The U.S. government reaction to the Enron Scandal - Research Paper Example

?Research Paper What was the Government’s Reaction on the Enron’s Scandal Sociology November This paper focuses on response made by the government as a result of Enron scandal. The chaos caused economic losses to it stockholders and people have lost trust to the financial community. Much more, it has rendered the Code of Conduct and Ethics an insubstantial piece of covenant that could be disobeyed by seniors when they chose to do so. This paper used published literatures and materials in order to review government’s reaction on the said scandal so that risks of same incident are apprehended. An aftermath of the investigation showed perpetrators of the crime were persecuted, and the creation of a legislative Act that offered strict regulations and changes on the financial reporting. What was the Government’s Reaction on the Enron’s Scandal? Introduction The collapse of Enron in 2001 created ripple effects to its investors, its creditors, banks, employees, and the government. It has shattered the confidence of people to the financial markets and brought financial losses to its stakeholders, unemployment, and closure of two giant corporations, the Enron, and Arthur Anderson (AA). AA was also one of the largest accountancy and auditing firms in the world, and was the auditing firm of Enron. A long period of time has passed since then, and it is the duty of the government to take action on this big financial mess. Focus of this paper is to know what have been the reactions of the U.S. government toward this. Methodology Qualitative research using secondary sources of information, published articles, and journals will be used to establish information required. Knowing what the government has done to give justice to the people who lost money and employment will rebuild its trust to the financial system. Background Enron was the 7th biggest corporation in the United States in 2001. It was founded in1985 and was involved in electricity, natural gas, communications and paper companies, but was better known for its matchless style of business operation of futures trading of gas and electricity and creation of new unusual markets of commodities as broadcast time for advertisers, internet bandwidth, and weather futures. From a $9 billion revenue in 1995, its annual revenues rose to over $100 billion in 2001. So, the world was shocked to find out that it has filed for bankruptcy in the mid -2001. What was unknown to the public before the bankruptcy was that Enron’s reported financial condition was covered with systematic, organized and planned activities to cover up the losses of Enron. The drop of Enron’s stock price from $90 per share in the mid-2000 to less than $1 per share at the end of 2001 caused 11 billion dollars of losses to shareholders (Yuhao Li, 2010). Findings and discussions a. Violations of Ethical Practices Causes of bankruptcy in Enron is a tangled web of unethical practices committed by the Auditor, senior management, laxity of government rules, investment houses, banks and board of directors, stock analysts who kept on pushing Enron’s stocks and media frenzy.(Tesfatsion, L. 2011) Causes of bankruptcy is also deeply seated on breaking the rules of The Code of Conduct and Ethics wherein truthfulness was not followed by management by not announcing the true health of the company and conflict of interest. There was conflict of interest between the role of Andersen as Auditor and as a Consultant for Enron. The report of accounting irregularities on reports of Enron, and the admission of AA’s employees tearing of documents and evidences related to Enron’s involvement had totally eroded AA’s reputation and the quality of his audits on the Accountancy field were put to doubt by his clients. As an Auditor and Consultant of Enron, AA has the duty to inform the shareholders the correct information as the report influences economic benefits for its shareholders. But in this instance, Anderson chose to betray the stockholders for his best interests (Li,Yuhao, 2011) It is imperative that all employees are morally and duty bound to follow the Code of Ethics and Conduct of the company, but what if it is done by higher-ups, are they not liable? According to Tesfastion, L. it is evident that disobedience of the Code emanated from senior executives which in this case, were known as the then Chairman of the Board, Kenneth Lay, and CEO Jeffrey Skilling, CFO Andrew Fastow who was allowed to build private institutions and then transferred them illegally. Fastow violated professional ethics and took the crime of malfeasance. Employees who followed the orders of their superiors, knowingly that it is wrong are also guilty of conspiracy and equally liable. b. Bad practices