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Business and Professional Ethics



Introduction

Enron share price rose significantly for a long time since its establishment. The company experienced exponential growth, which was apparently stopped by the fraudulent activities within it. Those were such activities that exposed the corporate giant to huge losses and eventually to a bankruptcy declaration. Enron was founded in 1985 after a merger of two gas companies: Houston Natural Gas and InterNorth. During the tenure of Kenneth Lay as the CEO of the company, he championed the deregulation of electric and gas prices in the region. That move foresaw the empowerment of the energy traders to make propounded profits and to take advantage of the high prices of their products. In order to ensure the further development, the company diversified into the ownership and operation of multiple assets with an inclusion of gas pipelines, paper plants, broadband services, and electricity plants across the world market. The huge market base enabled the company to report a profit margin of $100 billion in 2000 with the 22,000 of personnel.

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In 1990s Enron market share price grew tremendously with an increment of approximately 56% in 1999 and 87% in 2000 compared to S&P 500 index up by 20% and down by 10% in that order. On the 31st December, 2000 the share price index stood at $83.13 down from August’s record high price per share of $90.56 in the same year. Enron’s market capitalization was reported to stand at $60 billion with a prospective to increase in the future within the same period. In a report, established by the American Fortune Press, Enron was named the most innovative company in the period. However, owing to its huge success, the company was doomed to collapse due to the numerous fraudulent activities indulged by both management and the employees (Arnold, Beauchamp, and Bowie, 2013). The current essay analyses some of the problems and behaviors that led to the fall of Enron Company.

Question 1: David Duncan’s Behavior and Ethical Code of Conduct

David Duncan, who was connected with Enron, indulged in a number of unethical practices which were obviously punishable by the law of the US. Arthur Andersen was judged with an obstruction of legislation after he was found shredding documents which were to be laid as a proof for his fraudulent activities. David was well-informed that such documents could be used as the instances in the investigations of the foresighted crimes. It was completely unethical to undertake such affairs as far as the accounting principles were concerned. Openness and authenticity are the factors that govern the accountancy and they are important ingredients in its code of ethics. It is done through such activities that many Enron employees pleaded guilty to multiple crimes with an inclusion of a conspiracy to mislead the investors and the public via unfair financial practices and reporting.

David Duncan acted unethically during his tenure when he violated GAAP. He disobeyed the principles that governed his profession in four distinct ways. David Duncan abused GAAP by the failure of consolidation and proper selection of the equity of the accounting methodologies, incorrect accounting for SPEs, and the impairment. All these factors eliminated the overall impact of the transactions among the entities. He also failed to ensure the full disclosure of the financial records and embraced unfair reporting approaches. He ignored the fairness principle which stands out as one of the most important. Moreover, he ignored the legal precedents that superimpose on the significance of the fairness in the society. The agglomeration of all these factors depicts that David acted unethically towards his mandates in the accountancy. His general behaviour harmed the collaboration between Andersen’s and Enron’s management. As much as the two companies benefited, the caused losses made the whole scheme worthless.

David Duncan held a moral obligation to protect his clients and the public (including investors) as well. Thus, he ensured that the client achieved its desires in the long run. However, David Duncan had an obligation of ensuring correspondence of the law of the land which essentially thwarts the need to protect fraudulent behaviour in the company at the expense of doing what is right in the society. Hence it can be summed up that David Duncan acted unethically to undertake the auditing procedures while a clear and accurate picture of the postulating events was not conveyed, and his professional attributions were broken (Mintz & Morris, 2011).

According to the classic perspective of ethics as per virtue, a member of a society is supposed to undertake an activity if it is within the good of the whole community, and it carries the rights and obligations which necessitate virtuous behaviours. This is completely the opposite of what David Duncan did as per the regulations and obligations of his profession. He pursued personal interests at the expense of hiding the reality of the matters from the real investors of the company (Mintz & Morris, 2011). The collaboration that transpired between Enron and Andersen is described unethically since it is the opposite to the professional undertakings. Accounting code of ethics requires a professional to utilize it when someone faces with a dilemma. For instance, David Duncan stood between his own self-interest and the interests of the society he served. Owing to his position as an auditor, David would establish a professional stance by doing what was right according to his professional ethics. Instead, David let his selfish ambitions to grab his mind and led him to the conveying the wrong message to the people.

