An Incident that Change the Course of the Corporate World

Enron, and Arthur Andersen, once possessing prestige name in the world, becomes an ash of history in an incident that wavers the world of business.

Once the seventh largest company in America, Enron was formed in 1985 when InterNorth acquired Houston Natural Gas. The company branched into many non-energy-related fields over the next several years, including such areas as Internet bandwidth, risk management, and weather derivatives (a type of weather insurance for seasonal businesses). Although their core business remained in the transmission and distribution of power, their phenomenal growth was occurring through their other interests. Fortune Magazine selected Enron as "America's most innovative company" for six straight years from 1996 to 2001. Then came the investigations into their complex network of off-shore partnerships and accounting practices.

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Enron didn’t start as unethical business. As we have seen in the case study, what introduced the virus was the pursuit of personal wealth via very rapid growth.

Great vision for the company’s growth is indeed a significant recipe towards achieving organizational success. However, it has to keep in mind as always that vision without clear and congruence to goal puts one’s business to oblivion. That’s what Enron Company has disregarded. The management, envisions the company of creating a business based on a broadband network which could supply and trade bandwidth. With primarily being the natural gas producer, they tend to mix the industry to indifferent, not in line venture; and the result, the expansion turned bad because of inadequate administration and the contracts were not met.

 Hard driving culture was fortified by incentive schemes which promised, and delivered, huge rewards in compensating packages to outstanding performers. The result was that, to achieve results, aggressive accounting policies were introduced from an early stage. This premise produces two distinct faces to which conclusion is drawn. First, an incentive to employee is implemented to encourage employee to achieve organizational goal. It is powerful motivator, and yet can be the greatest foe if does not regulate considerably. In unfavorable circumstances, high regards with incentive scheme causes employee to exert forces outside their limit and in most cases even to outlaw existing policies just to attain rewards and recognition. The main point of this, incentive scheme is a must if the organization needs motivation; provided that it is given with just and considerably proportionate to employees’ worked. The second argument is the use of aggressive accounting. As we have searched, aggressive accounting (also known as creative accounting) is the use of accounting knowledge to influence the reported figures while remaining within the jurisdiction of accounting rules and laws, so that instead of showing the actual performance or position of the company. According to our understanding, it is legal. It raises us two questions in our minds. One is that how come the method (aggressive accounting) becomes the fire that leads to the downfall of Enron if its use still lies within the jurisdiction of legality? Also, it concerns us about the ethical constraints of using this method.

Enron’s collapse leads to downfall of one of the largest accounting firms in the world, Arthur Andersen. As we all know, external auditors play a vital role in enhancing the credibility of the client firms in the eyes of investors. This is only true as long as investors are satisfied that these auditors will not collude with the firms they audit. The possibility of collusion leads firms, investors, and auditors to modify their behaviour. This is what Arthur Andersen had neglected. They deemed to have so compromised its professional standards in its dealing with its client Enron that it was in many ways complicit in Enron’s criminal behaviour.

This scandal caught the attention of the world, particularly the authoritative body of America. As a result, one of the known bills, in presenting the financial reports, was passed in the US Congress – the Sarbanes-Oxley Act.

Sarbanes-Oxley Act of 2002 also known as Sarbox or SOX is a legislation passed by US Congress to protect general public from accounting errors and possible fraudulent practices of the enterprise as well as improve the accuracy of the corporate disclosures. The bill also contains a number of issues such as Enron and Worldcom. The act covers issues such as auditor independence, corporate governance, and internal control assessment. Studies and reports include effects of consolidation of public accounting firms, the role credit rating agencies in the operation, securities violation and enforcement and actions, and other manipulative financial conditions.

The SOX take action to fraudulently influence of the corporate governance in the entity. On the other hand, it also prevents misleading financial statement regarding the actual performance of the company. The most difficult part of the mandate is the required independent audit of some public companies despite the initial cost of internal control. Despite the fact that companies would shoulder cost, it can also give benefits such as assessing internal control and improvement in the internal control practices.

The great dealing of the issue is not just the accuracy of the financial statement but also the loss of trust in the public entity as a whole. Meanwhile, there will always be upfront concerns in terms of the regulation of the reporting and disclosures which lead to important building of opportunities in measuring the cost-benefit analysis.

The SOX act has been praised for nurturing an ethical culture as it forces top management to be transparent and employees to be responsible for their acts whilst protecting whistle-blowers.

Lastly, Enron scandal reminds us that even high-end company is in danger of chaotic downfall if administration of the company was consume by greed in personal wealth and pursues their self-interest . Moreover, Sarbanes-Oxley still inspires dear in board and top executives – of enforcement actions, of the stock market’s reaction to a deficiency, and of personal liability. Fear can be a powerful generator of upstanding conduct. But business runs in discovering and creating value.