Enron Case Pros And Cons

In review of the Enron case, executives higher up exploited their privileges and power, participated in unreliable treatment of external and internal communities. These executives placed their own agendas over the employees and public, and neglected to accept responsibility for ethical downfalls or use appropriate management. As a result, employees followed their unethical behavior (Johnson, 2015). Leaders have great influence in an organization, but policies will not be effective if they do not abide by the policies established. “ Enron: The Smartest Guys in the Room” demonstrates how the nature of people do not change, whether it’s terminating employees as way to handle issues, or ongoing fascinations for profitable advances. Enron’s collapse produced a culture that prioritized profitable gains.

In light of a number of high-profile corporate failures during the first half of 2001, a number of studies have been performed to address the impact of mandatory rotation of audit firms to ensure the appropriate level of ‘independence ' of auditors. Majority of studies conclude that the detrimental effects of firm rotation on the quality of the audit work by far outweigh its positive effects as a safeguard against various independence and quality threats.

1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. Briefly justify each of your choices.

In the case against Enron, one of the most influential accounting scandals, investors sued the corporation and its external auditor Arthur Andersen LLP (Andersen). The collapse of Enron at the end of 2001 revealed that accounting fraud sustained its reported financial health and consequently Andersen’s validation of Enron’s financial statements covered up the fraud. Further investigation uncovered large amounts of revenues from consulting fees paid to Andersen by Enron; parallel to a long-standing business relationship between Andersen and Enron that fundamentally robbed the auditor of its independence. In turn nullifying the highest role, Andersen supposedly played as Enron’s external auditor, delivering strong independent verification of its financial reports. Subsequently, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) mandating reform in the accounting profession, to protect investors. While SOX, is vital to fraud deterrence, audit failure attributed to the lack of independence is still at large. Two distinguishable components yield auditor independence. One, “the auditor must maintain independence in mental attitude” (AU 202.01) known as possessing independence in fact and two, “Independent auditors (…) should avoid situations that may lead outsiders to doubt their independence” (AU 202.03) referred to as independence in appearance. This raises the question, is auditor independence authentic? No- the reforms made by SOX is deficient in ensuring auditors’ independence in fact, the structure of the auditor client relationship neglects auditors’ independence in appearance, and a psychological element exists that challenge auditors’ independent opinion.

The financial report during the late 1990s and early 2000s had less public confidence in the auditor’s performance. The first issues are on the rise of non- audit, consulting and service. At that time, clients were paying their auditors more for consulting not for the financial statement audit. For the result, the company seek for the lower-margin audit as a foot-in-the-door to more lucrative consulting engagements. The later issue is about the downward

Q 1: Evaluate Enron profit and cash flow performance during the period 1998 – 2000?

In a free and open market, listed companies are required by law to provide their stakeholders with financial information that is credible. One method that can be used to obtain a trustworthy and objective financial reporting is through statutory auditing. However, the recent financial scandals and crisis have renewed concerns regarding the tenure of auditors and its impact on their audit quality and independence. Regulators and other experts have become concerned that the familiarity created between management and auditors over time and the need to retain client firms weakens the independence of auditors, and adversely affect the quality of their audit reports (Arel 2013: 16). On the other hand, those opposing mandatory audit firm rotation claim that the costs incurred as a result of frequently changing auditing firms surpasse its benefits by far (Beasley et al., 2009:67). Pozen (2012:11) points out that the chances of audit failures are greater during the early stages of an auditor-client relationship since the new auditor may not have auditor knowledge regarding operations, processes, and client-specific risks. The role of audit firm rotation as a means of sustaining the independence and reliability of financial reporting will be discussed in the paper as well as the views of stakeholders regarding the rotation rule and make recommendations on how to improve audit quality and independence will be considered.

“Ethics and integrity are at the core of sustainable long term success … Without them, no strategy can work and, as Enron has demonstrated, enterprises will fail. That’s despite having some of the ‘smartest’ guys in the room.” by Richard Rudden. As the quotation states, ethics and integrity play a key role in the success of any corporation; through these principles, companies can ensure their compliance with law, build a strong relation with their stakeholders, and create a positive reputation in the market. However, this was not the case with Enron, America’s energy giant. This company’s mission statement was stated that its performance was

Abstract……………………………………………………………………………..…...4 1. Introduction ……………………………………………………………………..……5 2. Literature review ……………………………………………………………….….....5 2.1 Accounting failure concept:……………………………………………….…..….5 2.2 Sample of accounting failure in organization………………………………....…6 2.2 Ethical issue concept………………………………………………………….….9 3. Research methodology…………………………………………………………..…...12 4. An

The main purpose of this report is to understand the Enron business practices so that it can be analysed that what leadership traits & style were responsible for its failure. Enron was a US company, which was founded in 1986 with the merger of Houston Natural Gas & Internorth the two big natural gas pipeline companies. Enron was a huge company that reached to remarkable heights but eventually collapsed due to improper business practises, accounting frauds, and unethical culture with in an organization. Top management of Enron had used their position & power in wrong way resulting bankruptcy of such a huge company in 2001. This report will examine the internal culture of the organisation as well as the leadership practices of its top management. Further in this report I will be explaining the disaster happened at Enron by trait & transformation leadership theory and ethical theory that have been identified as the appropriate analytical tool for examining Enron culture. At the end this report shows how the Kenneth Lay and Jeffery Skilling led to the downfall of Enron also provide some recommendations and

Enron should have be aware of certain risk factors can lead to unethical behavior. Top management must adhere and emulate the highest ethical standards. In order to stop unethical behavior within an organization, there must be a way employees to discuss their experiences with someone outside the organization. This creates a firewall between employees and management where fear of retribution for their actions does not exist. Addressing unethical behavior quickly and thoroughly is imperative in order to move the company forward (Anand, Ashforth, & Joshi, 2005). An organization should craft a Code of Ethics rooted in reality and with the input of employees, managers, and executives. A zero tolerance attitude and environment must prevail regardless of the cost or consequence if the code of ethics is breached.

The scandal of Enron in 2001 lead the company to the bankruptcy. Enron is the largest bankruptcy reorganization in American history at that time. Undoubtedly, Enron is the biggest example of the audit failure. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. In this paper, it describe the reason why Enron became an admired company in the world, the story of Enron 's rise and fall, the issues of internal and external auditing in Enron, the breaches of accounting and ethics that carried by Enron.

Auditors who do not perform independently will face the potential risk of losing professional credibility and being punished with fines or imprisonment. Moreover, auditors should act ethically in the interest of public and provide unbiased audit reports to the public, especially to those who will make future decisions based on these audited financial statements, such as investors, employees or lenders. It does not mean that the auditor could not behave in both parties’ interest at the same time, but when a conflict occurs between interest of public and that of management, auditors should choose to behave independently, keep audit work fair and honest, and ensure their work assists the public to make a right evaluation on the audited client.

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.

Recent KPMG LLP insider trading scandal (2013), determined the company management to fire a partner and resign as auditor of Herbalife Ltd. and Skechers USA Inc.. Releasing a statement on April 8th, 2013, KPMG explained that the firm had decided to fire the partner after learning of his involvement in providing non-public client information to a third party (Byrt,2013,p.1). Although unlikely to result in immediate changes in regulations, the incident is a reminder of the role accountants had in the collapse of giant Enron and WorldCom in 2001.It has been suggested that prolonged auditor-tenure leads to a decrease in auditor independence and an increased likelihood of fraud, as was the case in the Enron scandal. In response to the Enron audit failure, several limiting auditor tenure and mandating auditor rotation bills were proposed as part