is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m INTI INTERNATIONAL COLLEGE SUBANG AMERICAN DEGREE TRANSFER PROGRAMME sh Th ASSIGNMENT 1 ETHICAL ISSUES IN ACCOUNTING Name: Lim Jee Yan Course Code: ACC201 Course Title: Principles Of Accounting I This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ Lecturer’s Name: Ms. Alicia White Enron Case Study Introduction In the early 2000, Enron was one of the first companies to have traded using the Internet. Enron invested in the dot.com boom. Enron’s share price rose. Enron funded the losses is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m that were transferred from its books to a partnership. In the late 2000, Enron’s share price rose and its annual report reported global revenue of US$100bn with income increasing in three years. Enron used advanced accounting tools to keep the share price high. Early 2001, Kenneth, the senior management of Enron was invited to become the advisor for national energy policies after Enron donated $100,000 to the president. The result of an energy policy review was favorable to the energy industry as expected. In the October of 2001, Arthur Anderson, Enron’s auditor, suggested a change in the accounting method for partnership and a lawyer reminded him to not retain unnecessary documents. This lead to Arthur Anderson’s staff shredding Enron’s documents. On the November of year 2001, Enron negotiated for a merger. Enron also restated its profits for the past four years. Profits inflated due to the hiding of debts in the complicated partnership arrangements. Enron negotiated a possible taken-over attempt by Dynergy. On the December of year 2001, Enron filed bankruptcy protection. Also, Dynergy was taken into legal action for withdrawal from the merger. On January of 2002, Enron’s situation was taken into Th account as a criminal investigation by the US Justice Department. On February of year 2002, the investigation report was out and it included a fundamental default of leadership sh and management and the attempt by Enron’s management to misinterpret the company’s financial position. Questions 1. Why did the Enron case surface? This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ Senior management of Enron was undergoing unethical practices, which then lead to the Enron case surfacing as the company was appearing too good to be true. In conclusion, there was a major default of Enron’s leadership and management and also, Enron’s management tried to misinterpret the company’s financial situation; therefore, this leads to surfacing of Enron case. (3 marks) 2. Who should bear the blame? Example of stakeholders like accountants, bankers, auditors and lawyers should is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m bear the blame for failing to perform their responsibilities. One of the reasons why the stakeholders mentioned above should bear the blame is the accounting firm who was in charge that restated its profits for the past four years. Profits were admitted to have inflated due to conceal of debt in the partnership arrangements. Arthur Anderson, the accounting firm that was in charge of Enron’s accounts shredded the key documents because of the lawyer’s advice to Arthur Anderson asking him not to retain unnecessary documents. Moreover, stakeholders such as the Board of Directors and the senior management should equally share the blame as well. (5 marks) 3. Should the accountants/auditors be equally responsible for the Enron case? If yes, in what aspects? Th Yes. There are a few main aspects of why the accountants or auditors should equally bear the responsibilities for the Enron case. One of them includes sh accountants manipulating of data of the company by management. In other words, books, accounts and financial statements of the company was not maintained or was inappropriately reflected the transactions and legal requirements of the company. Some examples of manipulating data may be mischarging certain expenses record intentionally or when the company makes cash payment or This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ receipt, only then expenses and revenues are recorded. Other than that, accountants also involved in bribery and conflict of interests, which was one of the major reasons for the downfall of Enron. As for auditors was helping Enron’s senior management to conceal their bad practices including concealing liabilities and the debts in the complicated partnership arrangements. In addition, auditor who was in charge of Enron’s accounting, Arthur Anderson shredded all the Enron documents; thus destroying evidence relating to its relationship with Enron. (8 marks) is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 4. What can we learn from the case of Enron? From the case of Enron, we learnt that an improved and much more advanced corporate governance is also required with the enforcement of the legal act. Having said that, accountability of certain individuals can be ensured in an organization through mechanisms that reduce the impact of agency problem. An example of agency problem in this case