Enron as a Part of the Most Admired Firms - Assignment Example

Case Analysis of Enron Related to Accounting Profession Name Institution Course Instructor Date Case Analysis of Enron Related to Accounting Profession Question one: Why Enron was an admired company prior to 2000 Enron was an American company that was famously known in the sectors of commodities, service offering and energy. Enron was one of the giant companies in the United States as it employed an estimated number of 20000 individuals. The services and the products that were offered by Enron were rated as essential therefore the cause of its fame. Aside from the external appeal of the company, in business terms the company was making a reasonable amount of money, an estimated $ 111 billion by the above stated year of 2000 (Davis, 2009, p. 28). Enron was listed on New York stock exchange. Throughout the period of the 1990’s, Enron witnessed massive expansion where its stock inclined by a percentage of 311. In 2000, Enron’s stock was priced at 83.13 U.S dollars while its market capitalization had already exceeded the sixty billion US dollars tag (Benston, 2006, p. 466). Based on the figures expressed on the stock market, the company’s future prospects were looking very bright thereby leading to its admiration by many. According to the survey conducted by the Fortune magazine at that particular time, Enron was rated as the most innovative large company as part of the most admired firms at that particular time. Enron is company that outgrew the borders of the United States economically and expanded internationally. The international expansion meant that Enron was stretching the limits of accounting and taking the profession to another level. The admiration of Enron was as a result of the accountants who worked to analyze the assets and liabilities that the company owned. The accountants worked within the limits to manage the company’s earnings and the balance sheet to present a positive admirable image of the company. During the original Enron Company, the accounting process was straight forward where the expenses and the gains of the company were listed. As the firm expanded, so did they adapt the market to market approach of accounting (Davis, 2009, p. 39). In a nutshell, the admiration that Enron had acquired throughout America by the year 2000 was the innovation of an online platform. That platform witnessed the increase of the amount of transactions carried out by its traders incline to 3084 in 2000 from 672 that were performed in 1999. In terms of employee management, Enron was ranked the best. The company lured its recruits with bonuses to ensure that it stays a head of other competitors. Question two: the rise and fall of Enron One of the most notable factors that propelled Enron to its higher ranking was the fact that the company had skilled personnel. The company recruited majority of MBA business students to manage most of the transactions in the company. Apart from that fact of professional skills, many factors played part in the rise of the company levels that was at the dawn of 2000. The Company had strict financial management and nonsense was not tolerated by the then chief executive officer. The first question as discussed above, has vividly explained most of the factors that fueled its journey to the top. The rise of Enron in the span of three years was too good to be true as explained by many analysts. However, in this segment, the article will discuss more on the downfall of the giant that every share holder least expected. The fall of Enron was witnessed abruptly after the company had hit its peak in 2000. This was only after one huge scandal that left the company on its knees. Accountants played a major role in the crumbling down of Enron. According to various research articles that were published after the company had officially closed, Enron’s expansion had happened so dramatically that it had no clear strategy on how to handle certain transactions. Some of the deals transacted went through while others backfired. The major problem however began with the accounting practices that the company had adopted. The market to market approach was very complex and risky. Reports from the company sources indicated that the company had violated the guidelines of accounting (Thomas, 2002, p. 44). Hence, the downfall was long coming. Enron had developed a complex business model that required the accounting department to misrepresent revenues of the company and adjust the balance sheet in order to remain more appealing to the public and potential investors. The mark to market approach that was adopted by the company’s former chief executive, Jeffrey Skilling, always encouraged the company to hide its debts from the public. This ensured that the company was still appealing externally but was crumpling down internally. Investors were cheated with the mode of accounting adapted by Enron. Market to market accounting is a complex way of doing accounts and it is mainly used by financial institutions. The stated mode of accounting requires that once a long term deal has been agreed upon, the total future cash flow is estimated using the present value. Using that approach, the prediction of the future net cash flow was a difficult task for Enron to provide the estimate. Accountants were therefore left with the task of trying to match the cash and profits thereby creating large