Business and Accounting Ethics of Enron Company - Essay Example

Business Ethics Table of Contents Table of Contents Introduction 2 Accounting Ethics 3 AICPA Ethics Rules 5 Conclusion 5 Reference 6 Introduction Accounting means recording, classifying and summarizing the transactions that take place in the company in a financial year. The accountants need to prepare the financial statements like the balance sheet, profit and loss account based on the data they have collected. These statements are published by the company management in the annual report for the use of the stakeholders. Mainly the external stakeholders like the shareholders, prospective investors, bank and government use the financial statements for taking decision about their further association with the company. Along with this the management accountants also use the financial statements and the statements like cash flow, fund flow (which are not published in the annual reports) and they formulate a plan about the further steps that should be taken by the management so that the company can use the available resources optimally and can perform better. If the accountants doing fraudulent while preparing the statements then the objective of the company can be hampered. The external stakeholders would fail to take the right decisions and the management accountants can’t plan successfully. So protecting the interest of the stakeholders it is necessary to maintain the accounting ethics properly by the company management. The accounting bodies has prepared some rules, the companies are bound to maintain those rules for protecting the interest of the stakeholders. The paper describes the issue of ethics in accounting; the importance of the ethics rules of AICPA is also discussed. A case study will also be discussed by the researcher for depicting the importance of ethics in accounting. Accounting Ethics Doing fraud in the financial statements is an intentional activity for making the balance sheet stronger, for showing higher profit of the company in the financial year. For showing higher profit than the actual the accountants shows higher value, higher revenue. Enron, the company in the energy sector started its business in 1985. In the 1990s the company’s growth was fine. The growth of the company made it one of the best companies in the world. In Standard and Poor 500 index the growth of the company was also good. But the lack of transparency was the cause of the downfall of the company. Their business model was complex and they used to do unethical practices. The company used to recognize the revenue even when the deal was signed between the two parties. Government deregulation was also a factor for their downfall. Enron used the Special Purpose Entities for accessing the capital or hedging the risk. By using the tool a company can increase the leverage and the return on asset and don’t have to report the debt in the balance sheet. The disclosures in the company financial statements don’t make any sense for the stakeholders of the company, the notes which were included in the statements was not useful also. The auditor of Enron was Arthur Andersen LLP. Their responsibility was to do the internal audit as well as the external audit. The transparency of the auditors was also under question as many of the internal accountants were the employees of Arthur Andersen. The auditors have also approved the accounting principles and practices of Enron. As a result of the accounting fraud done by Enron, all the stakeholders had to face loss (Thomas, pp.41-48). The case of Enron raised questions about the practices and beliefs about the accounting practices. The efficient market hypothesis proposed by Eugene Fama was under question. As per the theory of Fama the no traders can beat the market and the market always revealed the fair value of the stocks which was not in case of Enron (Fama, pp.412-415). The corporate governance structure of Enron was also under scanner. The employee compensation and the retirement planning were also inefficient in case of Enron (Gordon, pp.10-15). After the case of Enron in 2001-02 United States federal law implement a law called Sarbanes Oxley act which would monitor the finance strategy of the companies. As per the law the companies have to assure the corrective disclosure. The auditor should be transparent and independent; the responsibility of the company management is to produce accurate and complete financial reports. The financial statements should also include the important transactions which are not disclosed in the balance sheet (Senate and House of Representatives of the United States of America, pp.7-16). The companies have to maintain the accounting standards for reporting the financial statements. The companies should be more transparent and they should be accountable for all the activities they do. These practices should protect the interest of the investors. Following the accounting standards would assure the companies to prepare the financial statements properly as well as these would help the stakeholders to take any decision regarding the company (Voon, pp.1-4). It has been found through a research that the implementation of International Financial Reporting Standards (IFRS) the market liquidity has increased. The cost of capital of the company has also decreased as well as the equity valuation has increased. The accounting fraud has been decreased over the period (Daske et al, pp.1126-1131). A company can make some mistake intentionally or unintentionally while preparing the statements which are used by