Frequently stated as the first major failure of the New Economy, the downfall of Enron Corporation shocked stockholders, board members, and accountants and transmitted repercussions across financial markets once the corporation reported for bankruptcy on 2nd December, 2001. At that point, the Houston-established energy trading corporation's insolvency was the biggest in history. Enron collapsed not so greatly for the reason that it had grown too big, rather because it was recognized to be much larger than it actually was. Enron staffs and pension accounts throughout the nation lost billions of dollars after the value of Enron stock dropped from its maximum of $105 to its de-listing by the NASDAQ at hardly few cents. Arthur Andersen, one of the Big Five accounting company, crashed by its conviction for Impediment of Justice in association with the auditing amenities it offered to Enron. Enron's imprecise financial reports did not accurately detail the finances and operations of the company with analysts and investors. From late 1997 until its collapse, the main inspirations for Enron's financial and accounting transactions appear to have remained to retain reported revenue and reported cash flow up, inflated asset values, liabilities off the records, escape tax payment and inflated stock price of the company. Continuously dedicated on meeting Wall Street anticipations, pushed for the use of mark-to-market accounting and pressured Enron administrators to discover new ways to hide its liabilities. Enron was in a position to hide vast acquired losses that could have hampered its progress much earlier, by decentralizing their operations into various companies and shell organizations. The lack of consideration displayed by the Enron board of directors towards the off-books financial entities with whom Enron did business; and the lack of honesty by management about the business operations and the condition of the enterprise. The senior management affirmed Enron had to be supreme at whole lot of things it did and that they had to shield their reputations and their returns as the most prosperous executives in United States. Once a number of their business and trading projects started to execute poorly, they attempted to hide their own failures. Obviously, executives that understood the actual image sold their stocks prior to the downfall and waltzed off with billions. Publicly trading companies are needed to display their financial statements public, however Enron's finances remained an impenetrable web of cautiously crafted fictional transactions between itself and its companies that camouflaged its actual financial condition.
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The Enron corporation scandal led to a disgraceful and deep scar on the contemporary business aspect. The Enron's collapse has been evolved into many dimensions resulting into raising questions about external auditors, corporate governance, ethical practices of directors and financial reporting issues. The culture of Enron added greatly to the ethical scandal.Â Enron was a strict and an arrogant firm, who highlighted competition and financial objectives. It had an evaluation system which mandated that 20 percent of the total employees had to be graded as under required each year and then were fortified to leave Enron. Even though Enron expected that this evaluation system possibly would have encouraged employees to put more effort, in reality, the system added more harm to Enron than benefits. Firstly, Enron's competitive surroundings and demanding performance assessment standards triggered a culture of dishonesty as employees were anxious about losing their job. They overlooked the ethical standards, and solely focused on the accomplishment of their financial goal.Â Once a few employees initiated cheating on their jobs, the only tactic to win over these people was to cheat even more. Gradually, no individuals felt embarrassed about cheating since they were left with no other choices and every co-worker surrounding them was cheating.Â Employees were assessed on their capabilities to cheat.Â In such an atmosphere, the individuals who never cheated were considered as weird.Â Secondly, this competitive atmosphere added to the covering of the faults and cheating because employees inclined to be uncooperative and occasionally communicated with the co-workers.Â Moreover, they were also less enthusiastic to share information and resources because they competed against each other. Furthermore, they ignored the faults and cheatings of others because they believed if others were in reality not mistaken, the person who mentioned problems would be laughed at. The culture of Enron considerably stressed on the company's financial goals.Â The person who can accomplish the budget figures would be the star of the company.Â Both senior managers and employees dedicated on making revenues for themselves by making great financial figures instead of actual growth of the company's financial value. Enron was also not much bothered about the desires, ethics, needs and also the welfare of the employees. Employees were dispirited from conveying doubts about the financial situation of the company along with the decisions made by the executives. At Enron, both senior managers and employees acted unethically at the time of encountering their conflicts of interests.Â They were selfish and greedy. In the period when it committed deception in its financial statement, Enron offended both internal and external people of Enron, who suspected Enron's financial situations. For instance, John Olson, a Houston company analyst, lost his job since Olson recommended his client not to invest in Enron as he had queries about by what means was Enron making money.Â Hence, Enron stressed its employees to work blindly, remain quiet, guard their individual short-term interests, and attempt to accomplish their goals even if it was an apparent fraud. From the ethical aspect, employers should respond to their employees and keep the goal of benefiting them. Â In Enron, ethical standards were only window dressing. To escape another Enron the corporations must contemplate over the corporate culture as it has an undeviating influence on its employees and managers decisions when encountered by ethical problems. Also, the company needs to lay the standards for ethical behaviour and communicate it to all its employees in order to ensure that ethical code is being followed. Finally, the corporations should have the understanding of the business ethics concept and models to appropriately exercise the well engraved ethical code efficiently within the business environment. Further contributing to the reasons of collapse of Enron was the conflict of interest among the multi roles played by Arthur Andersen, besides an external auditor, an internal auditor and an advisor to Enron thereby disrupting accounting and auditing standards. The role of the external auditor involves standards such as truthfulness, independence and objectivity to be accomplished, but Arthur Anderson disrupted these standards by maintaining close connections with Enron's chief accounting officer, a number of Arthur Anderson employees had permanent offices at Enron. Also the external auditor works for the private interests of the stockholders of an enterprise, but Arthur Andersen worked in favor of Enron thereby cheating the shareholders and violating the standards. Arthur Andersen encountering the incorrect financial situation never revealed it. Since Arthur Andersons most important client was