discrepancies. From various analytical research articles presented, close analysis indicate that the major pillar to the downfall of Enron was its CEO, Jeff Skilling. Not only had he violated the accounting principles postulated by Generally Accepted Accounting Principles (GAAP) but also he manipulated the auditing and analysis process (Thomas, 2002, p. 44). Question three: Why Enron’s internal and external checks failed to prevent its demise Based on the information made available on how the company operated, it is straight forward that internal checks and external checks were being controlled differently and could have done nothing to prevent the demise. Enron was managed by master-minders who knew to play the game of bending the rules very well. On their part, accountants had already tried to find the weakness in the Generally Accepted Accounting Principles and tried to exploit the working guidelines. This was however done with the aim to maintain the rosy image of Enron to potential investors and the public in general. External checks could not have prevented the demise simply because things were being controlled. Enron had a board of directors that were responsible for appointing the chief executive officer. It is the same board that was responsible for the appointment of the auditing firm that was to check the internal and external regulations. The board was led by Ken Lay before things began falling apart. Andersen having been Enron’s auditor since the year of 1985 stated that the audit firm was responsible for regulating external and internal procedures that were implemented in the company. In other words, Andersen was there to represent the best interest of investors. Part of the duties that were to be performed by the audit firm was to reveal the accounting irregularities that were being practiced in the company. However, that was not to be as Andersen was accused of covering up the accounting malpractices that were being carried at Enron. Andersen was therefore part of the existing conspiracy that led to the crumbling down of the firm. The auditing firm which had also taken up the duty of internal auditing at Enron had received a substantial amount of money. With the auditing firm part of the conspiracy at the management, both internal and external checks could not have in any way prevented the demise that occurred to Enron. In the year 2000, Andersen received 25 million US dollars in auditing services and 23 million US dollars for non-auditing services (Thomas, 2002, p. 48). Enron also hired the services of other players such as the Certified Public Accountants and also the services of the Financial Accounting Standards Board (Benston, 2006, p. 472). The two categories of professional tried to work towards saving the company’s money. Enron also occasionally acquired the services of Ernst & Young and Pricewatercooperhouse to perform certain auditing services and pretend to the public that they have hired new auditing firms to replace Andersen. The news regarding Andersen covering up for Enron accounting malpractices was revealed to the public by the United States Securities and Exchange Commission. To avoid the accusations one of the Andersen’s offices stationed in Houston shredded its evidence and deleted over 28000 thousand e-mails. Another indicator of how the internal and external checks could not have prevented the demise is the fact that the chief executive officer, Mr. Jeffery Skilling was involved in covering up for the mess that had already been done. When the internal analysis was conducted in the company, the executive officer could cover it up through shifting employees from various departments to other sections. The main motive for this was to create the illusion that every employee in the company works extra hard. All these factors that were hidden to the auditing company and the fact that the scandal saga involving Andersen was released to the press completely dismissed any hopes Enron had for surviving. Question four: Would continuous auditing have saved Enron? No continuous auditing would not have saved the company. Either way, the company could still have crumbled to the natural forces of wrong doing. The first case would involve the use of Andersen services to audit the firm. Andersen had already been accused of hiding important information from investors thereby termed as unethical. If Andersen could have continued its auditing services like the way it did, Enron could not be saved from the turmoil. The mistakes had already been made and the auditing firm was trying to cover for it. If the accounting errors could have been released to the public, Enron could still had fallen due to the fact that majority of the investors would have taken off. The second option is the scenario where an auditing firm that was not Anderson, could be brought in to carry out the internal and external checks. That approach would also have less effect to saving the company from that turmoil. This is simply because the errors made could still be revealed to the press. The reaction of investors would be as the one mentioned above. In summary, auditing could not have saved the company from shutting down. The consequences that were being experienced at Enron were as a result of complicated accounting choices that the company’s executive officer chose to operate with. Question five: Failure of Enron’s Board of Directors to prevent the demise. Everything