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Looking back at the history of corporate scandals, many would remember Enron as one of the largest scale of corporate bankruptcy in the United States. Enron was involved in numerous unscrupulous acts as they were in need to portray positive and healthy images of the company to the stakeholders. It did, before everything went out of control. However, I believe that one man's action is insufficient to bring down an empire. Enron had several deceitful collaborations with parties such as Merrill Lynch and Arthur Andersen (AA). Fraud do not arise out of a person's intention, there must be fulfillment of all three elements of the Fraud Triangle- Motive, Opportunity and Rationalization.
In the case of Enron, the men in power, Jeffrey Schlling and Kenneth Lay had the motive of helping the company make large profit even if it was through dishonest mean. They rationalize in their own distorted thinking that this was really for the sole benefit of the company and so they did not admit that they were wrong. However, this was insufficient for Schlling and Lay to commit the fraud. The most important element I feel would be the opportunities. One of the opportunities was the help they had gotten from AA, their auditor. The best gift from by AA was the mark to market accounting method and this was one of the main causes of Enron's fall.
AA allowed Enron to use an accounting method that depends largely on the discretion of the top management and so there are higher chances of fraudulent activities. After the news reported Enron's fraud case, AA disposed Enron's documents used for auditing. This implied that they were guilt stricken and they were destroying evidence that would cause them deep trouble.
Readers' reliance on audited financial statement
Readers use financial statements to make decisions or to know more about the company. Readers trust the auditors especially audit reports from the big 5 auditing firms. If the financial statements are audited and expressed unqualified opinion has been made, readers like myself, would likely vest more trust in the accuracy of the statement. Some of the readers include creditors, investors, member of public, employees, government bodies, reporters in the media industries and any party that are concern with the financial health and performance of the companies.
Auditors' roles and consequences due to failure of due diligence
Auditors are to conduct studies of the practices used by the clients and then make recommendation for improvement. They have to advice their clients the right accounting practices and guidelines. Also, auditors are to access the quality of information given for their auditing process. At the same time, they have to identify the risks associated with the usage of that information.
Auditors are to look out for irregularities in the accounts. They would have to inform top management of abnormalities and if the management chooses to ignore the advice, auditor will have to blow the whistle. These are the most fundamental roles of an auditor. Moreover, I feel that auditors' fundamental roles are not only to be of service to their clients. They are answerable to the general public and all the other users of the financial statements.
Any failure of due diligence in conducting these duties would lead to serious consequences such as investors losing their capital, employees losing jobs and retirement funds when the companies go into bankruptcy, government losing sources of tax collection and public losing confidences in the companies and audit system.
Some may argue that it is not the entirely the auditors' fault when a company goes into bankruptcy due to deceitful acts. Yes, though they may not be entirely at fault, they are still one of the first to be able to identify abnormalities. If they are aware but did not take any actions to stop the fraud from going on, they should not be able to evade the blame.
Sadly, there have been many cases of fraud taking place over the past few years. Another famous case would be the WorldCom scandal. This scenario depicts the instances whereby auditors did not act in due diligence and opened doors of opportunities for the company to carry out fraud.
In 2002, WorldCom's internal audit staff reported to the company's audit committee and its external auditors that Sullivan, the chief financial officer, was capitalizing expenses fraudulently. AA tried to elude accountability by saying that "WorldCom CFO did not tell AA about the line-cost transfers nor did he consult with AA about the accounting treatment." Something peculiar was that the internal audit staff was able to identify such accounting mistreatments so how did AA miss them? Arthur Bowman, editor of Atlanta-based Bowman's Accounting Report, commented that $3.8 billion of asset mistreatment is too huge a sum to be missed.
Indeed, auditors should have known that there were deceits going on. However, AA did not blew the whistle in both Enron's and WorldCom's case. As a result, many lives were disrupted and serious consequences were suffered (mentioned earlier). The aftermath of the events were the drastic drop in public confidences in the existing audit system, audit firms and even investing in securities markets. The public were not deluded only once, but a few times. This resulted in public outrages.
