Case Study on "Analyzing Corporate Governance"

Case Study 12 pages (4042 words) Sources: 12

[EXCERPT] . . . .

Federal officers intervened with governments from other nations to promote the company's projects, while representatives of the company contributed significantly to instituting a national energy policy in favor of deregulation of added energy markets. Meanwhile, any individual/entity believed to be unfriendly to the company's interests would receive retribution. In one case, Enron's CEO pulled out of an underwriting agreement, in order to pressurize banker Merrill Lynch to fire an analyst responsible for downgrading Enron's stock (Smith, & Raghavan, 2002). In one conference call, Skilling swore at an analyst who questioned Enron's performance.

Right from the start, accounting company Arthur Andersen was Enron's external auditor. A couple of years after Enron's collapse, this leading international accounting firm that employed 36,000 individuals closed down. In the course of its 16-year-long association with Enron Corporation, Arthur Andersen provided Enron consulting and internal auditing services, in addition to external auditing. Between 1997 and 2001, Enron exaggerated its revenues by no less than 568 million dollars, which was 20% of its earnings for that period. Andersen auditors aided Enron in hiding this manipulation of earnings. On 15th June, 2002, the accounting firm was found guilty of obstructing justice by shredding Enron's audit documents (Arthur Andersen v. United States, 2005).

Enron's founder, chief executive, and chairman, Kenneth Lay proved to be a deceitful individual who lacks integrity, as is evidenced by the facts mentioned above. Under his guidance, the company engaged in fraud, and investors ended up losing several billion dollars. Another key individual held accountable in this case is Enron's Chief Operating Officer and President, Jeffrey Skilling, who also held the CEO's post for a brief period, between February and August 2001. Skilling testified to being innocent, which he clearly wasn't. On 14th August, 2001, Skilling, stating his desire to devote more time to his family, left Enron without making any of its financial problems known. However, on 17th September, 2001, he sold a whopping 500,000 shares. Prior to his departure, Skilling also indulged in unethical actions (Wang, 2012). Andrew Fastow, Enron's chief financial officer, is the third individual incriminated in this case. Fastow was directly to blame for the fiasco Enron witnessed, having manipulated financial numbers. Enron's audit partner, David Duncan, is liable as well. When faced with a dilemma, he chose personal gain and violated auditing standards, hence, contributed to fraud. The last and most important individual involved in this case is Enron's corporate development vice president, Sherron Watkins, who is the epitome of an ethical executive. She revealed Enron's financial situation to the public, by developing a memo disclosing Enron's financial situation, thereby risking her job. Despite being sure she would be out of a job soon, Watkins merely started seeking another job, while preparing reports for the public.

Aftermath of the Collapse

Enron Corporation's ethical code and foundational, core values of integrity, communication, excellence and respect failed in creating an ethical climate at Enron. Legal proceedings are still on, and the full explanation and extent of the organization's ethical collapse remains unknown. No less than 14 other employees of Enron (many of whom were at high-level positions) have been found guilty and accepted the various charges made against them; of these, twelve await sentence, and two (including Andrew Fastow's wife) have been sentenced to a minimum of one year in jail (Enron Case Study PDF). Five individuals have been charged with fraud by juries, as has Arthur Andersen, which shares responsibility for Enron's falsified accounting statements. Of the condemned individuals, 3 were employed at Merrill Lynch and were involved in a Nigerian agreement with Fastow. Skilling, Lay and the chief accounting officer of Enron, Richard Causey, await trial. Skilling, Causey and Lay face thirty-five, thirty-one, and eleven criminal charges, respectively. Five Enron Broadband executives await trial as well (Enron Case Study PDF). Also, three British banking executives embroiled in a complex set of agreements in one of the infamous Fastow partnerships, are fighting deportation. Additionally, the federal case against Skilling and Lay has no less than 114 unindicted conspirators.