that was happening at Enron could be directly blamed on the inefficiency of the Board members. The board members consisted of elite members who were well learned including top officials from the government. The Board of Directors therefore had the authority and mandate to determine the well-being of the company. Jeff Skilling and Kenneth Lay were among the board members. The board had powers to select an auditing firm and constitute a special committee that was put in place to check the mandate of the executive officer. The board members were supposed to be acting independently to avoid any conflict of interest. That was not the scenario at Enron according to the survey that was conducted. Several board members had conflict of interest as they were aiming to fulfill their personal motives. With conflicting interests, it was apparent that the board members could not do anything to prevent the giant corporate from going down in such a manner. The major reason why the Board of Directors failed to save the turmoil was the fact that majority of them who were non-employees of the company, did not understand the business strategy adapted by Enron. Only two members from the board were aware of the company’s status but both of them had conflicting interests. The idea of adopting market to market accounting strategy was harshly enforced by the executive officer, Skilling. Other board members did not question a lot the business motives of implementing the complicated accounting practices that violated the working principles of accounting. With the market to market accounting principle, it meant that the profits that were announced by Enron could not be challenged as the system was complex. The board members had formed various committees that were to be responsible in regulating transactions of the company. The total number of board members was 15. Members were subdivided in to five sub committees that had various responsibilities that were well laid out. According to the stated responsibilities, the board had a strong backing to save the company from collapsing. The board members were being enticed by the huge contracts and the incentives earned from them to often maneuver the accounting numbers in order to increase their pay. This was being done with a clear goal of boosting the stock exchange earnings. Mr. Kooper who was one of the board members was involved in a transaction, an action that was against Enron’s ethics code. The transaction should have been abandoned but the members of the board ignored it. This scenario therefore indicated that members of the board had conflicting interests thereby failing to rescue the company. Question six: The breaches of accounting and ethical code of conduct that occurred within Enron. It is already known that Enron accountants used a number of accounting practices that were fraudulent and deceptive. The tactics that were employed made Enron look more appealing and more superior to investors and the stock market fifty times more than it was. The accounting breaches were being performed each quarter making the company to appear to be raking in more billions of US dollars (Davis, 2009, p. 43). What makes this kind of practice unethical and a breach of the accounting principles was the fact that the company’s executive knew everything while the company’s investors had no idea of the excessive amount of money that they were being swindled. Breaches of accounting and Ethical code of conduct that would to accounting profession Accounting is like any other profession and it is necessary to observe the ethical aspect of that profession. The code of ethics for professional accountants basically carries the professional ethics that all professional accountants must adhere to avoid bias in their duties. Many issues have recently been raised referring to how the accounting and auditing practice has been untruthful about delivering the required information. To try and make things right, the International Federation of Accountants (IFAC) has set out its mission on ensuring that accountants provide quality services by abiding to the formulated code of ethics for professional accountants. IFAC formed a committee referred to as International Ethics Standards Board for Accountants (IESBA) that was put in existence to determine the code of conduct that accountants should follow. According to IFAC’s views, auditing should be performed independently (Melé, 2005, p. 101). This means that all auditors should be free of bias and not affected by any conflict of interest while delivering their duties. As witnessed at Enron, Andersen breached the code of ethics while auditing the company as the auditing firm had conflicts of interest. The firm was receiving a substantial amount of money from Enron’s executive officers thereby opting to hide the accounting breaches from investors. The code of ethics for professional accountants put forward by IFAC is there to maintain the principled based approach towards providing free and fair auditing services. The guidelines are responsible for the resolution of any conflict of interest the auditors may follow. The guidelines provided by IFAC are more of principle based rather than rule based. To summarize what IFAC stands for, the federation believes that all auditors should be independent. With independence, the code of ethics can be strengthened up and in that particular scenario it will comply with