the stakeholders of the company. It is the responsibility of the auditors to check thoroughly the statements that are going to publish in the annual reports. They have to check that the statements are as per the accounting standards and the companies are also liable to disclose the standards which are followed by them while preparing the statements. The auditors are there to check whether the statements are reliable, all the necessary facts are disclosed by the company, throughout they check the transparency of the statements (Deloitte, “Internal Audit Roles and Responsibilities”). AICPA Ethics Rules AICPA means American Institute of Certified Public Accountants. The organization was founded in 1887. This is the organization of certified public accountants. The members of the organizations are operating in 128 countries and the area of operation is diversified. The areas where the certified public accountants are operating include government, business and industry, student affiliates, education etc. The main aim of the organization is setting the standards of U.S. auditing as well as set the ethical standards which the organizations have to maintain. As per the guidance of AICPA the members have the responsibility of cooperate each other and improving the accounting art so that the public has confidence on them. They are liable to carry out the responsibilities of the profession and to maintain effective corporate governance in their client organizations. For ensuring ethics in accounting the members who are in the public practice should be independent. The member should consult the board of accountancy of his state while he is performing the attest engagement as per the rule of 101 (AICPA, “ET Section 101 – Independence”). While performing their responsibilities the members should have to maintain the objective of the job, he should not perform such activity for the interest of any person or the company. He can’t misrepresent the facts knowingly as per the rule of 102 (AICPA, “ET Section 102 - Integrity and Objectivity”). The rules 101 and 102 assure the transparency of the financial statements as well as it also assure that proper ethics have been maintained while preparing the financial statements. The members can’t disclose the confidential client information in front of public as per the rule 301 (AICPA, “ET Section 301 - Confidential Client Information”). It means without any specific consent from the company management the members of AICPA can’t disclose the news and documents of the company. Conclusion Maintaining ethics in business is very essential for continuing the business. Accounting is a very essential part of a business. The statements prepared by the financial accountants are published in the annual report of the company and the stakeholders of the company take decision based on the reports. The internal stakeholder that is the management also uses the statements for planning for the future successfully. So if the ethics is not maintained while preparing the financial statements the objective of business would not be fulfilled and the business may have to face dissolution. It has been seen in the case of Enron. The company used to practice unethical accounting and as a result the company had to face bankruptcy in 2001. After that for ensuring that the companies are maintaining proper standard of ethics and following the accounting standards, the U.S. government has implemented the Sarbanes Oxley act. The auditors have a bigger role in this scenario as they have to check the statements independently and have to make sure that the published statements are transparent. There is also an institute named AICPA where the members are liable to check that the accounts are properly maintained and the corporate governance structure is maintained well by the company management. Implementing relatively strict guidelines for the companies i.e. set the accounting standards, which the companies have to follow; as well as to check the accounts and the financial statements by the independent auditors which have enhanced the ethical practice in accounting; have decreased the rate of bankruptcy of the companies. Reference AICPA. ET Section 101 – Independence. 2012. Code of Professional Conduct. 14th February. < http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/et_101.aspx#et_101 > AICPA. ET Section 102 - Integrity and Objectivity. Code of Professional Conduct. 14th February. < http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/et_102.aspx > AICPA. ET Section 301 - Confidential Client Information. Code of Professional Conduct. 14th February. < http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/et_300.aspx#et_301 > Daske, H. et al. 2008. Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequence. 14th February, 2012. . Deloitte. Internal Audit Roles and Responsibilities. 2011. Corporate Governance. 14th February. < http://www.deloitte.com/view/en_CN/cn/services/corgov/ic/iarr/index.htm >. Fama, E. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. 14th February, 2012. . Gordon, J. 2002. What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections. 14th February, 2012. . Senate and House of Representatives of the United States of America. 2002. Sarbanes Oxley act of 2002. 14th February, 2012. < http://fl1.findlaw.com/news.findlaw.com/cnn/docs/gwbush/sarbanesoxley072302.pdf >. Thomas, C. 2002. The Rise and Fall of Enron. 14th February, 2012. . Voon, J. No Date. The Importance of International Accounting Standards in Promoting Regional Business Growth. 14th February, 2012. . Read More