Enron and Andersen Scandal

Synopsis
Enron was formed through 1985 merging of Houston Natural Gas and InterNorth -a Nebraska based gas pipeline compan ! In 1989" Enron started trading natural gas commodities and e#entuall became the world$s largest bu er and seller of natural gas! In the earl 199%s" Enron became the nation$s premier electricit marketer and established the de#elopment of trading in such commodities as weather deri#ati#es" bandwidth" pulp" paper" and plastics! Howe#er" despite of its growing success Enron suddenl fell and collapsed due to some mismanagement and fraud! &or instance" Enron scandal has the most contro#ersial scandal that reall affects the accounting profession! Enron scandal in#ol#es complicated accounting issues! 'ome of its suspicious accounting scheme are (educing Enron)s ta* pa ments" inflating its income and profits" inflating its stock price and credit rating" hiding losses in offbalance -sheet subsidiaries and fraudulentl misinterpreting financial condition in public reports of Enron! It started in the merging causes large amount of debt to Enron compan ! +nd to find the best solution to the compan )s problem" ,E- .en /a hired 0efrre 'killing as a consultant and finall had its solution" to create 1a gas bank1- bu ing gas from its suppliers and sell it to the consumers! Enron then became a trading business with its product" energ deri#ati#e! 2he compan also engaged into 1mark to market1 in which whene#er the companies ha#e outstanding energ -related or deri#ati#e on the balance sheet" the must ad3ust them to fair market #alue! 4ut the Enron)s financial anal sis rating is still lower than what the desired" the debt is still #isible that led them to issue '5E6 special purpose entities7! Howe#er these '5Es did not result to transparent financial statement! 4ut then" regardless of these transactions +rthur +ndersen" compan )s auditing firm and at the same time the one who did consulting to Enron" issued an un8ualified opinion! 9nder in#estigation" it was found that +ndersen is negligent at best and at worst that creates false earnings reports b hiding huge amounts of debts and artificiall inflate stock prices intentionall ! It was also determined that the firm had either directed or personall destro ed man documents that showed the true e*tent of Enron)s financial problems! +nd so bankruptc arouses causing for Enron compan to collapse! Code of Ethics` Violation +lmost of the basic principles of the code of ethics was #iolated! +bo#e all independence was not performed !2he people in Enron as well as the auditing firm did not act professionall based on the outcome of the scandal! 2he decisions were not being e#aluated and decided properl ! Here are some of the situations that would pro#e that the had #iolated the ,ode of Ethics:

 Integrit 2he compan )s personnel itself is not honest in their ser#ice! 2he chairman of the board" .en /a and the ,E- 'killing" allowed the ,&- to build pri#ate institution secretl and illegall ! +rthur +ndersen hides huge amounts of debts and misinterpreted the financial statement of the compan !

-b3ecti#it +ndersen is being biased that influenced his professional 3udgment! +lso the compan has its conflict of interest that also affects the 3udgment of the auditor! He has failure in disclosing in audit papers! 5rofessional due care +ndersen)s global engagement partner" ;a#id ;uncan failed to e*ercise professional due care and skepticism! He failed to notif the Enron +udit ,ommittee of the management)s re3ection of audit recommendations! He as reckless in not knowing that the Enron)s financial statements were not performed according to G++' and that its financial statement did not present Enron)s financial position! 2his is 3ust one of the e*ample situation of #iolating professional competence and due care! 5rofessional 4eha#ior +cting professionall complies with rele#ant laws and regulations and a#oids an actions that ma discredit to the profession! 4ut what +ndersen did - misstating the financial position and issuing un8ualified opinion regardless of the #iolations done b the management of the compan is an opposite of this! +ndersen in#ol#ed into fraudulent actions that he should a#oid!

Threats 'elf- interest - It is said that ha#ing conflict of interest contributed a lot in the firm)s collapse! 4ased on the reports and hearings" Enron kept accounting documents hidden and well manipulated with the complicit of its auditing compan ! 2his is due to some unethical practices 6a7 off-balance sheet used to hide the companies deteriorating fianc<s 6b7 re#enue from long=term contracts being spread for a se#eral ears 6c7 financial reports being falsified to inflate e*ecuti#e bonuses and incenti#es9d7manipulation of electricit market! 2he staff of +ndersen failed to follow auditing procedures that issues un8ualified opinion! -n the part of the management" the board of directors were irresponsible of detecting the compan )s mess! 2he were more interested in

incenti#es and satisfied profits! >anagers and +ndersen chose to betra shareholders to ma*imi?e their self-interest!

