Bus 557 Assignment
Ethics behavioral aspect of accounting is a special area of accounting that is developed to address such aspect of human information processing behavior, judgment quality, accounting problems created by users and providers of accounting information as well as their decision making skills. Secondly, paper will describe the organization, the accounting ethical breach and the impact to the organization related to ethical breach. Thirdly, this paper will determine how the organizational ethical issue was detected and how management failed to create an ethical environment.
In some cases, some company pledged its own stock to ensure that partnerships would be able to borrow money. And when Enron stock started plummeting, the whole thing fell apart. Fourthly, this paper will analyze the accounts impacted and or accounting guidelines violated and the resulting impact to the business operation. They operated as the masterminds behind the system to defraud investors. The banks, by offering fake, illegal and not approved by regulators deals, played a significant role in helping Enron falsify company financial statements and mislead investors.
Finally, the paper will discuss as a CFO which measures could have been taken to prevent this ethical breach and how each measure should be implemented in the future. First of all, there should be analysis of culture within the organization including norms of behavior, standards of conduct, values, perspective of attitudes, perceptions, there seems to be pressure to commit misconduct, communications, risks and vulnerabilities Review of Accounting Ethics Page 3
Given the corporate ethical breaches in recent times, assess whether or not you believe that the current business and regulatory environment is more conducive to ethical behavior. Provide support for your answer. Ethics behavioral aspect of accounting is a special area of accounting that is developed to address such aspect of human information processing behavior, judgment quality, accounting problems created by users and providers of accounting information as well as their decision making skills (Ponema, 2009).
Existing businesses and regulatory environment is more conductive behavior because some companies and managers feel as though they can get away with it. The unpredictable increase and collapse of the Enron Company set off a long-burning fire under the American social conscience. From every crevasse and corner, voices rose demanding increased accountability, demanding tighter regulation, and demanding that the unethical be brought to justice.
Clearly, in such estimation, those at fault should have been punished business. Many transformations in the business environment have taken place, including immoral conducts and the tendency for corruption. Unethical accounting behavior is also included as a consequence. (Sims, 1992). So the government has been forced to increase regulations and inspect actions taken in business, most especially after the Enron, Tyco, WorldCom and other unethical accounting scandals.
As a result of the mentioned scandals, the government then passed the Sarbanes-Oxley Act in 2002 providing regulatory requirements for better precision in business action, accountability and assurance of ethical accounting behavior by publicly held companies and accounting firms. According to White (2000), the total number of boards of directors who set ethical codes of conduct within organizations has increased from 41 percent in 1991 to 78 percent.
Review of Accounting Ethics Page 4 According to the Wall Street Journal about 79 percent of youth in the United States do not believe in the presence of moral principles in business. There should be a business foundation, especially in accounting which should provide society with adequate information about companies and industry. Accounting is more and more involved in consulting, so it requires high ethical standards to built trust between clients and companies (White, 2000).
Even if society does not believe in the honesty in any business, I think that ethics and ethical behavior are very high priorities for companies today and this is proofed by the increasing number of companies currently applying ethical codes of conducts. Codes of ethics are arrangements that are frequently used as a force to promote ethical behavior. There are many ways that a business could operate ethically. They can impose legal actions and fines. This could then remove destruction to any firm’s reputation, and protect and / or increase the capital of any shareholder.
Paying special attention to Shareholder value, cost control, creating a competitive advantage and avoiding internal corruption would also be a help. A firm’s unethical behavior could also contribute to the organization’s productivity level being lower over time. Because of all these aspects I believe that the current business and regulatory environment is more conducive to ethical behavior. Based on your research, describe the organization, the accounting ethical breach and the impact to the organization related to ethical breach.
Enron Corp. was an energy company born from a mildly innovative 1985 deal that combined two boring businesses: an Omaha-based natural-gas-pipeline company named InterNorth and a similar Texas company called Houston Natural Gas. Instead of just delivering gas to customers at a modest profit, Enron decided to use newly deregulated pipelines to match other buyers and Review of Accounting Ethics Page 5 sellers in the energy industry.
Enron became a gas trader, which would be much more exciting than just building pipes and transporting gas. Moreover, Enron was managing its own employee pension funds. This should not happen because it allowed the company to use these funds for the advantage of the company only, without taking care of their employees. Besides, Enron should have a code of ethics that prohibits managers and executives from being involved in another business entity that does business with their own company.
Usually, codes of ethics are voluntary, but the board of directors should set them up as the important restriction of company. According to the Markkula Center for Applied Ethics (2002), legal and regulatory structures would trigger Enron’s bankruptcy. Initially, Arthur Andersen LLP would provide consulting and the audited reporting services noting the financial results of their consulting activities. This occurred because it was allowed by current law and regulations imposed by the Securities Exchange Commission (SEC).
I see this as fault of within the legal structure and an evident conflict of interest. Additionally, another conflict of interest occurred in Enron by hiring and paying its own auditors. It is understandable that the auditors did not issue an adverse report on the company that was paying them. The conclusion coming from this situation is that private companies should not be allowed to pay for their own auditors.. Moreover, Enron would also expand into other business areas, including water, fiber optics, newsprint, and telecommunications (Halbert T & Ingulli, E. (2009).
Legal structure permits managers to enter these arrangements, which constitute a conflict of interest. The managers and executives should take care of the best interest of the company and its shareholders because the law leaves them with freedom, to choose what it is the best interest of the company. There are no doubts that Enron’s officers did not act within the scope of their Review of Accounting Ethics Page 6 authorities.
A few days before the outstanding loss of Enron was made public, workers who audited the company books for Arthur Andersen had been given an extraordinary directive to damage all audit material, except for the most basic “work papers. ” Even if, there are no rules for how long company should keep its documents, it was illegal. (Halbert T. & Ingulli, E. (2009). Determine how the organizational ethical issue was detected and how management failed to create an ethical environment. Enron Corporation is a classic example of organizational-level corruption.
