Dissolution of Enron Corporation - Essay Example

In summary, Enron collapsed due to bankruptcy that was associated with a major audit failure of the company’s books of accounts. The bankruptcy led to major losses to shareholders, highlighted by a dramatic fall in prices from 90US dollars to less than a dollar within one year (Thomas, 2002). This was followed by investigations and summoning of the company’s executives who were later sentenced in various prisons.

WorldCom was a big company involved in the telecommunications business. It was declared bankrupt around July 2002 due to accounting fraud but later reemerged for business in 2004 after changing names to MCI (Tolunay et al., 2005). WorldCom was regarded as one of the largest telecommunications companies operating in the United States, where it had expanded from Mississippi in 1983. The downfall of WorldCom began when it started experiencing diminishing infrastructural demands due to the oversupply of telecommunications, and as a result, its revenues had fallen since the debt was used to finance huge infrastructure investments. Thus, the main cause of the demise of WorldCom was the increase of net income and assets through the transfer of expenses to the main capital account (Tolunay et al., 2005). There was an understatement of operating expenses and capitalized costs were treated as investments.

There are specific ethical violations in accounting practices that were done by Enron and WorldCom since in the year 2000, Enron had started showing financial difficulties and problems. CEO Jeffrey Skilling did one of the ethical violations, as he had formed a method of concealing and hiding some company operations and financial losses it incurred. This was referred to by financial analysts as Mark-to-Market accounting (Seabury, 2011). As Seabury (2011) highlights, it is a method used in trading securities by the determination of their actual value at the current moment. This method is considered not suitable for conventional businesses.

The second violation that led to the collapse of Enron was issues of corporate governance (Jickling, 2002, p. 4). This was caused by a conflict of interest between the executives and the company. For example, Andrew Fastow, the Chief Financial Officer (CFO), had made a deal with Enron by partnering with it to do business. In these transactions, the CFO concealed losses and debts which were accrued by Enron. Hence, this had a significant impact on the reported Enron profits (Jickling, 2002).

The third ethical violation in accounting practice by Enron was referred to as Accounting issues (Jickling, 2002). This was because Enron recorded canceled contracts and projects as assets in its books and did not indicate which ones were canceled. In accounting issues, Jickling highlights, Enron used derivatives to manipulate accounting figures, and this was an ethical violation of accounting ethics. The fourth ethical violation was pension issues whereby, Enron’s employees held a large percentage of stock. The last violation of ethics was in the financial audit. The firm’s auditor used careless standards in auditing Enron due to a conflict of interest over the fees they levied for their services. They used unrealistic payment ratios which generated controversy as to whether they were taxable or not.

On the other hand, WorldCom had also violated some ethics in accounting practice. Tolunay et al. (2005) highlight that there were three ethical violations in WorldCom’s accounting practices. The first violation was underreporting of line costs, which had formed a large fraction of expenses. WorldCom understated its ratios instead of stating them correctly. They also inflated revenues with false accounting entries (Tolunayet al., 2005). The second violation was the release of accruals to suppress line costs. The executives improperly acted to understate line costs. WorldCom improperly released used-up accrual line costs, which caused a misrepresentation. The last ethical violation was the capitalizing of line costs whereby WorldCom capitalized line costs in the balance sheet instead of classifying them as expenses (Tolunay et al., 2005). This fraudulently increased their asset values.

The Certified Financial Planning Board of Standards (CFP) highlights that there are various roles that business ethics play in strategic financial planning, which include integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence. According to CFP, integrity is upheld during financial planning. These ethics helps to ensure that the planners maintain honesty and legitimate accounting practices and ensures the avoidance of manipulation and misrepresentation of financial information. Secondly, business ethics ensures objectivity. This is concerned with the objective conduct of business practices in financial planning free from secret motives. This ensures that there is impartialness in financial planning (CFP Board, 2012). In addition, ethics ensures that in planning, maintenance of knowledge and skills is necessary to enhance the provision of professional services.

The fifth role of ethics in financial planning is fairness. In this role, ethics ensure that there are reasonable professional relationships where conflicts of interest are discussed. Confidentiality is another role of business ethics in financial planning whereby executives are supposed to safeguard private client information, and accessibility of information is limited only to authorized personnel. The second last role is professionalism whereby in financial planning, executives must conduct business by laid down guidelines (CFP Board, 2012). They should avoid socially unacceptable practices and conduct business professionally. Lastly, ethics ensure diligence in financial planning. In this case, financial planning should be done promptly without delays (CFP Board, 2012).