Schroth, R. J. 2002). Jeff also showed characteristics of Law and order abiding citizens since he feels he cannot stay for so long in power in order since he pretended to follow law through his resignation since he had noticed fraudulent activities in the company and therefore, he didn’t want blame to be placed on him. The investigation proved that he didn’t have direct link with the fraud but in real sense he did played a role in defrauding the company (Elliott, Schroth, R. J. 2002). KEN LAY Ken Lay is at pre-conventional level in respect to his way of reasoning in making his decision when in dilemma. Person at this level is self-centered and everything he/she is thinking about his himself not the interest of general public (Estes, R. W. 1996). The category is reached after analyzing his reasoning basing on the following aspects; Ken Lay showed characteristics of self-interest where he is making decision only to keep him on the safe side. For example Ken was in support of formation of offshore accounts in order to guarantee himself and close allies millions of dollars on collapse of the company. Another instance of self-interest is also seen when Ken sell off his shares using confidential information after investigation by Vinson and Elkins, showed that Enron could collapse but there was no action need. Ken sold his shares using insider trading without taking into consideration the interest of other shareholders in the company who placed them on that position of taking care of shareholder interest in the company. Lay wife also sold part of his shares showing the characteristics of using insider information (Estes, R. W. 1996). Ken showed characteristics of avoiding being blamed by use of indirect means of defrauding the company since investigation showed that Ken didn’t have direct link in accounting and audit malpractice that caused Enron collapse since he was able to hide his malpractices since David Duncan bared most of the charges since he was Enron CFO and root cause of all the creative accounting and creation of special vehicle entities (Goodin, Robert E. 1985). SHERRON WATKINS (whistle-blower) Sherron Watkins is at post-conventional level according to his way of reasoning in making his decision in Enron Company. At this level individual doesn’t put strict follow up on rules laid by his superior but he relies on his personal held principle on what is wrong and right in making his decision while in dilemma. The individual puts aside his personal interest and considers the best solution for the benefit of the lager group. It is opposite of pre-conventional level (Korhonen, I. 2003). Sherron displays the following characteristics that make him fit to the above level; Sherron showed characteristics being just in his reasoning since she is the ‘whistle blower’ in Enron scandal where she showed to concern on the interest on general public since Enron directors had been manipulating accounts thus taking a step of reporting to relevant authorities (whistle blowing). The act of whistle blowing therefore shows Sherron emphasis on consensus through use of due process (Law) since legal system always emphasis on justice, humanity and will of the people governed by the law. The reason of whistle blowing is a method of trying to change the culture in the organization due to its unjust nature to the stakeholders of the company (Korhonen, I. 2003). At this level, individual emphasizes on principles in reaching his decision and he/she is rarely manipulated by others or his own interest but champions for the right approach in dealing with a given situation in the company. For our case, Sherron didn’t consider losing her job but her interest was only to see things were done on the right way or a stop to malpractices that has been going on in the company. She didn’t allow even the influence from authority change her mind in spilling the beans to the public about malpractice that were going on in the company but stick in her decision to disclose (Korhonen, I. 2003). It is opposite of Bass situation where he went by the Arthur Andersen CEO assertion that the audit was okay even after noting that the financial statements had material errors that could lead to severe financial crisis to Enron company. CONCLUSION In conclusion, it is noted simple unethical practices can lead to collapse of a large organization. Therefore, it is important to establish acceptable code of ethics in order to ensure such cases are not encountered in the organization. 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