Halbert T & Ingulli E. (2009). Enron debacle is not just the story of a company that failed; it is the story of a system that failed. And the system didn’t fail through carelessness or laziness; it was corrupted. “ According to Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002), Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received–Farrow by at least $30 million, Hooper by at least $10 million, two others by $1 million each.
Any of these employees, except Farrow, did not obtain the permission required by Enron’s Code of Conduct of Business Affairs to own interest in the partnerships. Moreover, many Enron transactions were designed to accomplish favorable financial statement results. These examples show that Enron’s officers put their own interest ahead of their obligations to Enron. The company allowed chief financial officer Farrow to set up partnerships that enabled Enron to report pretty much whatever numbers it needed to keep Wall Street happy. In some cases, the company pledged its own stock to ensure that partnerships would be able to borrow money.
And when Enron stock started plummeting, the whole thing fell apart. (Farrow made off with millions of dollars for himself, but his depredations played no significant role in Enron’s fall. ) . When Review of Accounting Ethics Page 7 forensic accountants finally got a look at Enron’s books in late 2001, they discovered that the company had been reporting incorrect numbers for at least five years.
Analyze the accounts impacted and / or accounting guidelines violated and the resulting impact to the business operation. Perhaps Enron could have been somewhat successful by branching out into the commodities business creating an international, privatized water market. Enron’s leaders in 1998 set up a subsidiary called Azurix with a major water concession in England, but British regulators cut the firm’s rates-and Enron’s style was significantly cramped. Azurix’s expansion into Brazil also worked out badly due to local politics. Enron hid the mounting debts in an off-the-balance-sheet partnership.
This became a common Enron technique and led to the kind of debt load that became unsustainable when investors lost confidence in Enron’s numbers (Snider, 2006), according to Snider (2006), Farrow, the former Enron chief financial officer, said that Enron’s banks played important role in the corporation fraud. They operated as the masterminds behind the system to defraud investors. The banks, by offering fake, illegal and not approved by regulators deals, played a significant role in helping Enron falsify company financial statements and mislead investors.
It was the banks that instructed Enron how to deal with the company’s significant financial challenges. If stated, dividend targets could not be met by Enron, and the company would have had to generate more cash flow to maintain its credit ratings. The banks assisted to design the fake and deceptive deals. The banks helped Enron to hide the debt which was not showing up on the books by replacing bad assets through creation shell companies. These shell companies, run by Enron executives who profited richly from them, allowed Enron to keep hundreds of millions of dollars in debt off its books.
Also, loan transactions were reported as cash flow instead of debt. These finances were not shown in the financial statements. Review of Accounting Ethics Page 8 This action would lead the company’s stock and hurt most of investors across the country (Halbert T. & Ingulli, E. (2009). As a CFO, recommend which measures could have been taken to prevent this ethical breach and how each measure should be implemented in the future.
Enron was liable for the action of its agents and employees, because most taken actions, which lead Enron into bankruptcy, were taken inside the corporation. Enron officers and managers repaid the banks by access to special deals; premium payments and insider access to future beneficial transactions (Maximizing Business Performance, 2007). In order to avoid situation that took place in Enron Corp. there are some actions that should be taken within an organization.
First of all, there should be analysis of culture within the organization including norms of behavior, standards of conduct, values, perspective of attitudes, perceptions, pressures to commit misconduct, communications, risks and vulnerabilities. The Code of Ethics should be complied by Board Members and Senior Executives as well as by all employees. Measures they recommend should include staff training, evaluations of compliance systems, appropriate funding and staffing of the corporate ethics office. An organization has to make sure that consulting and auditing are separated while financing auditing has its independence with integrity.
Moreover, managing proper communication regarding expectations, requirements, goals and roles at all levels is significant to constitute ethical behavior within an organization. Establishing an Ethics Committee helps to focus on ethical conduct and empower employees to make decisions according to organization’s values. Enron and other corporations need better financial disclosure mechanisms. The Financial Accounting Standards Board, responsible for rule making in the area, has to create regulations and standards that are more Review of Accounting Ethics Page 9 forth right and understandable to ordinary people.
In addition, corporations need more responsible public servants, instead of creating more laws. We need to teach people to be responsible for what they have done, just as we have held the business people to accountability. Conclusion Since the objective of accounting is to provide relevant, timely information for user decision making, therefore, Accountants must behave in an ethical manner so that the information they provide will be trustworthy and, thus, useful for decision making.
The purpose of ethics in accounting is to direct accountants to abide by the code of conduct that facilitates and encourage public confidence in their services. Ethics are moral principles that guide the conduct of individuals but unfortunately, some accountants sometimes behave in an unethical manner. These ethical violations led to fines, firings, and lawsuits. In some cases, accountants were criminally prosecuted, convicted, and sent to prison. References Snider, D. (2006, September 26). University of California, San Francisco. UC Says Farrow Implicated Banks in Enron Fraud.
Retrieved April 27, 2013 from http://ucsf. edu/ stories/uc-says-farrow-implicated-banks-in-enron-fraud Halbert T & Ingulli, E. (2009). Law & Ethics in the Business Environment: 2010 custom edition (6th ed. ). Mason, OH: South-Western Cengage Learning White J. (2000). Ethics in Business. Retrieved April 27, 2013, from http://www. pro2net. com Sims, R. R. (1992). Journal of Business Ethics, 11: 651–662. Committee of the Board of Directors of Enron Corp. Retrieved April 27, 2013, from http://fl1. findlaw. com/news. findlaw. com/wp/docs/enron/specinv020102rpt1. pdf