Lessons from Enron: Bad Management, Negative Consequences

One of the classic examples of bad instruction, Enrons collapse according to the Economist (2002) was a result of bad practicement and poor decision-making of the examineing tauten Andersen in handling the account of the follow. The primary root of Enrons collapse was bad management and the power of the management to delegate audited accounting and history system responsibilities to a firm that they lay down chosen. The dependence of the auditing firm on the management in essence creates the arrest in the accounting and auditing ethics in order not to put down an all- likewise important account such as Enron, they would require to abide by the decisions of the management.The lack of impartpower of Andersen to question the unethical pr turningices of Enron made it culpable in the same way as Enrons managers. This led a half mask and cascading effect in the corporate world of the States the g all overnment scrambling to assure for opposite companies who atomic number 18 excessively hiding in their auditors books, the deterioration of the auditing and accounting profession, lack of trust in companies, and investor apprehension. The collapse of Enron was more often than not a decision by the top management which also involves its accountants to hand over a bogus statement of finances to make Enron look kindred a profitable company.Auditors of Enron on the other hand, start out sought to comfort the company by shredding incriminating documents. From an agency theory perspective, the role of the Enrons top management to that of the shareholders is matchless that is governed by the principle that managers will act in a way that will benefit the owners or shareholders of the company (Abrahamson and Park, 1994). In essence, what happened to Enron was that the managers or the agents gained alike much power and the shareholders did not effect its function of overseeing the operations of their company.Fundamentally, what the shareholders and th e managers who did not take part in the Enron s shadowerdalisation could have done was to have the government to allot an auditing or accounting firm that will monitor the financial movement of the company. In this way, accountants and auditors will not be obliged to follow what the top managers would want them to do. Managers need to be wary of decisions made by the top management or their colleagues. To a significant extent, appointments should be made independent of the managers.In an era where auditing and accounting fraud are prevalent, managers can protect themselves by safeguarding their companies among their peers. References Abrahamson, E. and Park, C. (1994) Concealment of oppose organizational outcomes An agency theory perspective. Academy of Management Journal, 37 1302-1334. Barefoot, JA. (2002). What can you learn from Enron? How to k in a flash if you are creating a climate of rule-breaking. ABA Banking Journal, 94. The Economist. (2002) The Lessons from Enron. 362, 8259 9-10. Retrieved 1 July at http//www.csupomona. edu/smemerson/PLS499%20Greed_Need/Enron. doc. Appendix 1. Enron Article Title THE LESSONS FROM ENRON , Economist, 0013-0613, February 9, 2002, Vol. 362, Issue 8259 Database Academic Search elite group Section Leaders THE LESSONS FROM ENRON After the energy firms collapse, the entire auditing regime needs radical transport THE mess entirely keeps spreading. Two months after Enron filed for Chapter 11, the reverberations from the Texas-based energy-trading firms nonstarter might have been expected to fade instead, they are growing.On Capitol Hill, politicians are tenanted in an investigative orgy not seen since Whitewater, with the blame pinned variously on the companys managers, its directors, its auditors and its bankers, as well as on the Bush administration then on any trunk except the hundreds of congressmen who queued up to take campaign cash from Enron. The sole(prenominal) missing ingredient in the scandalso faris sex . The personal effects are also touching Wall Street. In the past a couple of(prenominal) calendar weeks, investors have shifted their watchfulness to other companies, making a frenzied expect for any dodgy accounting that might reveal the next Enron.Canny traders have found a lucrative new strategy sell a firms stock short and then spread rumours about its accounts. Such companies as Tyco, PNC Financial Services, Invensys and even the biggest of the lot, General Electric, have all suffered. Last week Global Crossing, a telecoms firm, went bust amid claims of dubious accounts. This week shares in Elan, an Irish-based medicate maker, were pummelled by worries over its accounting policies. All this might create the motion-picture show that corporate financial reports, the spirit of company profits and the standard of auditing in America have suddenly and simultaneously deteriorated.Yet that would be wide of the watch the deterioration has actually been apparent for many a(pre nominal) years. A growing body of evidence does indeed suggest that Enron was a peculiarly egregious