Analysis Paper – Enron
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Analysis Paper – Enron
Introduction
The focus of this ethics paper is Enron, a company that could be easily viewed as the direct opposite of an ethical corporation. The paper will analyze the legal and ethical changes after the Enron collapse, including a thorough breakdown of Enrons code of conduct and where they went wrong. The analysis will also cover stakeholder management, and Enrons corporate social responsibilities which includes; legal, economic, ethical, and philanthropic responsibilities.
Legal and Ethical Changes
The Enron scandal and revelation of other financial wrongdoings by other corporations mandated Congress to pass Sarbanes-Oxley Act (SOX) of 2002. Enrons collapse was from falsifying financial statements. The law (SOX) was established to increase investor confidence in the financial reports provided by corporations. “SOX addresses perceived weaknesses in auditing, reporting, and corporate governance of US public companies and has been hailed as the most dramatic change to federal securities laws in over 50 years. In combination with related actions and provisions from Securities and Exchange Commission (SEC), which administers the laws set forth in the act, and rules changes from the major stock exchanges, notably the New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange (NASDAQ), the Sarbanes-Oxley Act has established enhanced regulations for public company governance and reporting requirements” (Colley, Doyle, & Logan, 2004).
The role of many different entities was reconfigured due to the massive amount of money that was lost to shareholders, the local, state, and federal governments, and local communities.
The responsibilities of Public Companies Accounting Oversight Board (PCAOB), Corporations, and External Auditors had to be tightened to provide security for all stakeholders.
PCAOBs main role was to investigate potential violations of SOX regulations, rules, and/or professional accounting standards. PCAOB has the authority to execute approvals and agreements on accounting firms, including licensing postponement and legal penalties. PCAOB has the authority to refer situations to the Department of Justice to enhance further legal action.
Corporations have had to make many process changes, along with new roles for upper management. Chief Financial Officers, and Chief Executive Officers are responsible for certifying their financial statements. The CFO and CEO also have to sign off that all financial information, balance sheets, cash flow statements, and income statements, reliably represent the corporations economic position. The reports signed by the CEO and CFO must state that:
they have reviewed the financial reports
the reports are not misleading
the reports fairly present the companys financial condition and results of operations
the officers are responsible (1) for establishing and maintaining an adequate system of internal controls sufficient to ensure reliable financial reporting and (2) for assessing the effectiveness of those controls
the officers have disclosed to the companys audit committee and external auditors (1) significant deficiencies in the companys controls identified in their assessment and any significant changes in the controls and (2) any fraud involving
management or employees who have a significant role with respect to internal controls.
The auditor must attest to and report on managements assessment of a corporations internal controls. The auditor is responsible for examining the client firms internal control system and verifying that the system is adequate to provide reasonable assurance of reliable financial reporting information. (SWLEARNING, 2011, para.1).
Corporations after the Enron collapse had negative responses towards the legal litigations associated with SOX. Corporations were under a huge undertaking with the amount of work that was expected from the PCAOB, upper management, and auditors. After Enron companies were forced to test, manage, and adequately support the effectiveness of internal processes within the company. However, it has provided a new ethical standard in the way corporations maintain their presence.
Enron has forced companies to spend more time and money in corporate compliance. If the laws arent followed companies could face criminal and civil penalties. Although many argue that the compliance costs outweigh the benefit, the federal government has been determined to crack down financial fraud and be able to reassure investors and stakeholders that the market is safe. “One of the main effects of Enrons collapse has been on the general confidence of the government, corporate and professional bodies, and investors in companies activities and management integrity. The effects of Enron have been so far-reaching that the term Enronmania has been coined to refer to the reaction among company bosses and investors to fear (indeed terror!) that companies with characteristics similar to Enron may share its fate”
(Solomon & Solomon, 2004).
Code of Ethics
Along with the many legal and financial changes made in the economy since Enron, how have companies changed their ethical standards since the Enron collapse? If we look back and go through all the unethical situations that happened, accounting failures allowed them to present profits rather than losses, soothing emails to employees, consistent denial of key role players in big decisions, upper management disobeying Enrons code of ethic, and the aggressive fictional response to whistleblowers, we have learned that not only was Enron a company that was failing financially, they also didnt follow their code of conduct; therefore, they were unethical in their business practices. Enron based their code of ethics on respect, integrity, communication and excellence. The values are described as followed:
Respect. We treat other as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance dont belong here.
Integrity. We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we wont do it.
Communication. We have an obligation to communicate. Here we take the time to talk with one another and to listen. We believe that information is meant