of the company Investigation of the case showed that dubious transactions of Enron started in 1993 to 2001 when it took advantage in the loophole in the market rules on energy trading in California. It also went into illegal strategies that would reduce Enron’s tax payment; pump up the company’s income and profits as well as its stock price and credit rating; and to design transactions not reported in the balance sheet to enrich themselves and their families; and to make a fraudulent report of Enron’s financial condition to the public (Tesfastion, Leigh) As a rule, auditors should be hired by shareholders, but in practice it was done by senior management, thus breaking the regulation of independency. ?This creates conflicts of interest because auditors consult senior management and took its advise. Auditors also own stocks of the company, and since they are privy to the company situation, they can sell their stocks ahead. The company also retained same audit company for a long period of time which is against regulations. The Board of Directors was also paid by stocks of the company to align their interests with shareholders. As such they can also sell their stocks based on insider’s information. When senior executives fail to abide with SEC rules, it is the company who paid fines. c. Actions done by the government After the first sign of public trouble on October 1, 2001, when Enron announced a quarter loss of $618 million, the Securities and Exchange started to conduct an investigation. Accordingly, after the legal examination, Anderson was charged with lax accounting; AA Auditor Duncan was fired on January 15, 2002; CFO Andrew was sentenced on Sept. 26, 2004 to a 6 years imprisonment for creating false partnerships; Timothy Bolden, sentenced on 2007 with a two year probation. CEO Jeff Skilling received the longest punishment of 24 year prison sentence, and another CEO Kenneth Lay, died without finishing the case.(Tesfastion, Leigh) The consequence of this fiasco is the coming out of the Sarbanes-Oxley Act of 2002 that I considered as the most far-reaching changes of the Securities Exchange Act of 1934. The Act which took effect on July 30, 2002, contains reforms for issuers of publicly traded securities, corporate members, lawyers, auditors and corporate members. It has new penalties that put off any intention to commit fraud and corruption, and severe punishments to wrongdoers in order to protect the interests of workers and shareholders. Accordingly, the Sarbanes-Oxley Act : ? creates a Public Company Accounting Oversight Board to enforce professional standards, ethics, and competence for the accounting profession; ? strengthens the independence of firms that audit public companies; ? increases corporate responsibility and usefulness or corporate financial disclosure; ? increases penalties for corporate wrongdoing; ? protects the objectivity and independence of securities analysts; and ? increases Securities and Exchange Commission resources The SOX Act now requires public traded corporations to comply with the comprehensive reform of accounting procedures in order to promote transparency of financial reporting of auditors. They must list and track performance of their material risks and associated control procedures. The CEOs are obliged to guarantee the truthfulness of the financial statements. The Board of directors must have audit committees whose members are independent from senior management. Companies cannot grant loans to the company directors. Conclusion From investors’ side, it is important to understand factors surrounding operations of company, such as how the company makes money, its legality, or is it sustainable in the long run so they avoid risk of financial failure. The case demonstrated weakness of the Accounting System, and the need for a significant reform and governance. The SOX is a response of the government for cases of financial irregularities and oversight. The Code of Ethics and Conduct of a company has been created to govern the moral and ethical standards of the employees. But in this case, the code was disobeyed by senior management. It is easy to police lower employees, but who would keep watch over the seniors who are all in cohorts of this scandal. This is a gray area that should be addressed by proper authorities so that corporate messes as big as Enron will not be repeated. References Li, Yuhao. (October 2010) “The Case Analysis of the Scandal of Enron”. Retrieved 07 November 2013 ccsenet.org › Tesfastion, Leigh(April 3, 2011) “The Enron Scandal and Moral Hazard”. Department of Economics, Iowa State University,. Pdf Retrieved 07, November, 2013< http://www. Econ. Iastate.edu/tesfatsi. > Sabanes-Oxley Act of 2002. Public Law 107-204. 107th Congress, pdf. Retrieved 08 November 2013 Read More