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The case of Enron Corporation was one of the most vivid examples of accounting errors and unethical behavior followed by the company’s management. This case had a great impact on other companies and auditing and reporting standards and procedures. After the collapse of the energy company Enron in January 2002, financial statements seem a lot less hard and objective than they once did. Enron caused many problems occurred among equity shareholders, as a company with an equity market capitalization of over $70 billion became worthless in just over a year (Burton 2002). The Enron fiasco focused attention on US accounting practices, and highlighted the relationship between companies and the accounting firms who as auditors were meant to confirm the accuracy of financial statements. For many years corporate governance experts had worried over potential conflicts of interest when accounting firms acted as both consultants and auditors to the same firm, but these conflicts burst out into the open after Enron. The auditors to Enron were Arthur Andersen, one of the top five firms that dominate the global accounting market (SEC Says Corporate 2002). The fallout from Enron’s collapse left Andersen facing legal challenges including a criminal charge from the US Department of Justice. About the same time, the SEC announced that it might seize the profits of company executives who made profits by selling company stock while earnings were inflated. It noted that Enron executives had sold $1 billion in company shares before the share price collapsed on news that charges would reduce earnings by $585 million, and revelations of off-balance-sheet debt The SEC also announced that it would assess the performance of the audit committee of any company whose financial reporting was investigated by the SEC (‘Socially Responsible Firm Publishes 2002).
The damage to its reputation also led to a number of its major clients such as Merck replacing it with alternative auditors. In March 2002 Domini Social Investments (DSI) issued new proxy voting guidelines that had been revised in the light of Enron (‘Socially Responsible Firm Publishes 2002). The new guidelines stated that DSI would vote against the appointment of auditors who were not independent, while it would also vote against companies whose boards did not have a majority of non-executive directors. The case of Enron shows that violation of accounting principles and issues can lead to bankruptcy and legal responsibility of the company’s executive team. Enron’s collapse was also a calamity to many of its employees, who not only lost their jobs, but saw the value of their 401k pension plans invested in Enron stock disappear. Inquiries into Enron’s collapse indicated that it resulted from major failures of corporate governance. Certain senior Enron executives appeared to have made significant profits from secret deals made with the company. The board of directors appeared to have failed to control such behavior, just as it rubber-stamped the production of accounts that failed to disclose material factors such as significant off-balance-sheet debt. The Enron board also seemed to ignore reports from middle-ranking executives exposing dubious practices. In February 2002 US Treasury Secretary Paul O’Neil announced changes in the law making it easier to punish corporate executives guilty of misleading shareholders:
Applying modern theories of ethics and social corporate responsibility, it is evident that Enron violated ethics and moral standards. In terms of utilitarian approach, Enron behaved wrong as it ruined life of many people and deprived them of stable work. In terms of Christian ethics, telling the truth is the root of all contracts. It is also fundamental to criminal law; that is why we swear (sometimes on the Bible) to be honest in a criminal trial. The law reflects our social mores: school desegregation is an illustration. And often the law demonstrates our imperfections and uncertainties. That is why affirmative action is such a controversial topic. Our society, and thus our law, is not yet settled on this difficult problem. The law, above all, embodies social principles, ideals that must not be violated easily or at all. Just as biblical authority tells us, “thou shalt not steal,” so does secular law prohibit burglary and theft (Donaldson et al 2002).
So the law is both a set of structures for social stability and a set of moral guideposts. When the law is broken, in the cases that reach a court, the moral drama of a society trying to right a wrong. Loyalty to the truth–embodied in the very notion of objectivity-is fundamental to accounting (Duska and Duska 2002). Accounting firms have placed emphasis upon marketing as a function of the firm. While auditing may be the “bread and butter” of an accounting organization, increasingly we find that consulting is where the profits lie in the accounting profession. In fact, concern has frequently been expressed that competitive pressure, particularly price competition, is reducing the audit to a mere commodity. With pride in a quality audit and the attending external and internal rewards in danger of extinction, the audit could be reduced to nothing more than a means to entry for lucrative management advisory service work. Following deontology, Enron also violated ethical principles as its failure led to collapse of the corporation. The principle is veracity (truth-telling); the assumption about consequences is that airing a grievance will lead to conflict resolution and that all parties, including society per se, will be better off if legal and moral norms are adhered to (Duska and Duska 2002).
The case of Enron shows that the company was ruled by weak and inexperienced leaders unable to predict and foreshadow changes and coming failure. Inadequate organizational structure and lack of ethical principles, prevented the company from ethics audit and control (Donaldson et al 2002). Though independence and objectivity are basic to accounting practice, the sources of data–and thus the bases for financial interpretation–most often reside with the client. If audits were designed to detect all fraud they would become prohibitively expensive. When routine conflicts of moral duties and ethical behavior arise–when the role of accounting professionals, for example, impinges upon one’s personal values–the struggle for a solution to a dilemma is no less difficult. Conflicts of moral duty come in various shapes, sizes, and intensities. Managers cannot anticipate all such problems. But what such conflicts have in common is both situational and philosophical.
References
Donaldson, T., et al. (2002). Ethical Issues in Business, 7th and, Upper Saddle River, NJ: Prentice Hall.
Duska, R. F., Duska, B. S. (2002). Accounting Ethics. Wiley-Blackwell.
Burton Malkiel, ‘(2002). The Lessons o Enron, Wall Street Journal, 2002.
SEC Says Corporate Audit Panels under Scrutiny in Agency Probes, (2002). Bloomberg newswire.
‘Socially Responsible Firm Publishes 7th Annual Proxy Voting Guidelines Tightening Auditor Independence Requirements in Wake of Enron Collapse’, (2002). Bloomberg newswire.
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