Various Resolution Options

Enron's issue portrays the need to improve financial disclosure procedures. Programs should, perhaps, be instituted for replacing the current AICPA (American Institute of Certified Public Accountants) peer review procedure. At the very least, this case appears to demonstrate that the FASB (Financial Accounting Standards Board), responsible for making rules in this field, ought to establish more direct standards and regulations, which can be understood by ordinary people. More reliable public servants are required, rather than more regulations. The Private Securities Litigation Reform Act of 1995 slackened restrictions that would have curbed the behaviors leading up to Enron's scandal and destruction (What Really Went Wrong with Enron?). Nevertheless, government officials are now demanding more laws, which is apparently a ploy for turning the attention of the public from what policymakers have done to legislation, already. For instance, the Democratic Party representative from Ohio State, Dennis John Kucinich, formerly mayor of Cleveland, who was virtually single-handedly accountable for Cleveland's 1978-79 bankruptcy issue, is seen drafting legislation for creating an independent organization for the purpose of auditing public companies. Are another governmental office and more legislation really needed? What about already existent laws and their enforcers? Proposals like the one put forward by Kucinich appear to be diversions for protecting politicians. I personally feel politicians must be held responsible for their actions, and not just the businessmen (of questionable integrity). Moreover, the Enron case demonstrates a need for amending rather than banning non-audit works. Of late, auditing companies are being pressured to quit providing non-audit service (What Really Went Wrong with Enron?). Nevertheless, people fail to see that a number of key non-auditing services are actually very closely associated with audited information, and banning auditors from offering them makes no sense. One example of such a service is tax advice. Auditors are familiar with financial records of companies, so giving them tax advice seems the sensible thing to do.

Utilitarian philosophers John Stuart Mill and Jeremy Bentham contend that, resolving ethical issues necessitates balancing, wherein the harms resulting from a particular decision are minimized even as its benefits are maximized. In utilitarianism, decision-makers need to take into account the interests of every party impacted by the decision. Actions that maximize benefits must be chosen. Decision makers need to do as much good as they possibly can. They face the ethical quandary of protecting personal interests with foreseen harm to investors, or simply protecting a majority of stakeholder interest while sacrificing personal short-term interests. The answer for followers of utilitarian theory is obvious. Immanuel Kant and Categorical Imperative theories clearly state that one cannot exploit others and gain a one-sided benefit. Also, managers can employ the test cited in Spencer Johnson and Ken Blanchard's The One Minute Manager, which is to ask oneself three questions when deciding upon a course of action: 1) Is the action legal? 2) Is the action balanced? And 3) How does it make one feel? Enron employees ought to have considered these three questions (Wang, 2012). If I was employed with Enron, this is how I would answer those questions: First, according to some threads or my business intuition, I sense that the company is committing fraud. Helping anybody hide fraud is illegal. Secondly, disclosing such information to the public would get me fired. But hiding such important information will cause more people (i.e. company stockholders, investors, etc.) to suffer. Thirdly, I must expose this illegal activity to public as well as try to put a stop to it, despite the possibility of losing my job. I will feel guilty if I hide facts and let others suffer as a result.

Best Option for Resolution and Worst Option

The plan mentioned below will probably be the best resolution alternative for Enron:

Improving the MD&A (Management Discussion and Analysis) part of disclosure documents is deemed to prove valuable. MD&A has the following related goals (Pitt, 2002):

To present investors with a narrative account of the financial statements of companies, so that they can view companies from management's standpoint;

To make financial disclosure better on the whole, and offer a context for analysis of financial statements; and To present information regarding risks to, and quality of, organizations' cash flow and earnings

MD&A forms the mainstay of organizations' disclosures. It aims at wrapping GAAP (Generally Accepted Accounting Principles) financial statements up in an understandable, clear-cut discussion of context.

Investors must have increased awareness of financial statement sensitivity to the techniques, estimates, and assumptions based on which they are prepared. In its issue published on 12th December, 2001, the U.S. Securities and Exchange Commission (SEC) requested organizations to start addressing this need. The goal is adoption of new rules for eliciting more accurate and consistent disclosures with regard to crucial accounting policies within MD&A sections of companies' registration statements, information and proxy statements, and annual reports, with quarterly disclosure updates. Key accounting rules and policies need to… READ MORE

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