Enron, Arthur Anderson continued to support Enron fraud in its financial statements which was not only unethical furthermore it was illegal. Also, Arthur Anderson destroyed several documents and papers of Enron after Enron's scandal was unveiled. Â Without those documents and papers, SEC faced a lot of complications while they investigated the Enron scam. The financial audit remains a critical aspect of corporate governance that makes mandatory for the management to be accountable to its shareholders for the sustentation of the company. The main concern is to protect auditor's interests and the shareholders of a company to ensure no conflicts in the commercial interest with each other. The new directive at Enron states all firms to be listed on the stock market are obligated to have independent audit committees recommending an auditor for shareholder approval and also focuses on audit partners rotation. External auditors ensure fair application of standards set-up by the FASB. They have a principally obligated to the public, since the fundamental truths of an entity's operations and transactions are not available by the users of the information and investors. External Auditors are allowed to audit an entity's reporting in contravene to the standards, and the controllers can exercise the standards to evaluate that entity and auditors are offering and scrutinizing financial statements indicating those standards.The loopholes in financial reporting matters at Enron are linked to the concept of entity -- failure to merge entities, selective practice of the equity technique of bookkeeping for entities, and failure to eradicate the impact of transactions amid the entities. Enron exercised "creative accounting techniques" along with off-balance sheet transactions encompassing Special Purpose Entities (SPEs). Initially Enron had some SPE's which were undertaken for managing risk but in the years preceding bankruptcy, it encompassed over 3,000 SPE's to manipulate financial report. Enron was effective in hiding enormous sums of debt and frequently collateralizing that debt with Enron stock. As per the GAAP requirement for debt, Enron did not reveal its contingent liability. Enron had invested in businesses which it associated or reported on the equity technique. When the losses were highlighted in the investments, Enron transferred them into SPE's account to hide losses. Enron traded facilities to SPEs for huge amounts with the purpose to inflate its sales proceeds and revenue. The energy would be sold from one unit of Enron to SPE which was resold to another unit of Enron resulting in the transfer of cash reported as increment in revenues by Enron. Besides, progressive cash flows were reported from operations by manipulating cash flows. In January 2003, in the U.S, the Securities and Exchange Commission (SEC) declared that issuers of every yearly and quarterly financial report filed along with the Commission had to release entire material off-balance sheet transactions anticipated to influence the company's financial situation - either at current or upcoming state. Over the period of time, the Financial Accounting Standards Board has brought forward several financial reporting standards to constantly develop and improve the transparency in the information accessible to financiers. Â· Demanding that reporting entities identify liabilities for pension funds at the time those entities give assurance to their employees rather than when they pay them in future. It requires substantial revelations about the distinct operating divisions of an entity's business so that stockholders can estimate the contrary risks in the various operations, it necessitates that derivative tools and hedging transactions be revealed in financial statements, which, formerly, were not produced, it calls for that the acquirement of one firm by another be accounted for in the same manner for all entities and that the overall sum paid for the acquirement be revealed in the financial statements.
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The Enron bankruptcy has justifiably been the most publicized scandal amid the corporate scandals principally due to its degree of influence on politics and mysterious nature of business transactions. It turns out that the series of corporate scandals were the tip of the iceberg with regards to the unsuccessful regulatory structure which is inadequate in protecting the potential investors from economic hardships. Such traumatic episodes of debacles led to the discussion between the government, professional bodies, regulators and standard setters. The approach was much comprehensive in US than in UK. The Coordinating Group on Audit and Accounting (CGAA) in UK was established under Department of Trade and Industry as a response to the Enron scandal. It reviewed the regulations concerning the audit independence and company law and also ensured curbing such corporate failures. Whereas in US, the Securities Exchange Commission (SEC) performed a revision of detailed necessities on the provision of the non-audit services. In the post Enron scenario, the SEC revised the auditor independence and analysed the adequacy of existing rules and regulations in order to propose required alterations or any additions to the rules. Meanwhile in UK, the Companies Act 1989 covering the administration and monitoring of auditors was viewed as a sufficient means to guide the auditors and companies. However, in the wake of Enron, the DTI recommended changes in the auditing and accounting regulations and the company law in order to maintain independence and competition amongst auditors professionally. As in US, the UK had put forward evidences which depicted no serious deficiencies in the regulations. However the crisis could pose implications to the professions in UK. The CGAA was designed and developed to ascertain the extensive work related programmes undertaken by the individual regulators in order to avoid unimportant overlaps. It was also obligated to re-examine the capability of UK's current regulatory system for financial reporting and statutory audit. As these systems seem to suffice in dealing with the crisis, it proved to be even more effectual than the ones developed in US. A role model for corporates globally, the approach adopted by UK complied with the international standards of accounting and had immense flexibility and professionalism. On the other hand, US had opted for a comprehensive vigorous response. Although the governance has shared a common vision of improvising on audit independence and avoid such corporate hitches. As a consequence to corporate downturns, the regulators of UK and US were reviewing and analysing the capabilities and effectiveness of their existing regulatory structure. UK may not be in need of many changes in its requirements but it tries its level best to keep its standards stringent and safeguard against incidents like US. Despite appreciation of UK's high class standards, it yet requires refinements in certain areas of activity. On the contrary, US's regulatory framework is a matter of concern as the bankruptcies call for review of the entire regulations. Every cohort effort put in by the governing authorities and regulators would result in strengthening the issues concerning the auditor's independence. A successful capital market shall be beneficial to all the parties from the government to the shareholders and eliminate the deficiencies in the regime along with minimizing the effect of independence problem thus promoting excellent corporate governance.