The ethical framework of the individual rights describes the duties of people by different parties. For instance, David Duncan was expected to report to the investors on the postulated performance of the company. However, by siding with management, he indulged in unethical practices. Essentially, David Duncan was employed by the investors to paint a clear picture of the overall performance of the company. Corporate governance is an aspect that needs to be clearly monitored in order to avoid numerous injustices hailed to the investors by management. One key regulators of financial monitoring in the society are the external auditors who ensure that no falsified reports leak out to the public. Thus, it is required by any accounting professional to uphold a huge value for integrity, owing to the fact that they continuously expose the huge financial data and other information that enables decision-making processes. David Duncan opted to undertake a different road that is completely opposite to a truthful professional auditor (Morse, Davis & Hartgraves, 2003).

The economic efficiency of the ethical model shows that auditing must encompass a thorough analysis of the data that is skewed to identify the real costs embedded in the society for financial misrepresentations. It is exactly what happened to Enron: management simply manipulated the financial figures with an intention of keeping away some of the money for personal use. It was the responsibility of David Duncan as an auditor to learn the scheme and to report the move to the relevant authorities. However, David failed to perform his duties effectively since no real result was outlaid until the collapse of the company (Palepu & Healy, 2003). Hence, David acts unethically according to the accounting code of ethics of reporting a crime to the disciplinary bodies in the country. Generally, the accounting code of ethics stem the transparency, effectiveness, efficiency, correctness, materiality and other virtues that tend to ensure a smooth operation of the financial institutions in the society. Just like the other professional code of ethics, the accounting one is meant to regulate the individuals to follow their professional paths.

Question 2: Sherron Watkins’ Behaviour and Ethical Code of Conduct

Sherron Watkins is among the few individuals that were caught for the machinations happening in Enron. During her tenure she tried hard to speak of the impending danger if some aspects were not corrected in the organization. For instance, she wrote a letter to the CEO Mr. Lay outlining her fears about one of their employees being resigned at such a time. However, one thing that comes out clear from the letter is the fear of exposure. Sherron Watkins knew that for the past years she had been working on a company that cheated its investors and the government. Her role as the vice president ought to be cemented on the principles of accounting. However, it turns out that Sherron Watkins was a segment of the scheme which was raiding the investors’ money and was avoiding correlation of the correct amount of taxes to the government (Strouhal et al. 2010).

Fraud is a criminal offence as well as unethical practice in the society, according to the American laws any individual indulging in fraudulent activities is subjected to the requirements of the law. The same notation is expressed in the accounting code of ethics which explains that an accountant is supposed to give a true and fair view of the facts to the users. A clear analysis of Sherron Watkins’ behaviour depicts that she never took transparency into consideration; instead she wanted to conceal the whole issue from the revelation to third parties who may be the government or the investors (Thomas, 2002). Sherron Watkins’ move to inform the CEO of her concerns is a bold approach which describes her mandates in the company. As the vice president of the company, she was not mandated to undertake some tasks without the approval of her superiors. It is the same aspect that pushed Sherron Watkins to open the president what actually taunted her. The move can be described as an ethical approach since it’s correlated with the safeguard of the interests of the company from the external forces.

Sherron Watkins’ behaviour can also be described as skimming; she might have not been utterly fighting for the interests of the company, but rather for her own selfish gains. In the letter she wrote that she would waste eight years if the whole Enron fraudulent activities leaked out to the public. It is a clear demonstration that Sherron Watkins was only out to clear her own name from the list of the wrong acts. According to the managerial concepts and the code of ethics, a manager is required to take blame for any wrong doings that may arise in the organization. However, Sherron Watkins seemed to be running from her responsibilities and obligations. This is an expression of unethical behaviour against her professional conduct. Sherron Watkins remained aware of all the activities that happend in the organization and did not bother to report the issues to the relevant authorities in the country. It entirely jeopardizes her position as a member of the senior management (Thomas, 2002). When an issue erupts in an organization the first people to delve a solution are the managers. However, Sherron Watkins was the part of those who caused the problem instead of being a solution finder. These aspects showed the ethical and moral integrity of her position.