I feel that it is essential for the government to step out during emergency like this. Government should set things right by putting in place policies which will protect and minimize the risk citizens have to undertake, help rebuild confidences in the audit system, companies and securities markets so that investments can take place safely.
In 2002, they stepped in to calm the public and assure them by introducing regulations to prevent such fraudulent cases from happening again. US federal law enacted the Sarbanes-Oxley Act (SOX). The intent of introducing this Act is to enhance the accuracy and reliability of corporate disclosures and creates new guidelines for corporate responsibility. This Act also included serious penalties such as 25 years imprisonment for securities fraud and 20 years for executives who made untrue sworn statements. Moreover, it will correct how board of directors, executives and corporate auditors interact with one another.
SOX specifies that public companies must issue internal control reports and external auditors must evaluate and report on the soundness of their clients' internal control. Public Company Accounting Oversight Board, a new body, will oversee the audits of the public companies. In addition, accounting firm may not provide both auditing and consulting services to their client. Though the government is doing their best to instill public confidence and transparency of disclosure, other parties such as companies and audit firms will have to do their equal part to earn the trust that were destroyed.
Government involvement in firms
In Enron's case, though there is no confirmation that George W Bush and Pat Wood (FERC ex-chairman) had not responded to California's plead because of their close relationship with Lay, there have been many speculations that indeed Lay had such political ties. The close relationship between Bush and Lay could be seen in Enron's funding for Bush's presidential campaign. No concrete evidence can be found that the government had supported Enron.
Government are to impose law and order. Therefore, it is notable that government which supported those companies engaging in fraud, it will affect the trust the public vested in the government and also result in unhappiness among the members of the public.
Closer to home
It is challenging to look for cases whereby the Singapore government had involvement in companies which had fraud. However, I feel that government subsidiaries represent the Singapore government's support as well. If those government subsidiaries were involved in fraud cases, it is a reflection on how inefficient the government was in managing their subsidiaries.
In 2003, Singapore had their very own fraud case and the company involved was one of the world's most prestigious airlines- Singapore Airlines (SIA). SIA is a government-owned company. Teo Cheng Kiat had control over claim reimbursement system and there was no proper internal control for verification process to authorize the reimbursement made. This was an opportunity for Teo to siphon $35 million over 13 years. Since it is our national airline and the fact that it is partly owned by the Singapore government, I felt that this news affected the airline and their audit firm negatively especially in the area of efficiency in detecting irregularities. Why did such an established company have poor internal control? Though government were not directly involved in this case, SIA was still owned by them and this would still affect them slightly.
Apart from government-owned companies, mistake committed by members of the government bodies would reflect badly on the government as well. In 2005, Abdul Samat Kaman, a policeman, was caught for embezzlement of funds amounting to $15,000. He had been engaging in embezzlement activities for 4 years but was later caught. I believe that as policemen, there is a need to uphold justice and to behave in a lawful manner. Knowing that such dishonest act have been committed by a policeman, it would have given the Police force bad names and some members of the public may even be skeptical about the characters of policemen.
Since Singapore Police Force (SPF) is a government body, it has direct reflection on how government selects their policemen to ensure that those they have chosen uphold the highest integrity and honesty. I believe Abdul was not the only one that has done shame to SPF; there are still a few other black sheeps. If more of them start to appear, the Singapore government may have to stand out and impose a new way to select personnel for its government bodies.
Since government vested interest in many companies and their own government bodies, it is important for them to ensure that all companies under their name and care are operating in a lawful manner. For government to be able to rule the nation, it has to garner its people's support. If government-related companies start to go wrong, the public may stop supporting them. This may result in an unfavorable situation for the government.
From Enron, we have learnt how business, government and society interacted with one another. Two important lessons I have learnt were the important relationship between auditors, the users of financial statement and the government. Also how deceit acts happening in government related companies and bodies could result in troubled positions for the government.
There is no entity that does not interact with others. It is similar to an ecosystem whereby organisms rely on each other and interact. Therefore, it is important to know who your stakeholders are and that you are acting in a responsible way that would not cause them harm. Once harm have been caused, many repair actions have to be taken (usually by the government) to reinstate situation to how it was before fraud had taken place. However, I believe, prevention is always better than cure.
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