Questionable Accounting Leads to the Collapse - Essay Example

? Case Study Analysis: Enron: Questionable Accounting Leads to The Collapse [N a m e] INTRODUCTION: As the world enters into the twentieth first century, many experts think that a new era of business world has dawned in which companies not only have to create targets for their product and services but also need to adopt entirely new concept in their mission, purpose, vision, implementation and conduct, through the implementation and practice of Ethics on the organizational scale. They need to address the societal thoughts while developing strategic plans. But this implementation of new ideas is not easy as it is not just a single new constraint, in fact a whole lot of new constraints, restricting companies to stop doing a lot of things which they are used to in a global competitive market. Similarly, in financial studies reporting plays a very important part not only to the company’s point of view but also from the point of view of public and investors. So financial reporting is actually a very important matter not only for the companies who develop the reports and send them out, but in fact also for the investors, consumers, business partners, competitors, other agencies as well as general public who read the reports and analyze it to make their decisions. With the help of financial statements in these reports a company actually represents their performance to the stakeholders. They do not only tell their activities and philosophies in detail but also explain the vision and future plans as well. At the same time they try to enhance their reputation as well. And lastly but most importantly the managers show accountability of their work and decisions to the stakeholders through these financial reports. So if the reporting by these companies is not accurate a lot of such decisions can become wrong. As all the stakeholders of the company rely on these reports to forecast the performance of company and for answering their questions like what and how they will be performing in future. This case is actually termed as the distinguishing point of entirely new era of ethics in financial reporting. Before the Enron case, there were no such laws related to financial reporting and internal and external auditing etc. But the Enron case raised the importance in making ethics necessary in this field as well, but it also enabled the development of regulatory bodies that enforced the ethical practices in the financial reporting as well. Before the Enron’s scandal, there was very little, in fact no public attention on the truthfulness of the financial reports published by the companies. Yet people have suspicions about misrepresentation but mostly didn’t affect the decision making of public and did not indulge them on deep research and analysis. But after the Enron case, it became necessary that these reports should be certified by some public accountant who would ensure that whatever information is presented in financial reports are truthful and these statements must represent the true picture of the company. So this scandal played a vital role in the legal development of laws in the field of financial reporting and auditing. Further, it gave rise to the ethical role of management for providing the public the information based on truth. ENRON’S CORPORATE CULTURE: Enron gained a lot of popularity in the 90s due to its extra ordinary earnings and its name was listed in the Fortune 500 companies. Their management felt proud of their performance and considered them the best in the industry. The management and executives believed that they are leading by a very big lead from their competitors and that their competitors have no chance to even come near their performance standards. They were so proud of their performance that they did not fear to take any degree of risk for their projects as they believed that they can handle it easily. The executives took the meetings easy and the focus of top management was on how to generate more money for the executives in spite of how they can increase the worth of the company. The executives and top management had lost the sense of corporate citizenship and they were just trying to earn as much for themselves as possible and take decisions to increase their worth without considering the company anywhere. Furthermore, they possessed the culture of deregulations as employees often broke the rules and they still were not punished. Things were taken easy and small things were just ignored. These small things in the end accumulate for high level of inefficiencies. Their arrogant behavior had developed a sense of power in them where they could do anything and no one could punish them. Since top management did not follow the rules by themselves so the employees under them followed the same style and it all became the part of corporate culture. Their appraisal system had created a lot of inefficiencies by itself. The new appraisal system implemented by the CEO of the company had the policy that employees would be evaluated in every six month and those who fall out at the last 20% in the performance standards would be kicked out of the company. This made a high degree of politics in the corporate culture. This system created an environment in which no one could trust each other and everybody tried to pull the leg of others. This fierce competitive culture destroyed the communication system and created large barriers among the colleagues. No one told the mistakes of others and in this manner mistakes were not noted and avoided in the first place and secondly when they got big they were simply written off by others to hide their own bad reputation. This system also created distances not only among departments but also among the levels of management. In spite of a failed system, they were actually proud of this system and considered it as the best in making employees using their full potential. Apart from that even top management did not follow the integrity in their practices. They considered that everything could be sold by using some statistical tools and making things look good. So because of the continuous use of these statistical tools and misrepresenting the actual performance, they actually became too short of physical assets at one time to pay off their debts. ROLE OF BANKERS, AUDITORS AND ATTORNEYS IN ENRON SCANDAL: Such manipulations cannot happen if other institutes would be performing their jobs with proper conduct. These problems would have caught at their start as in big organizations each statement has been verified by different institutes. There is always mistake or contribution of external parties in such frauds and in Enron’s case each party contributed a big role in helping them to manipulate the truth and