the

'elf-re#iew - +ndersen offers two ser#ices- auditing and consulting! 2he two roles of +rthur +ndersen" as auditor and as consultant" this might 3eopardi?ed their reputation and independence! +s a result of pro#iding non audit ser#ice" the audit firm is associated with aspects of the preparation of the financial statements and ma be unable to gi#e an ob3ecti#e #iew of rele#ant aspects of those financial statements! &amiliarit - there is an intimate relationship between the auditor and the client! 2he auditor is not independent! +ndersen tends to de#elop o#er-familiarit in the internal control and surroundings of the compan because of the long in#ol#ement in the compan ! +ndersen ha#e been an internal and e*ternal auditor as well as consulting for Enron for a se#eral ears since it was established in 198@ that)s wh there is stronger relationship as ears pass b ! Intimidation threat- +uditor is being fee dependent in their client! +nd so this ma affect its 3udgment because the are afraid the might be replace b another auditor the ne*t ear! Safeguards 1! Ha#ing a good culture in the compan is a good safeguard! HowA 4 ha#ing own ,ode of ,onduct is a good wa of implementing good culture in the compan ! 5osting in the bulletin or ha#ing at the paper documents of the ,ode of ,onduct is not enough! It should be that the boards and e*ecuti#es should set as an e*ample of the conduct that the want to e*pect from others! B! 2he compan should conduct code ethical trainings for the people in the compan annuall or e#er other ear to de#elop and enhance the ethics of its people! @! It should be that auditing and consulting must be separated! Hiring +ndersen)s emplo ees as Enron emplo ees made a real ethical conflict of interest! 2o a#oid conflict of interest" this two ser#ices must be separated! &irm should not accept two ser#ices at the same time and at the same client and client must not ha#e same auditing and consulting firm! C! 2here must be a rotation of audit firms! 2his is to a#oid from being familiar to the client)s business flow! 5! Implementing bigger fines or sanctions to those who #iolates an of the code of conduct of the firm or the code of ethics!

Effect in the accounting profession Enron scandal lea#es marks to the accounting profession not 3ust in +merica but also in other place including 5hilippines! +fter this phenomenon" a lot of things changed in the accounting profession! 2he scandal led to one of the most significant pieces of legislation associated with the o#ersight of corporate ethics- 2he 'arbanesD-*le +ct which sets guidelines and re8uirements for +ccounting" financial disclosure and the ethical beha#ior of corporations! Eith this legislation in place" the promise e*ists for the elimination" if not total eradication of corporate fraud as was so transparentl practiced b the Enron team! It also discouraged the double role of auditors! +fter the collapsed of Enron" a lot of comparisons were drawn between the principles based approach which e*ists in the 9. and the 9' rules-based approach! 2his incident also led to mandator rotation of audit firms with a ma*imum of F ears of ser#ice! 5hilippines follows same standards of accounting profession from 9'! +nd so we could sa that our countr is also affected from the Enron scandal! -ur countr is becoming strict to a#oid fraudulent and unethical actions that might happen! 2oda " if ou passed the board e*am ou cannot easil sign financial statements without recognition and registration from the 5I,5+ e#en though ou are alread a ,5+! Gou still need to compl the re8uirements before doing some engagement! +lso" a &ilipino accountant cannot easil work abroad as an accountant because of accounting profession abroad is restricted! Gou must first register to their organi?ation and compl e#er thing the re8uirements in order to practice our profession outside the 5hilippines! 2he Enron scandal shows that +merica can no longer take the pre-eminence of its accounting for granted! 2hat is a far bigger concern than an number of congressional in#estigations!

(eferences: http:DDwww!slideshare!netD3oelnshissoDenron-s-wnal sis http:DD#oices! ahoo!comDthe-enron-scandal-crime-scandal-traged -contro#ers 1@HH95!html G(FI2obias5a#elI> leneencontroIEN(-N!pdf http:DDmpra!ub!uni-muenchen!deD11CFD1D>5(+IpaperI11CF!pdf http:DDwww!economist!comDnodeD9C%%91

Eorldcom ' nopsis Eorldcom is the Nation$s second largest long distance telecommunications compan ! It grew rapidl through ac8uisitions and from increased demand for telecom! 4ut in 1998" the telecommunications industr began to slow down and Eorld,omJs stock was declining! ,E- 4ernard Ebbers came under increasing pressure from banks to co#er margin calls on his Eorld,om stock that was used to finance his other businesses endea#ors 6timber" achting" etc!7! 2he compan Js profitabilit took another hit when it was forced to abandon its proposed merger with 'print in late B%%%! ;uring B%%1" Ebbers persuaded Eorld,omJs board of directors to pro#ide him corporate loans and guarantees totaling more than KC%% million! Ebbers wanted to co#er the margin calls" but this strateg ultimatel failed and Ebbers was ousted as ,E- in +pril B%%B! 4eginning in 1999 and continuing through >a B%%B" Eorld,om 6under the direction of 'cott 'ulli#an 6,&-7" ;a#id > ers 6,ontroller7 and 4uford Gates 6;irector of General +ccounting77 used shad accounting methods to mask its declining financial condition b falsel professing financial growth and profitabilit to increase the price of Eorld,omJs stock! 2he nature of accounting fraud in Eorldcom occurred in two main wa s: a7 understatement of operating e*penses of KF4 through improper release of accruals and through improper capitali?ation of operating e*penses and b7 -#erstatement of re#enues of C14!s

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