The agency problem is among many other problems that galvanized Enron in the year 2000. Agency problem in Enron was catalyzed due to lack of accountability within the company. There was a constant objection of duties among the top managers. For instance, instead of appraisal of employees in the company, they were constantly reprimanded by the fellow employees or managers for being whistleblowers or acting in good faith. This describes Sherron Watkins’ behaviour in the organization which was driven by selfish ambitions.. However, at one time Sherron can be celebrated as one of the very few employees in the organization who stood to defend their principles and to uphold their ethical code of conduct; she did that by standing up against the CEO of the company and expressed her fears and opinions on the transpiring activities.

Question 3: Auditor Independence Issues

Arguments Supporting Auditor Independence

External auditors are expected to be independent of the kind of services they offer to companies. If an independent auditor begins to offer consultancy and management services as well as auditing services to the same company, a number of questions are expected to arise which include:

  1. Can auditors maintain independency when offering both services?
  2. How does the provision of both services infringe on the judgment of the auditors?

These are the main issues observed in the Sarbanes Oxley Act of 2002. The act tried to enhance the independence of auditors. Section 201 of the act simplifies a number of factors which relate directly to the auditor independence. According to the act, it is illegal for a registered accounting firm to provide non-audit services to any organization. This act intensifies the importance of auditor independence during decision-making. The case of the Enron Company is a good example of clarifying the significance of ensuring auditor independence. Andersen could have done a good job by ensuring that there was transparency and correctness of the reports they disseminated to the public (Turner & Weickgenannt, 2013). Enron’s management was actually responsible for the manipulation of the auditing reports owing to the independency of the discrepancies at the time. Hence it is important for an auditor to indulge in one task for a single organization; this aspect will ensure that no manipulation will ever arise during the auditing process. Enron case is an example of a company that never used an auditor independence approach; this led to its failure in the long run which is mainly due to the frequent data manipulations.

Arguments Supporting Auditing and Other Services

Auditors can perform both internal and external audits effectively and efficiently. This is because the performance of both services concurrently reduces any instances of overlapping which may lead to time and resource wastages. The second reason postulated on the significance of auditors undertaking other roles is that the auditors encompass crucial experience and keen perception of any loopholes that may exist in an organization. Hence, they stand in a good position of consulting management on the best approach to curb any arising problems. Thirdly, auditors already have a relationship established with management, thus by the provision of other services they reduce the company a burden of searching other organizations to deliver the same services. Fourth, auditors can act independently when performing other services, hence it is not necessary to infringe them to stick to only a given line of service. Lastly, the law is not supposed to infringe the freedom of individuals in pursuing other business activities, there should be a freedom of trade in the market (Turner & Weickgenannt, 2013).

What to Believe

Auditors may not act independently if it is allowed to perform other services. This is because the other services may offer better incentives that may hinder better judgment. Internal audits can be better performed by internal auditors who understand the company and its operations. The internal auditors encompass an important segment of cthe orporate governance which cannot be replaced by external auditors. Lastly, the company can have the best benefit from multiple viewpoints as compared to sticking to one provision. It is important for management to consider the employment of multiple service providers for purposes of achieving quality and reliable services in the long run, hence the significance of auditor independence.

