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Review of Accounting Ethics

HomeReview of Accounting Ethics
07.11.2019
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Introduction

Accounting ethical breaches in organizations affect customers, employees and the general public. There are ethical standards in accounting that exist in order to protect the public from unscrupulous organizations and accountants who may plan to hide or misrepresent information. In the past, there have been many cases of violation of ethics in accounting. This has forced accounting bodies to set strict rules such as those for the Certified Public Accountants (CPA). They have helped to discover such violations and act accordingly to ensure that victims face the law (Elkind & McLean, 2004; Fowler, 2002). The current business and regulatory environment are conducive to ethical behavior. This is because of the strict codes that CEOs and accountants have to follow to the letter. In addition, the use of ICT in accounting has resulted in increased transparency and accountability in the field. Lessons learned in the past have also forced companies to create an ethical environment. This paper will look at the case of Enron which is one of the biggest violations of accounting ethics known in the United States.

The Case of Enron

Background

Enron Corp had a humble beginning in 1985 after the merging of two Houston pipeline companies. In the first years, it was a surviving company; however, through diverse efforts, it changed to a thriving company. This was after 1988 when Enron became a broker in the power industry thus making buyers meet sellers (Flood, 2003; Berle & Means, 200). The company engaged in partnerships that helped it to have enough capital for extra investment. However, the partnerships were the main cause of the violation through a cleverness culture that was created, whereby one party would rob from the company to pay for another party in the same company.

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At the time of the ethical collapse, the chairman and CEO of Enron Corp was Kenneth Lay. The company had enjoyed a reputation for being fair and honest. This was in line with the company’s code of ethics (Flood, 2003). The ethical code of the company which was formulated in a 64-page booklet was simply summarized as follows: “An employee shall not conduct himself or herself in a manner which directly or indirectly would be detrimental to the best interests of the Company or in a manner which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the Company” (Flood, 2003). The main values that were upheld by the code of ethics were respect, integrity, communication, and excellence.

Enron Corp collapsed dramatically. It reported revenues of $101 billion in 2000 and approximately $140 billion in the first nine months of 2001 and was declared bankrupt in December of the same year. The main cause of the bankruptcy was attributed to the failure of the top leadership, a corporate culture supporting unethical behavior, and the complicity of the investment banking community (Novak, 1996). The top leaders including the treasurer, the Chief Financial Officer, and the CEO were accused of leading the company to bankruptcy. Their actions did not match the company’s expressed vision and values. The corporate culture in the organization inclined people to believing that it could handle an increasingly greater risk without encountering any danger (Elkind & McLean, 2004). The culture did not work towards promoting respect and integrity because of the emphasis on decentralization, compensation programs, and employee performance appraisals.

The foundational values in the Enron code of ethics including respect, integrity, communication, and excellence failed to create an ethical environment in the company. This is because of the partnerships that the company engaged in. The culture changed to that of cleverness whereby each of the board of leaders was up to benefit as much as possible (Berle & Means, 2003). This resulted in the company’s bankruptcy in December 2001. This was too late considering that the company had a shortage of hundreds of billions. Bankruptcy as the only way of detecting the ethical issue was rather ironical, and yet the organization had top leaders who were still in office.

The Aftermath

The impacts of the violation were felt by both sides, where Enron became bankrupt while Arthur Andersen was destroyed despite being among the largest audit firms in the world. Many of the executives in the company were charged with criminal acts including money laundering, insider trading, and fraud. The CFO, the CEO, and the treasurer were the top leaders who fell victims of the violation. There were many investors in the company who eventually lost their investments; however, through the court, they were to get their initial investments back (Elkind & McLean, 2004). The company failed completely having moved from thriving in the community to surviving.

Accountants are expected to be honest at all levels. They are supposed to work according to strict principles to ensure that they provide data that are reliable and credible. The accountants from Arthur Andersen failed in credibility since they did not create an ethical environment (Flood, 2003; Berle & Means, 2003). This is the reason why as one of the leading audit firms in the world they failed.

There are a number of measures that should have been taken by a CFO to prevent the ethical breach. One should change the corporate culture of the organization. It means making all the divisions in the company interdependent as a way of enhancing excellence, respect, communication, and integrity, which were the core values in the company’s code of ethics (Mehta, 2003). This would help to remove the irony of the corporate organizational culture that was only expressed in words and not deeds.

Another measure that would be important for a CFO to implement in this case is reinforcing the aspects of culture including reaction to crises, attention focusing, role modeling, reward allocation, and criteria for hiring and firing of employees. This would be implemented by analyzing the culture of the company and considering past experiences, particularly those that led to bankruptcy (Elkind & McLean, 2004). Implementing this would require the involvement of all the employees, the definition of the powers of leaders and clear guidelines on how to handle different organizational operations such as firing.

The last measure that should have been considered is setting up appropriate terms and conditions of the partnership. Partnerships in business can be very tricky, especially in situations where there are no strict terms of incorporation. They also make it hard for auditors to efficiently perform their work. In the future, this would be implemented by bringing all the partners under one single leadership (Fowler, 2002). This would mean making the partners dependent so that they are guided by the top management rather than making their own decisions.

Conclusion

In conclusion, the case of Enron Corp is a good example of an ethical incident related to accounting. There are many ethical issues in accounting that arose in the previous years; however, one of Enron was beyond control. The impacts of the violation were severe not only to the company but also to the auditing firms. Auditors are expected to work to ensure that they promote honesty and credibility under strict codes of ethics. With increasing technology, fundamental values under different codes of ethics in organizations are being put into actions rather than words.

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