Question

The Enron failure and bankruptcy in early 2001 has become a symbol of corporate unethical behavior. It also cast a very dark shadow over the accounting industry, since Arthur Andersen, the largest accounting firm in the world at the time, was the company's auditing firm. Arthur Andersen was implicated in the illegal activities being carried on by Enron, since they failed to disclose accounting irregularities to the Securities and Exchange Commission (SEC). Since ethical behavior is one of the foundations of the accounting industry, I believe that it is important for students to understand what happened and why it happened in the Enron case.

A movie was directed by Alex Gibney called “Enron: The Smartest Guys In The Room.” It chronicles the rise and fall of Enron, who was responsible for it, and the shock waves that were sent throughout the world when the company collapsed. A DVD of the movie is available through the PCC library and in various places on the Internet (do a Google search on the movie title) and I would like all of you to see it and report on what you learn from it. Please focus on the impact of the case as it relates to the accounting industry, your feelings about the important topic of business ethics, and what has happened to the industry as a result of the Enron debacle. What was the effect of the Enron scandal upon the accounting industry? What was the effect of the scandal upon business in general? What were your impressions of the movie and the scandal?

Your paper should be between 500 and 1,000 words in length. Please cite any references you use. The paper should be submitted using good writing standards.

Answer 1

Answer :

Business in general witnessed a negative impact due to the Enron scandal. Immediately following the scandal electricity and natural gas companies put their projects on hold. Costs started rising in projects like projects to build power plants, pipelines, T&D lines (transmission and distribution). This slowing down affected other industries and sectors as well. Credit tightened and was no longer easily available. This together with rising costs led to slowing down of capital expenditures and project expansion. Bankers became skeptical of companies with high debt and thus companies were put on a back foot. Businesses were negatively impacted as after the Enron scandal recessionary forces became strong. Stock markets were driven to a downward tailspin and hence businesses found it hard to raise new funds. All in all Enron scandal had a significant and profound impact on business in general.

My impression of the movie was that the movie was more of an informative documentary. While being a documentary on the Enron scandal the movie was also concise as well as entertaining at the same time. The movie was made more like a crime story and as a viewer I started hating Enron, Arthur Andersen and its management for taking steps that duped several investors and stakeholders. I have now become more cautious when investing in stock market and research corporate governance level and internal control mechanisms within a company before investing in it. I have stopped taking advice from research houses, brokerages and analysts who promise significant potential returns and upsides from certain stocks.

The movie portrayed the actual events in a realistic manner. Emphasis was aptly put on crookedness that grew out of business practices and the need to put a check on such crookedness in the future to ensure long term sustainability and viability. It is also necessary to protect the interest of different stakeholders like investors, employees, suppliers etc.

The collapse of Enron in 2001 had a profound and a significant impact on the accounting industry in USA and the world over. Enron collapsed due to the accounting malpractices it engaged in to present a false picture to its stake holders. After this scandal the accounting industry and the accounting professionals were subjected to increased quantum of scrutiny. Policies and procedures were being put in place to ensure integrity and credibility on the part of public accountants. One of the key developments after Enron collapse was the introduction of Sarbanes-Oxley (SOX) act in 2002. SOX established an expansive set of rules meant to prevent the kind of accounting fraud evidenced at places like Enron. Secondly SOX, together with the PCAOB (Public Company Accounting Oversight Board) put restrictions on the non-auditing services that public accountants used to provide earlier. If a company audited a client’s financial statements then they were not allowed to offer any type of consultancy services to that client. Consultancy, till then, was provided in the following domains - human resources, technology, investment banking, or legal matters.

References:

1. Cooking the books – The cost to the economy.

2. Spartans mean business – Enron’s impact on society.