Question 4: How "Rules-based" Accounting Standards Differ from "Principles-based" Standards

“Rules-based” standards of accounting are detailed and specific. They can be compared to the tax and criminal law codes. The “rule-based” accounting system creates a pre-fabricated package of decision models for any situation at hand; this makes these rules versatile and flexible in any impending situation. However, the “rule-based” approach infringes on the means of ascertaining a situation. It does not give a clear path of defining every situation, hence people at times justify different violations as per the spirit of the law by complying with the letter of the law. On the other hand the “principles-based” standards can be described as general guidelines which are responsible for the specifications of how different classes of transactions ought to be reflected in general terms (Hightower, 2008). The “principles-based” standards require accounting to be appropriately reflected on economic substance. They technically allow the accounting experts to make decisions and judgments during the determination of specific applications. “Principles-based” standards demand that all auditing professionals possess the required integrity and necessary judgment in order to ensure appropriate decision-making (Jalil, 2003).

“Principles-based” approach is an important set of standards that can prevent the fall of another Enron by requiring accountants to make decisions and judgments in regard to the spirit of the law rather than to rely on technical compliance rules. For instance, SPEs in the case of Enron. The management might have succeeded in compelling the auditors into accepting the manipulated financial reports by pointing at the bright line standards which require 3% investments from the outside. The “principles-based” standards require all the auditors to assess the circumstances entirely in order to evaluate whether the parent company had a significant exposure in relation to the SPE that were unconsolidated (Hightower, 2008).

The removal of bright rules is likely to trigger numerous problems to the organization in question. This is because the human judgment and personal discretion is greatly involved. Auditors and managers can rationalize and skew activities to match their financial decisions and in the long run defend themselves by citing that the accounting standards do not prohibit their actions even a little bit. This is the main reason why the fall of Enron was mainly catalyzed within a very short period (Jalil, 2003). Enron management took the advantage of the former policies and accounting standards that did not give a clear path on the manner different activities were handled. The new revised standards are better streamlined to sweep across a huge span of organizations in the market presently. They essentially describe what ought to be achieved and how it needs to be achieved while taking into consideration the code of conduct and the ethics framework in different professional fields (Duska & Duska, 2003).

The eradication of bright rules is formulated to be a hard approach than it was anticipated; the rules have long been fabricated into the operations within an organization. At some point in time it is very crucial to employ the use of bright rules. Bright rules allow personal judgment and discretions to be made on some occasions which are very significant when it comes to some situations. Essentially not all situations call for a principled form of standards, although they are very crucial in the determination of credibility and responsibility of any undertaken tasks. For instance, there are those situations which allow immediate and quick decision-making process; this may not require a procedural approach since it is an impromptu decision that may be required immediately (Duska & Duska, 2003). This is where the human judgment and discretion creep in and salvage the situation. The whole significance of each standards base makes a complete transition hard without an incorporation of another. These approaches need to be employed accurately since they mostly rely on the performance of one another.

Conclusion

The demise of Enron is a case that describes a number of discrepancies in the financial sector before the introduction of substitution acts like the Sarbanes Oxley Act of 2002. Before the inception of SOX many companies run their own operations without being monitored by any governing body in the economy. There were no rules or policies that protected investors from fraud and exploitation. It is at that period when fraud prevalence was at the highest. However, a number of changes have been made since the inception of the Sarbanes-Oxley Act of 2002. This Act requires all publicly traded companies to adhere to the set regulations and policies. A number of these policies trace their origin before the inception of SOX, however, they were not enforced at all until SOX came into play (Arnold, Beauchamp & Bowie, 2013). SOX was construed to prevent any potential scandals and to re-build transparency in the US based corporations. It was a new move to prevent fraud in the corporations and to ensure that investors were cushioned from its effects. Other objectives that were to be achieved by the inception of SOX include corporate responsibility, the strengthening disclosures of the financial reports, and the ensuring that they stood as per the accurate statements and not just exaggerations.

SOX led to the introduction of strict rules and regulations. The act was an agglomeration of sixty six sections classified according to the intended purpose. Each segment dealt specifically with a different section of the reporting cycle. Sixty six sections were outlined in elven titles that encompassed the issue of internal control. The eleven titles, postulated in the act, include public company accounting oversight board, auditor independence, corporate responsibility, enhanced financial disclosures, analyst conflicts of interest, commission resources and authority, studies reports, corporate tax returns, corporate fraud and accountability (SOX 2002).

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