Accounting Problems as Reflections of the Society and the Need for Change - Enron Corporation - Case Study Example

Accounting Problems as Reflections of the Society and the need for Change: A Critical Essay Introduction This essay is about the relationship between accounting as a practice and the prevailing social conditions. The essay examines the relationship between these two phenomena and what needs to be done to address situations in which accounting problems relating to organisations are reflections of the societies in which the organisations operate. According to Cooper and Sherer (1984, p. 222), major problems related to the accounting practice are reflections of what is taking place in the society. In other words, it is said that big corporate scandals related to accounting practice are indications of the opinions, attitudes and interests of investors, the public and other stakeholders of the organisations involved. It is further argued that for one to successfully change the way accounting is practiced, one must first start with changing the predispositions of the members of the society (Cooper & Sherer 1988, p. 222). This essay is a critical examination of the observations made by Cooper and Sherer (1988, p. 222) by considering real-life examples. In the essay, the example of the accounting scandal at Enron Corporation is used. The essay is divided various sections. The first section is an overview of the Enron accounting scandal. The second section is an examination of the benefits that companies derive by adhering to the principles of the accounting practice. The third section discusses the notion that accounting problems are representations of the problems bedevilling the society. The fourth section analyses whether social change is a prerequisite for changing accounting procedures. It is argued that accounting problems are indeed reflections of the problems in the society and that it is not necessarily true that changing accounting practices requires that one changes the entire society since attempting to change the values of the society is difficult. The Enron accounting scandal Enron Corporation was one of the most successful companies that rode on the wave of energy deregulation back in the late 1990s. The company was started after the merger of two smaller gas trading companies in the United States, Houston Energy and Internorth (CBC News 2006). The new large company was named Enron Corporation. Immediately, the company started growing into a huge player in the energy market in the United States. The success of Enron was seen in the way the company first lobbied for the deregulation of the energy industry in California and other States (CBC News 2006). Following the deregulation of the energy sector, Enron profited from the free market nature of the energy market in states such as California and others. However, the rapid growth of Enron and the company’s expansion into different regions in the world, notably in India, did not last long. Soon, it was discovered that the company had been running a massive accounting scandal, in collusion with its lawyers and auditors. At the heart of the Enron accounting scandal was the use of special purpose entities, which are legal and accounting instruments that companies can use to finance their projects without necessarily reporting the transactions on their balance sheets (Stice & Stice 2013, p. 22). It emerged that Andy Fastow, the chief financial officer of the company and other top executives, in collaboration with the company’s board of directors, had intentionally colluded to abuse these instruments in a complex web of off-balance sheet financing transactions (Stice & Stice 2013, p. 22). The company had used these tools to hide its massive debts and falsely report that it was making massive profits in a bid to keep its share price rising and to please investors, financiers and other stakeholders, including the public. Benefits that companies derive by adhering to the principles of the accounting practice It can be argued that when companies remain true to their principles in their different activities, such actions can be beneficial to all the stakeholders of the companies. For example, Morgan (1988, p. 482) observes that when companies use the accounting practice to accurately record their financial performance, this process is beneficial to all the stakeholders of the company. The basis of this observation is that accounting as a discipline can be used by companies to accurately represent the economic reality of the company (Morgan 1988, p. 482). It then follows that when companies use accounting to accurately report their financial performance over the course of time, they end up helping their stakeholders to understand the actual state of the company. With reference to Enron, the financial reporting process that the company used was first and foremost important in providing information about the performance of the organisation to its various stakeholders. As it is the case with many other companies, Enron relied on financial reporting procedures in the form of releasing quarterly and annual financial performance reports to inform its stakeholders of its financial performance over different periods. The stakeholders of the company who relied on the financial reports of the company to gauge the performance of the company included its shareholders, employees and the public, given that Enron was a listed company. Therefore, at the basic level, it can be argued that accounting as a practice is useful to companies in that companies rely on it to provide information about their financial performance to the stakeholders. Another positive issue regarding the use of accounting practices by companies and how this relates to the society is that companies have and still use accounting to help their stakeholders make informed decisions regarding their relationships with the company. According to Azim and Ara (2015, p. 2), one of the most important roles of accounting is that it can be used as a tool to enhance the decision-making process within the setting of corporations. This observation implies that the information that the accounting process provides is important in that it facilitates the decision-making process not only for the individuals who are within the company but also for the external ones who have an interest in the affairs of the organisation. Essentially, the information in the financial reports that companies post is meant to help the stakeholders of the company to assess the state of the company and make accurate decisions about their relationship with the company (Millo, Barman & Hall 2016, p. 18). For example, shareholders rely on the information that is provided in the financial reports to assess the performance of their investments and make decisions about whether to invest in the company. Also, would-be investors rely on the information that is provided in the financial reports that companies post to make decisions on whether they should invest in the company under consideration or not. In the case of Enron, it can be argued that the use of special purpose entities (SPEs) by the company was, at the basic level, meant to help convince the investors of the company that the company was performing well at the time. In fact, it has been noted that SPEs, when properly used, can help