Review of Enron’s Accounting Ethics

Ethical Behavior in Current Business and Regulatory Environment

Accounting ethics are business-related professional behaviors or rules that organizations must follow during accounting practice (Cheffers & Pakaluk, 2007). Generally, the work of accountants is to prepare and provide financial reports related to the operations of an organization. These reports are useful, as they help investors and other stakeholders to make informed decisions concerning potential benefits they would derive from the reporting organization. Therefore, any misleading information by accountants can lead to the downfall of the organization, especially when investors and other stakeholders lose confidence in that organization. It can also lead to legal proceedings or imprisonment of employees engaged in unethical practice or illegal transactions. Therefore, ethics must be upheld in all business institutions, whether private or public (Duska, Duska, & Ragatz, 2003).

Importantly, accounting ethics greatly influence the ability of an institution to move forward or succeed. Due to the recent failure of most companies, attention has been directed towards ethical standards allowed in the accounting profession. In order to eliminate fraud and unethical behavior in companies, the government and some institutions have come up with solutions aimed at improving accounting ethics and standards (Cheffers & Pakaluk, 2007). Subjectively, the current business and regulatory environment are on a good track to enhancing ethical behavior. Evidently, recent ethical standards have been effective in enhancing the exposure of many unethical and fraudulent companies. For example, former WorldCom’s CEO, Bernard Ebbers, was convicted of underhand dealings that culminated in fraud and falsification of documents in 2006 (Hamm, 2013). Another example involves former Yahoo’s CEO, Thompson, who was discovered to have deceived the hiring board about his credentials in order to land the job, thus putting him and the board in legal and ethical malpractice (Hamm, 2013).

Enron Corporation’s Accounting Ethical Breach

The worst reported accounting ethical breach came from a company known as Enron Corporation. Before its downfall, Enron was recognized worldwide and was even once named as “America’s Most Innovative Company” (Duska, Duska, & Ragatz, 2003). However, the company was exposed as unethical for practicing accounting fraud, a case that has been named “the Enron scandal.” The discovery led to the declaration of bankruptcy of the company and subsequently shutting down of its operations (Duska, Duska, & Ragatz, 2003).

One of the first people to become suspicious of the malpractice in the company was Daniel Scotto, who had expertise in the energy market at BNP Paribas (Dietz, 2002). His suspicion later led to the discovery of over-inflated records. Although the management had prior knowledge of the fraud that was taking place at Enron, it failed to report or make disclosure in subsequent periodic reports. Instead, the managers took advantage and used it to swindle money from the unsuspecting public. Due to the managements’ ignorance of ethical laws, legal charges were pressed against them, with the executive, Paula Rieker, being charged with conducting fraud.

Accounts/Accounting Guidelines Violated and Impact to Enron’s Business

First, Enron broke the Full Disclosure Principle or law, which mandates all companies to record and provide all information related to the company, both financial and non-financial, in order to allow stakeholders to make informed decisions. The company violated this by refusing to record most of the transactions and profits earned; the auditors, Arthur Andersen, were also deemed to be part of this fraud because they agreed to ratify false information, making the public perceive it as true. They also broke the Going Concern Principle, which requires a company to inform its investors of its future plans and any potential bankruptcy. The executive, Paula Rieker, was well aware that fraud had been discovered and that a lawsuit was expected, but she still sold the remaining shares to an unsuspecting public, thus violating the law and professional ethics. Finally, the company violated the Revenue Recognition Principle, which mandates institutions or business enterprises to record all revenues earned in a given accounting period regardless of whether they have been received or not (Jackling, Cooper, Leung, & Dellaportas, 2007). Enron violated this guideline by not accounting for most of its revenue gained from limited liability special purpose entities. The violation of the above accounting guidelines led to bankruptcy and the eventual shutdown of the corporation. Importantly, most of the employees involved in the fraud and breach of accounting ethics were prosecuted.

Actions That the CFO of Enron Should Have Taken To Avoid the Scandal

The Chief Financial Officer (CFO) of Enron Corporation should have set a code of moral ethics, which every employee would have been obliged to follow. This in turn would have ensured genuine and transparent transactions, thus preserving the company’s reputation. In addition, all members should have been asked to sign a code of ethics, clearly stating that if employees were caught violating any guidelines they would immediately be sacked from the corporation and a case filed against them. This would ensure loyalty and keen performance from all employees (Dellaportas, 2006).

The CFO should also have ensured strict observations of the work specifications, especially in relation to financial statements (Alexander & Britton, 2004). He should have constantly checked all the institutional documents to ensure no fraud was being carried out. Moreover, he should have created a board of ethics committee that would ensure the proper conduct of employees at all times. The Chief Financial Officer should have also tried to gain trust from employees, which would have helped in encouraging openness among fellow colleagues. Finally, the CFO should have set a good example by following and living by all ethics of accounting. All the above measures should be observed in the future in order to avoid any discrepancies within an organization.

Summary

In relation to the Enron Corporation’s scandal, we get to learn and understand the repercussions that come along when ethics are violated or breached. Corporal punishment should also be introduced to companies that breach accounting ethics in order to ensure complete discipline among members of an institution who would eventually fear reprisal. It is important to note that ethics are an essential part of our day-to-day lives, especially when it comes to business conduct (Cheffers & Pakaluk, 2007). All investors greatly depend on the accountants’ way of thinking in relation to financial statements, and if genuinely observed, they can influence the success of a corporation. As we have seen above, accounting ethics are very crucial and everyone in the business should be encouraged to follow them. Accounting ethics should be taught in all schools and must be primarily an important part of the course. Moreover, auditors should also be encouraged to be truthful always when verifying information on financial statements prepared by accountants in order to ensure there is full disclosure of both financial and non-financial information that would be crucial in influencing decisions of users of such information; they should issue qualified reports based on any discrepancies or suspicions noted. Finally, all organizations must ensure that all employees have ethical guidelines with them at all times, which would serve as a reminder to them about the importance of working professionally and ethically.

References

Alexander, D., & Britton, A. (2004). Financial Reporting. OH, USA: Cengage Learning EMEA.

Cheffers, ‎M., & Pakaluk, M. (2007). Understanding Accounting Ethics. NY, USA: Allen David Press.

Dellaportas, S. (2006). Making a Difference with a Discrete Course on Accounting Ethics. Journal of Business Ethics, 65(4), 391–404.

Dietz, D. (2002). Auditors Are Timid: They Failed to Warn in Most Big Firm Bankruptcies. Pittsburgh Post-Gazette. Web.

Duska, R., Duska, B., & ‎Ragatz, A. (2003). Accounting Ethics. NJ, USA: Wiley-Blackwell.

Hamm, H. (2013). 5 Most Publicized Ethics Violations by CEOs. Web.

Jackling, B., Cooper, B., Leung, P., & Dellaportas, S. (2007). Professional Accounting Bodies’ Perceptions of Ethical Issues, Causes of Ethical Failure and Ethics Education. Managerial Auditing Journal, 22(9), 928-944.