basic principles that guide professional accountants to achieve their objectives. Following the principle based approach as advocated by IFAC, several guidelines have been put forward to help auditors to maneuver through various scenarios. However, these are only IFAC’s principles; there are also other international standards that advocate for the independence of auditors for their provision of assuring services (Melé, 2005, p. 107). Question seven: Lessons learned from Enron as an accounting professional. Several lessons were learnt from the events that took place at the company. A lot of things happened and many suffered but in this discussion, the article reflects on the plight of the accountants. The first lesson learnt from the proceedings at Enron is that it is important to respect the ethics and codes of conduct. The code of conduct advocated for independence in delivering services as an accountant. The accountants that were working at Enron at that particular period were from Andersen. They had conflict of interest that led to the crumbling down of the business. It is therefore important as a professional accountant who is ethically and morally upright, to make use of the necessary provided procedures to eliminate any biasness in terms of service delivery (Parker, 2005, p. 386). Another lesson also learned from witnessing the Enron’s failure is that it is important as an accountant to follow the existing guidelines to execute the required mandate. Accountants from Enron admittedly said that they were responsible for scrutinizing the available working principles and founding loopholes to go around the principles. Going around the principles was to ensure that they breached the rules of accounting for their own benefits. The accountants were being manipulated to publish wrong information in the name of glorifying the company in terms of its earnings. The big hole that the company found itself in was dug by the accounting profession. It is therefore necessary to adhere to the available rules in order to avoid certain occurrences that happened to Enron. It is therefore important for any one aspiring to be an accountant to work within the set guidelines as they deliver of what is expected of them. What happened at Enron may have been a different scenario but it is important to acknowledge that self respect is important while delivering services to others (Deakin & Konzelmann, 2003, p. 585). The bottom line is that greed is bad for any profession. Question eight: effects of unethical business practices on the society and community Enron’s case was a massive one and its aftermath claimed many victims. It was a tragedy that its vice chairman committed suicide as a result of the massive scandal that had occurred at Enron. Many people suffered losses ranging from employees to investors who had put their substantial amount of money in the company. The clients who sort services from Enron also suffered a lot as they were being robbed by the company. Many unethical malpractices happened at Enron which led to its failure. The effects were harsh as experienced by the communities who depended on Enron for service delivery. One thing is that unethical business practices like the one at Enron generally condemns the community to poverty. The livelihood of the communities serving the company depended on it and when it came crushing down, it meant that those members had to start life afresh. Poverty is generally bad to the society as people are tempted to do anything for their survival. The scandal that happened at Enron also makes the society to lose faith and develop fear in investing in certain bright companies. People begin to fear losing their money when they invest in particular companies (Sims & Brinkmann, 2003, p. 247). In a nutshell, the effects unethical business malpractices have long lasting effects. Despite the fact that all those who were involved in the scandal were brought to the book, the damage had already been done. Such events create the notion that certain professions are bad in the society. Conclusion Enron was a tragedy that could have been prevented if the necessary guidelines were followed and personal greed avoided. However it happened and claimed many victims. Lessons were learned from the incidences but it seems people have already forgotten. In 2009, United States witnessed the collapse of major financial institutions and insurance companies. References Benston, GJ 2006, “Fair-value accounting: A cautionary tale from Enron,” Journal of Accounting and Public Policy, vol. 25, no. 4, pp. 465-484. Davis, GF 2009, “The rise and fall of finance and the end of the society of organizations,” The Academy of Management Perspectives, vol. 23, no. 3, pp. 27-44. Deakin, S & Konzelmann, SJ 2003, “After Enron: an age of enlightenment?” ORGANIZATION-LONDON-, vol. 10, no. 3, pp. 583-587. Melé, D 2005, “Ethical education in accounting: Integrating rules, values and virtues,” Journal of Business Ethics, vol. 57, no. 1, pp. 97-109. Parker, LD 2005, “Corporate governance crisis down under: post-Enron accounting education and research inertia,” European Accounting Review, vol. 14, no. 2, pp. 383-394. Sims, RR & Brinkmann, J 2003, “Enron ethics (or: culture matters more than codes),” Journal of Business ethics, vol. 45, no. 3, pp. 243-256. Thomas, CW 2002, “The rise and fall of Enron,” Journal Of Accountancy-New York-, vol. 193, no. 4, pp. 41-52. Read More