Research Paper on "Accounting Ethics"

Research Paper 4 pages (1286 words) Sources: 4

[EXCERPT] . . . .

Accounting Ethics: The Enron Scandal

A number of recent scandals in the past ten years have motivated regulators to change the legal landscape in regards to what constitutes ethical standards in accounting. With the Sarbanes-Oxley Act (SOX) in 2002, Congress created the Public Company Accounting Oversight Board (PCAOB), a non-profit entity that assumed responsibility for establishing auditing standards. It replaced the role previously filled by the Auditing Standards Board of the AICPA. The AICPA was deemed to be overly self-interested to regulate the conduct of auditors. One of the precipitating events that generated the political motivation to pass SOX was the Enron scandal. Specifically, "the plight of David Duncan, the lead audit partner at Arthur Andersen on the Enron account, underscores the consequences accountants may face under professional responsibility rules. Duncan pleaded guilty to obstruction of justice in connection with document shredding. The Texas State Board of Public Accountancy, in lieu of further disciplinary proceedings, revoked Duncan's license" (Romal & Hibschweiler 2004). Auditing has traditionally been a self-regulating profession, but after Enron, SOX put into place independent legal guidelines to prevent ethical breaches (Verschoor 2012).

The Enron scandal was a scandal of betrayal -- betrayal of the public trust, of ordinary employees, and shareholders. What is so extraordinary about the story of Enron is that it seemed like a historic American success story. "In just 15 years, Enron grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries" (Enron scandal at-a-glance, 2002, BBC). However, the reason for its stratospheric rise in profitability was that "Enron lied about its profits" and it concealed "debts so they didn't show up in the company's accounts" (Enron scandal at-a-glance, 2002, BBC). Enron created a series of shell corporations "designed to hide its liabilities and mislead investors" and even when it knew it was in financial trouble, it concealed its losses and encouraged employees and other investors to buy over $1.1 billion in stock (Enron scandal at-a-glance, 2002, BBC). Both investors and employees alike saw their life savings wiped out as a result of the fraud (Kadlec 2002).

Enron was able to pull the wool over the eyes of regulators for so long with the aid of the formerly well-respected accounting firm of Arthur Anderson. From an accounting perspective, what was so remarkable was the complicity of the stalwart firm in perpetuating the fraud. Anderson did not merely ignore accounting red flags -- it was instrumental in perpetrating the fraud itself. "Just four days before Enron disclosed a stunning $618 million loss for the third quarter -- its first public disclosure of its financial woes -- workers who audited the company's books for Arthur Andersen, the big accounting firm, received an extraordinary instruction from one of the company's lawyers….the Oct. 12 memo directed workers to destroy all audit material, except for the most basic 'work papers'" (Kadlec 2002). Arthur Anderson complied with these instructions despite the fact that there was mounting evidence that Enron's business practices would soon be under investigation.

It should be noted that at the time there was no specific law mandating that Anderson had to keep all documents intact, but most firms keep documents for at least several years and "any deliberate destruction of documents subject to subpoena is illegal" (Kadlec 2002). Anderson, in contrast, avoided keeping any documentation that was not specifically mandated by law. This indicated a pattern of suspicious behavior. Eventually, as a result of Arthur Anderson's massive shredding, the government was "denied thousands of e-mails and other electronic and paper files that could have helped illuminate the actions and motivations of Enron executives" (Kadlec 2002). Anderson's actions were not a one-time oversight: "supervisors at Arthur Andersen repeatedly reminded their employees of the document-destruction memo in the weeks leading up to the first Security and Exchange Commission subpoenas that were issued on Nov. 8"… READ MORE

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