The Enron Fraud - Essay Example

Lecturer Question According to Dodd-Frank Wall Street Reform and Consumer Protection Act, Governments and regulators are persistently enhancing the aspect of auditor independence regimes with the main objective of regaining trust and strengthening the independence of outside auditors. The establishment of the standards policies and practices for accounting has for a long time based on a self-regulative system and a principle-based model. In the United States, the Security and Exchange Commission (SEC) and the American Institute of Certified Public Accountants have the sole responsibility of regulation and evaluation of the auditing practices adopted in the country (Gietzmann & Sen 22). The companies’ acts usually serve to offer adequate regulatory approaches, that auditor and companied to adhere to. With this respect, it is a requirement of SEC that all public corporations should have outside auditors to undertake the auditing process. This implies that an outside auditor is supposed to offer opinions regarding the precision and reliability of the company’s accounting statements, taking into consideration the principle of objectivity, lack of biasness and avoiding the engagement in activities that are likely to result to lack of auditor independence (Haines 14). As a result, auditors are required to display utmost ethics and honesty in the code of duties, which requires auditors to display integrity, objectivity and independence. The regulatory oversight that resulted to the Enron fraud is a violation of the aspect of auditor independence as evident by Andersen having an office space in Enron’s headquarters that was permanent. This served to reveal lack of auditor independence (Hill & Cronk 10). In addition, there is a possibility that Andersen overlooked Enron Corporation’s compliance with the required accounting policies, procedures and practices. In addition, Enron Corporation had relied on the auditing services from Andersen, resulting to him familiarizing with the corporations accounting policies and practices. The Enron scandal served to reveal the significance of auditor independence; as a result, the fraud served to question the efficiency and the adequacy of the present audit independence regulatory frameworks. The auditing procedures prior to the Enron fraud were sufficient to ensure that there is high audit quality, but in some cases fails to identify misappropriations (Hodgetts & Luthans 33). There have been significant changes in accounting regulations after the collapse of the Enron Corporation with the main objective of ensuring veracity of the financial statements. This is because most corporations faced accounting issues and poor quality of audit procedures. One of the new accounting regulations after the collapse of the Enron Corporation is the Sarbanes-Oxley Act passed during 2002 and incorporated numerous strictures on audit and accounting policies and practice (Horngren 43). According to the Sarbanes-Oxley Act, accounting firms have the sole responsibility of auditing committee of the boards and that auditors are not supposed from providing other services that are not related to auditing such as management, investment advice, broker and so on. In addition, audit partners are to be rotated within a period of five years and that auditors are prevented for duration of one year from the acceptance of employment within their client firms in positions such as Chief Executive Officers, Chief Financial Controllers and so on. The Sarbanes-Oxley Act also requires the establishment of an auditor oversight board in accordance with the SEC review (Hubbar & Beamish 11). This act has been effective in increasing the oversight of the accounting profession by the establishment of an oversight board as stated above. The act has also been helpful in enhancing corporate governance obligations of public corporations, which has helped in increasing the precision of financial statements (Larry & Bob 23). The act also aimed at increasing the disclosure of auditing information and off-balance sheet transactions undertaken by the company. The imposition of strict criminal penalties in case of violations of the accounting regulations outlined in the act and the present Federal security laws have helped in reducing the auditing failures, which has contributed significantly to the elimination of regulatory oversights during audit practices (Spiegel 22). Another regulatory oversight during the collapse of Enron Corporation is the potential interference by the United States government in the regulatory process. This serves to eradicate the self-regulatory system, and has received immense criticisms from regulators and professionals citing the complexity of the SEC and AICPA rules. This is perceived to result to more confusion and impose a challenge on the audit practicing community in the United States (Plaats 20). Significant changes have also been implemented at the SEC after the collapse of the Enron Corporation (Sherer & Turley 199). The Sarbanes-Oxley Act served to streamline the changes in order to enhance the effectiveness of the accounting profession at large. The change at the SEC after the collapse of the Enron includes a revision of the requirements that outlines the requirements to be met when offering non-audit services. The SEC was of the opinion that the newly implemented standards and guidelines offer adequate safeguarding steps that are aimed at eliminating the compromising of audit independence (Wells 19). In addition, the SEC hopes to revise the standards and guidelines every now then in order to address new challenges that may impede audit independence, precision and accuracy of the reporting of financial statements. After the Enron fraud, SEC significantly revised its auditor independence requirements with the main objective of analyzing the efficiencies of the existing standards and constantly suggests adjustments to the rules (Stevenson 12). Question 2 According to Lewis statement ‘bonus culture and a sense of entitlement’’ money is the only thing that motivates people and this has always been a promoter to fraud detection. . Unfortunately, having adequate access to accounting information or rewards is noted to have attached benefit in becoming fraud detector and whistle blower. Monetary rewards and reputation rewards are among probable incentives that increase willingness to reveal accounting malpractices. Historical frauds related cases identify various whistle blowers and detectors. To arrive to the detectors of fraud, it is important to first recognize the source of information and incentives that increase detectors willingness to bring such frauds to light (Zingales et al, 18). According to the research conducted by the Kuhn & Sutton, 2006 whistleblowers defer in their capacity to detect frauds. Essentially, the research indicate that, reforms of employee compensation practices needed to avoid another financial crisis, under legal duties and obligations, the independent auditors and the security regulators are the primary detector agents while on the other hand residual claimers (shareholders and lenders) and the analysts have a mandate to reveal some frauds. According to Kuhn & Sutton, 2006 securities regulators accounts for around seven percent while the auditors account for 10 percent. In the spectrum of corporate governance the non-residual claimers are not considered vital in blowing fraud whistles. This is opposite of reality where detectors are mostly employees, non-financial regulators and media who play a significant role in shedding light on fraud issues in public corporations. Question 3 The nature of the fraud in WorldCom Fraud Case was similar to that of Enron though of different magnitude. In 2000, the company suffered stiff competition, end user price wars, large over capacity bandwidth, and rise in mobile phone penetration in the market (Moberg & Romar, 21). In both instances, false accounting takes place with certain hidden agenda which include; defrauding organization or strengthening organization falsely. Among them include; to hide losses, to attract lenders, to inflate share prices, attracting customers, cover fraud, to realize false bonuses, or/and to report false profits. References Ethics institute of South Africa. (nd) WorldCom Case Study. Brooklyn Square, 0075, South Africa. Retrieved from http://www.irmsa.org.za/library/WorldCom.pdf Harrison, B. . Does the WorldCom Bankruptcy Put My Telecom Service at Risk? Implications for WorldCom Customers and Non-Customers. Epicom Corporation. Retrieved from http://www.telecomdirections.com/PageFiles/Worldcom%20Bankruptcy%20and%20Implications.pdf . 2002.print Kuhn, R. & Sutton, S. G.. Learning from WorldCom: Implications for Fraud Detection through Continuous Assurance JOURNAL OF EMERGING TECHNOLOGIES IN ACCOUNTING. Vol. 3. pp. 61–80 Moberg D. & Romar, E.. WorldCom. Retrieved from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html Scharff, M.M. Understanding WorldComs accounting fraud: did groupthink play a role?  Journal of Leadership & Organizational Studies.  Spring .2005.print Thorne, B., Stryker, J. & Michelson, S. (nd). The Sarbanes-Oxley Act Of 2002: What impact has it had on small business firms?. Stetson University. Deland, Florida. Zingales, L., Morse, A. & Dyck, A. Who Blows the Whistle On Corporate Fraud? University of Toronto & University of Chicago, NBER, & CEPR.2008.print Read More