remaining quite to address the problem. The role of bankers, auditors and attorneys has been discussed below: MERRILL LYNCH INVESTMENT BANK: They were responsible for handling all banking activities of Enron. Merrill Lynch is an investment bank and brokerage firm who provides services to organizations for all kinds of banking services including leasing, credit line. They also handled the equity shares of Enron in the market and as market makers it was their responsibility to make sure that the management was doing well with responsibility. As they were the financers as well and share a big risk against them so they possessed all the true financial information of the company which they failed to share with the authorities when the questionable accounting began in late nineties. One of their direct involvements in the wrong doing was the buying of the Nigerian Barges. In this sale Enron recorded about $12 million of profits improperly in their books and the bank did not even react to it. This recording helped Enron in matching year’s target and thus people remained satisfied that company was doing well with their money. Despite knowing all this still Merrill Lynch allegedly bought those barges for Enron for around $28 millions out of which $7 million was financed by the bank. Further Enron provided them reward for their participation in crime by allowing them to charge 15% of interest on financing of those $7 million which was outrageous. Documents at Merrill Lynch further proved that they knew that this deal had been done just to support Enron in providing wrong information related to their profits (Ferrell, Fraedrich, and Ferrell, 419 - 430). They further accused of replacing an analyst who had found out the truth about the intentions of the executives at Enron and made a report against them. But they were threatened by Enron that they would not be offered their upcoming stock options of about $750 million. Again they were hiding the information which was against public interests. ARTHUR ANDERSEN LLP: Arthur Andersen LLP, an auditing firm was responsible for auditing the financial reporting of Enron. They were responsible for ensuring that the information provided in the financial reporting and internal book keeping in Enron was accurate and that no information was manipulating the truth. All the stakeholders used the statements of Arthur Andersen LLP to get to know about Enron as they were their auditors and it was auditor’s duty to ensure that the statements available to the public should be based on the truth. Auditors had always got enough power in order to access the required documents of a company. So doing all this without involvement of the auditors would have been impossible. They did not perform their work with honesty and dignity because of which Enron’s top management was able to deceive such a large population. All the potential investors were using their reports to take decision whether they should invest in Enron or not, while on the other hand people who had already invested in the shares of Enron decided whether they should hold their investment or not. Andersen’s were one of the biggest partners of Enron as they shared more than one hundred employees who were only dedicated to the accounts of Enron. For which they actually earned $50 million each year. When the case was filed against Enron they were also found guilty for destroying some of the documents related to the Enron’s accounts in order to hide the wrong information. Due to which Andersen were banned from the auditing services (Ferrell, Fraedrich, and Ferrell, 419 - 430). The reason behind their part is simple that they earned a lot for their service which they did not expect from any other potential clients. So they did not want to displease the higher management of Enron. VINSON AND ELKINS: Vinson and Elkins were the official lawyers and attorneys of the Enron. Enron was also one of their top clients as well. The payment they received from Enron accounts for almost 7% of their total revenue. Most of the lawyers and members of general counsel in Enron came from the same law firm. The biggest part they played in all this fraud was that they dismissed the report of one of their employees working at Enron, Sherron Watkins, which was based on facts as she made some inquiries related to it. Enron was highly unethical as they did not as they did not trust employees of their own company and allowed client to continue doing fraud for such a long interval. Later Watkins also developed the reports related to their special deals in which she showed her concerns related to the nature of deals. But still the law firm approved the legality of those deals which was proved through their letter to the CEO of Enron. Most of the transactions were required to get approval from the legal entities which could not be done except Vinson and Elkins, and their letters proved that they have approved the legality of all those deals. This made them also the culprit in all the Enron scandal. ROLE OF CHIEF FINANCIAL OFFICER: The biggest culprit in the Enron scandal was their chief financial officer, Andrew Fastow. He along with his wife who was in US treasury, was alleged for many frauds and money laundering. Fastow knew each and every truth about the manipulation of the truths and falsified documents to support those reporting. He had created complex structure of business and used complex statistical methods to deceive the investors that company was doing great. He was also involved in insider trading as he sold a large amount of his stocks of Enron when he knew the company would be bankrupted in future. Fastow was alleged for fraud and theft and considered as the brain behind all the master plan of fraudulent activities committed inside Enron. He deceived the investors and stock holders through off balance sheets partnerships which were actually given to his two children with code names LJJ1 and LJM2. These partnerships showed Enron as very profitable but in reality these partnerships did not bear any returns. Further he was alleged of hiding the Enron’s big debts and not including them in the financial statements and showing inflated profits and further actually enriching himself with millions of dollars. He was not alone in planning all this; he actually had a team supporting his plans. His wife a former US treasurer was later found deceiving the government related to Enron’s taxation value. A number of US and European bankers were also part of Fastow’s team, who helped him in money laundering and for the preparation falsified documents for complex business partnerships. Work Cited Ferrell, O.C., John Fraedrich, and Linda Ferrell. Business Ethics: Ethical Decision Making and Cases. 8th ed. Mason, OH: South Western Cengage Learning, 2011. Read More