is the conflict of interest between the employee and the firm. For instance, managers might be induced to manipulate accounting figures that determine their year-end bonus. In addition to that, we learnt that mark-to-market accounting is proven to be unreliable. Based on the case of Enron, the use of mark-to-market accounting was later backfired. The company’s forceful accounting had ruined Enron’s books and had allowed the company to appear to be too optimistic in it’s assumptions of the future profits. Furthermore, we learnt that the Enron culture is also flawed due to being a competitive workplace; hence, everyone closes a certain deal in a hurry regardless Th of whether it is good or bad because right after a closed deal, they got their bonuses regardless of the result of that deal. For that, no follow-ups were made sh since no one wants to take responsible for the done deal. Next, honesty is one of the main parts of what we learnt from the case of Enron. The main person who brought dishonesty to the company was Andrew Fastow. He hid losses and fabricated earnings by creating multiple SPEs. Some of the examples of SPEs were Chewco, LJM1, and LJM2. Moreover, we also learnt that how greed takes This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ us nowhere. One such as Jeffery Skilling. He was responsible for implementing the mark-to-market accounting in Enron. Enron launched EnronOnline under his management, which in the end caused the company to declare bankruptcy due to the inability to cover the capital costs of their transactions. (10 marks) 5. What kind of precautionary measures do you suggest to prevent a similar case from occurring again? The acts by senior management must be monitored by the Board of Directors to avoid similar cases from reoccurring. Senior management’s unethical behavior is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m such as misinterpreting past accounting figure was the primary reason of Enron’s collapse. Having said that, strict monitoring should be given to accountants and auditors too from letting minor details from slipping away. In addition to that, accounting approach and financial structures must be carefully selected to use. Besides that, Board of Directors of the company also plays an important role; ergo, effectiveness of Board of Directors should be taken in considerations as a precautionary measures. For example, some Board of Directors will act selfishly by not reporting certain error caused by co-workers in order to keep his job or to maintain a good relationship with working partners. In some other cases, the members of the Board of Directors does not report the problems encountered for the services provided. Simple solution to the problem such as having regular check ups on Board of Directors by higher authorities could and will make a big difference. Problems such as bribery may occur among the Board of Directors who have worked for a long period of time at a company due to having Th familiarized themselves with the operations of the company; thus to avoid such problems, regular elections should be taken place in the company. In this case, it’s sh also a fair game where everyone is given a chance to prove themselves in the company. (10 marks) 6. What is ‘corporate governance’? This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ Corporate Governance is defined as a set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered and controlled. Besides that, Corporate Governance also includes the relationships among the many stakeholders involved and the goals by which the corporation is governed. (4 marks) 7. How would ‘Corporate governance’ work for Enron? There are various methods to implement Corporate Governance in Enron. One of them is demanding Enron to arrange an audit committee in order to review the is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m work of external auditors and making sure that the financial statements are presented fairly and accurately. The Board of Directors should be asked to act using the best code of practices of Cadbury Report. Besides that is stressing Enron to empower the non-management directors to check up on the management consistently and the management directors, which are absent to avoid ineffectiveness occurring in the company. Other than that, responsibilities and authority of the audit committee of Enron must be demanded to increase so that the mistake and flaws in auditing can be decreased. Also, the corporate governance guidelines for a listed company such as Enron should be disclosed. Code of business conduct and ethnics for directors, officers, and employees in Enron must be disclosed and adopted to avoid dishonesty within the company from occurring again. Last but not least, the independence of auditors in Enron should be strengthened. (10 marks) Th Reference sh 1. BAFS Learning and Teaching Example. (April, 2009) This study source was downloaded by 100000819287197 from CourseHero.com on 03-29-2021 06:22:46 GMT -05:00 https://www.coursehero.com/file/11578149/Enron-Case-Study/ Powered by TCPDF (www.tcpdf.org)
