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Impact of Unethical Behavior Article Analysis
Finance & Accounting
Pages 3 (753 words)
The Enron fraud case is perhaps the most recognizable and notorious cases of unethical (and illegal) accounting of the early 21st century, serving both as the root motivation for the Sarbanes-Oxley Act and a jumping point for public suspicion of corporate ethics.
The authors first give some theoretical background by describing the agency theory and the stakeholder theory. Agency theory is the thought that the firm is based around contracts between a principal and an agent, the latter of whom is a manager; the agent is bound by contract to fulfilling his obligations as it pertains to the firm’s objectives. Stakeholder theory is the thought that all stakeholders in a firm bear some moral responsibility for consequences of a firm’s actions. With those two theories in mind, the authors begin to analyze the kinds of breakdowns that occurred within a well-known case of accounting fraud. “Monitoring costs” is a term in agency theory that refers to the need for an independent third party to make sure the agent in a contract with a principal is living up to his end of the bargain. In cases where an independent monitor does not exist, the potential for fraud arises. In the Enron case, its alleged external auditor, Arthur Andersen, did not live up to the duties of a monitor. Because Andersen served as both a consultant and an auditor, a conflict of interest occurred that perhaps led Andersen to partake or encourage unethical accounting practices. In a general sort of case, this would be true for any other business that decides to rely on the same external organization for both financial support and to serve as its external auditor. ...
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