companies to effectively achieve their special financial goals and remain profitable (Newman 2007, p. 99). In other words, companies can use the complex processes of accounting procedures that Enron used without necessarily creating instances of accounting fraud. Accounting problems as a representation of the society According to Cooper and Sherer (1988, p. 222), problems in accounting are reflections of what is taking place in the society. Further, for one to understand what accounting represents, one should study the behaviour of the investors and other stakeholders of the company under consideration (Cooper & Sherer 1988, p. 222). In other words, it is argued that accounting scandals represent the predisposition of stakeholders of the company and that for one to understand the nature of accounting scandals, one should study the orientations of the stakeholders of the company. One of the main reasons why it can be argued that accounting problems mirror the state of the society relates to the observation that accounting does not exist in isolation but encompasses a complex interaction of multiple factors in the society and within the organisation under consideration. Wanderley and Cullen (2012, p. 162) opine that the process of accounting is a result of sophisticated socio-economic processes that take place in the society in general and within organisations. That is to say that accounting is affected by social and economic processes and cannot therefore be viewed as a highly objective process that is isolated from the complicated social and economic processes that occur within organisations. In the case of Enron, the use of the SPEs was as a result of the growing pressure from the stakeholders of the company on the management team to ensure that the stock price of the company kept rising. Therefore, the actions of the company’s management reflected the aspirations of the stakeholders of the company. This affirms the argument that accounting practice is carried out within the context of the society and that major problems in accounting are reflections of the aspirations of the society. The second reason why major accounting problems represent what is taking place in the society relates to the view that accounting as a practice is a socially constructed discipline. Hines (1988, p. 258) argues that accounting, like any other socially constructed phenomenon, acts as a stabilising force in the society in that it shields the society from unknown things by defining measures that should be used to assess the performance of organisations. What this observation means is that accounting is a product of social realities and the process of attempting to accurately represent the reality of what takes place within organisations. Thus, the rules and procedures that define the accounting practice are, in truth, social rules that are used to recognise and measure aspects of the performance of the organisation using methods that have been agreed upon by the society in general. Therefore, accounting principles, rules and procedures are products of the society and they serve the society by defining clearly the aspects of organisations that the society is interested in. In regard to Enron, the use of SPEs by the management of the company was not an entirely new thing. SPEs had been used and are still used by companies to achieve specific goals. However, the way the company used the instruments to hide its growing debt at the time and create fake profits is what was scandalous. Therefore, the problem that arose from the way the company used the procedures was merely an abuse of accounting procedures that were already in place. These procedures reflected the needs of the different stakeholders of the company in the first place. Is social change a prerequisite for changing accounting procedures? Cooper and Sherer (1988, p. 222) argue that for one to change accounting procedures and address problems in accounting, it is necessary to use social awareness. In other words, it can be argued that social change is a prerequisite for changes in accounting procedures to address accounting problems. However, this may not necessarily be the case. To begin with, it is difficult for one to change the society. Social norms, values, practices and behaviours develop via a complex process that takes a long time (Boyce 2013, p. 129). The complexity and longevity of social values are some of the main factors that make it hard for one to attempt to successfully change social norms. Secondly, it is important to point out that the social values and norms that are represented in the form of culture are so ingrained in the lives of individuals that attempting to change them will take a long time. Morgan (1988, p. 482) argues that accounting systems normally reflect the prevalent culture in organisations. It is further argued that the accounting procedures in place and the cultural values that exist interact with each other in such a way that the two have a complementary effect on each other (Moore et al. 2004, p. 23). What this implies is that for one to change an accounting system, it may be necessary to change the culture of the organisation, which in turn is defined by various external social, cultural and economic realities. Given the complexity of social structures, it is difficult for one to effectively change the society in order to change various aspects of the accounting discipline. Conclusion In conclusion, Cooper and Sherer (1988, p. 222) are right when they say that major accounting problems in a company are reflections of the predispositions of the company’s stakeholders. Essentially, accounting does not exist in isolation but is rather part and parcel of the society. Therefore, accounting practices represent social values and if a major scandal occurs, then it reflects the predispositions of some stakeholders of the company. Also, accounting is a social construct that is used to gauge the performance of organisations in the society. As a result, accounting principles evolve over time to reflect changes in the society. That is, changes in the society affect the process of development of accounting principles. In the case of Enron, it was seen that the use of special purpose entities was not inherently bad since these financial instruments are widely used in the corporate finance world. However, the way the management of the organisation abused these instruments to hide debt and post fake profits is what was scandalous. Moreover, this approach represented the values and predispositions of some of the stakeholders of the company. Finally, it has been argued that one does not have to rely on social change as a prerequisite to changing accounting practice since it is hard to change societal values within a short time. References Azim, M & Ara, J 2015, ‘Accountability of accounting stakeholders,’ Global Journal of Management and Business Research: D Accounting and Auditing, vol. 15, issue 2, viewed 5 May 2017, . Boyce, G 2013, ‘Professionalism, the public interest and social accounting,’ in, S Mintz (ed) Accounting for the public interest: perspectives on accountability, professionalism and role in society, Springer, Heidelberg, pp. 115–142. CBC News 2006, ‘The rise and fall of Enron: a brief history,’ CBC News, 25 May, viewed 5 May 2017, . 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