Accounting profession requires a lot of skills and ethical knowledge. This is because there are numerous temptations that accountants face such as pressures to satisfy investors or to maintain an upward revenue growth. As such, ethics are essential since accountants who maintain ethical behaviours are able to develop inner strength. This helps them to make ethical decisions which will ensure that a firm prospers in the long run. A professional accountant is expected to possess various principles. These principles include objectivity, integrity, professional behaviour, confidentiality, and professional competence. This paper discusses whether the current business and regulatory environment is conducive for ethical behaviour. In addition, this paper not only talks about the Enron Corporation accounting ethical breach and its repercussions but also how Enron Corporation scandals were detected. Further, this paper gives recommendations on measures that could have been taken to prevent the scandals.
Firms operate in a dynamic environment that keeps changing from time to time. Nevertheless, each and every firm must establish an ethical code of conduct that must be followed to the later. Firms have different departments which should operate within given policies and regulations. The accounting department is not an exception to this. In fact, people only have confidence in accountants who conduct themselves ethically and those who are able to make appropriate decisions when faced by an ethical issue. Ethical issues arise in various ways. For instance, a fellow accountant withholding firms` funds for personal use amounts to an ethical issue. Inflating firms` profits also amounts to an ethical issue. Most firms try their best to ensure the existing business and regulatory environment promotes ethical behaviour. Firms have ensured adherence to ethical behaviours through various ways. Firstly, firms have well stated code of conduct and ethics that employees are expected to follow. This promotes ethical behaviour since firms have also established modes of punishment for non-compliance. As such, employees try their best to behave ethically so as avoid suffering as a result of unethical practises. Secondly, the current business and regulatory environment is conducive for ethical behaviour due to continuous training organized by firms to educate their employees on the essence of behaving ethically. This is significant as it creates awareness and helps employees to appreciate and comprehend the essence of ethical behaviour. Employees are trained continuously through short courses on positive repercussions of ethical behaviour. Thirdly, numerous firms have developed strong internal control systems which ensure strict adherence to policies and regulations. This in turn has created a conducive environment for ethical behaviour. Internal control systems are set by firms to monitor internal operations and make necessary corrections within a reasonable period. Employees have been monitored through suggestion boxes, independent interviews, and peer reviews by fellow employees. All these are some examples of internal control set ups which are employed to provide an environment which is more conducive to ethical practises. Fourthly, government reaction towards people found guilty of unethical practises has led to a significant improvement. This is because harsh punishments accorded to people convicted of unethical practises have made other individuals to develop fear in behaving unethically. For example, in the Enron scandal, Fastow was given a ten year sentence whereas his wife Lea was sentenced for one year. This is a good example that makes people fear the dire consequences of behaving unethically.
Enron Corporation, formed as a result of merging InterNorth and Houston Natural Gas was an energy firm located in Texas. Due to its large operations, Enron Corporation realized huge profits. Enron Corporations sought accounting services from Arthur Andersen. Arthur Andersen was among the largest accountancy and audit firms worldwide. Enron Corporations` employees including Fastow who was the chief financial officer were not ethical. The executive officials took advantage of various accounting loopholes to manipulate the financial statements. Therefore, they were able to hide large amounts that resulted from failed projects and deals in form of debt. In addition, financial statements were fraudulently prepared and hence they did not represent the true and fair value of Enron Corporation. Further, executives at Enron pressured Arthur Andersen, Enron`s consulting accounting firm to ignore any arising issue. From Enron Corporation accounting scandal, it is clearly depicted that there were various accounting ethics that were breached. Firstly, executives at Enron were found guilty of fabricating and altering accounting records. This not only misled shareholders by giving them falsified information, but also failed to represent a fair and true position of the firm. Secondly, Arthur Andersen, Enron`s auditor did not act independently of its client. This is because it received pressure from Enron Corporation executives. As such, Arthur Andersen failed in its responsibility of giving a correct report to Enron’s board on what they found out about related party transactions. Thirdly, Enron Corporation booked costs on non-existing projects as assets.
Enron Corporations was adversely affected as a result of accounting breaches. Firstly, potential investors had a rough time in comprehending the financial statements of Enron Corporations. Worse still, even existing investors did not understand any information due to their complexity. This made investors’ confidence to decrease drastically. Secondly, Enron Corporation credit rating was downgraded. This affected its future investment transactions as its rating went below the investment rate. Thirdly, Enron Corporation was declared bankrupt. This decision saw the creation of 4000 unemployed personnel. Enrons` ethical concerns were discovered through a report produced by Bethany McLean through which she discovered strange transactions. The report also noted that Enron Corporation had huge debt and had erratic cash flows. Enron also experienced operational challenges which were a clear indication of serious loopholes. The resigning of its Chief Executive Officer merely after 6 months was also questionable. Enron Corporation management failed to create an ethical environment since its executives who are part of management were the ones who were promoting unethical practises. Further, the board of directors did not pay attention to their duties. They never questioned the eligibility of the information presented to them. The directors also failed to pay any attention to employees as they thought their work is to represent shareholders only.
As a Chief Financial Officer, I would recommend the following measures that should have been taken to prevent Enrons` scandal. Firstly, accounting policies should be made in such a way that ownership of both consulting and accounting services is prohibited. This would have saved Enron since Arthur Andersen would have offered only one duty. Secondly, Enron should change its policy of offering huge compensations to executives. This policy encouraged employees to manipulate accounts since they wanted to impress the management and earn huge bonuses. As such, in future, executives should be given reasonable compensations that are not so huge as compared to employees’ salaries.
References
Bauer, A. (2009). The Enron Scandal and the Sarbanes-Oxley-Act (Illustrated ed.). Santa Cruz: GRIN Verlag.
Gledhill, J. (2008). Corporate Scandal: Global Corporatism Against Society (Revised ed.). New York: Berghahn Books.
Jeffrey, C. (2012). Research on Professional Responsibility and Ethics in Accounting (Illustrated ed.). England: Emerald Group Publishing.
McPhail, K., & Walters, D. (2009). Accounting and Business Ethics: An Introduction (Illustrated ed.). London: Taylor & Francis.