plate of bad management, misleading accounts, shoddy auditing and, quite probably, outright fraud. But the bigger lessons that Enron offers for accounting and corporate governance have long been familiar from front scandals, in America and elsewhere. That makes it all the more urgent to respond now with the right reforms.Uncooking the books The place to start is auditing. Accurate company accounts are a keystone for any proper capital market, not least Americas. Andersen, the firm that audited Enrons books from its inception in 1985 (it was also Global Crossings auditor), has been suggesting that its failings are representative of the alone professions. In fact, Andersen seems to have been unusually culpable over Enron shredding of incriminating documents just ahead of the investigators is not merely a widespread habit.But it is also real that this is only the latest of a string of corporate scandals involving appalling audit failures, from Maxwell and Polly Peck in Britain, with Metallgesellschaft in Germany, to Cendant, Sunbeam and neutralise Management in America. In the past four years alone, over 700 American companies have been forced to restate their accounts. At the heart of these audit failures lies a set of business relationships that are bedevilled by perverse incentives and conflicts of interest. In theory, a companys auditors are appointed independently by its shareholders, to whom they report.In practice, they are chosen by the companys bosses, to whom they all too often become beholden. score firms much sell consulting services to their audit clients external auditors may be engage to senior management positions or as internal auditors it is far too easy to play on an individual audit partners fear of losing a lucrative audit assignment. Against such a background, it is little wonder that the quality of the audit often suffers. What sho uld be done? The most radical change would be to take responsibility for audits away from private accounting firms exclusively and give it, lock, stock and barrel, to the government.Perhaps such a change may withal become necessary. But it would run risks in terms of the quality of auditors and it is not always so obvious that a government agency would manage to escape the conflicts and mistakes to which private firms have so often fallen prey. As an intermediate step, however, a simpler suggestion is to take the job of choosing the auditors away from a companys bosses. Instead, a government agencymeaning, in America, the Securities and Exchange Commission (SEC)would appoint the auditors, even if on the basis of a list recommended by the company, which would stick to pay the audit fee.Harvey Pitt, the new chairman of the Securities and Exchange Commission, is not yet willing to be anything like so radical. He has been widely attacked because, when he acted in the past as a lawyer for a subroutine of accounting firms, he helped to fend off several reforms. Yet he now seems ready to make at least some of the other changes that the Enron scandal has shown to be necessary (see pages 67-70. ) Among these are much uncultivatedr statutory economy of the auditing profession, including disciplinary powers with real bite.Hitherto, auditors have managed to get away with the fiction of self-regulation, some(prenominal) through peer review and by toothless professional and lapse bodies that they themselves have dominated. There should also be a ban on accounting firms offering (often more profitable) consulting and other services to their audit clients. some other good idea is mandatory rotation, every four years or so, both of audit partnersso that individuals do not become too committed to their clientsand of audit firms. The most effective peer review happens when one firm comes in to look at a predecessors books.The SEC should also ban the practice of companies hiring managers and internal auditors from their external audit firms. In look of better standards Then there is the issue of accounting standards themselves. Enrons behaviour has support that in some areas, notably the treatment of off-balance-sheet dodges, American accounting standards are too lax while in others they are so prescriptive that they have lost sight of broader principles. Past attempts by the Financial Accounting Standards Board to improve standards have often been stymied by vociferous lobbying.It is measure for the SEC itself to impose more rigorous standards, although that should often be through sound principles (including paying less attention to single numbers for earnings) sooner than overly detailed rules. It would also be good to come up with internationally agreed standards. Although audit is the most pressing area for change, it is not the only one. The Enron fiasco has shown that all is not well with the governance of many big American companies. Over the years all sorts of checks and balances have been created to ensure that company bosses, who supposedly act as agents for shareholders, their principals, actually do so.Yet the fury of the all- decent chief executive, armed with sackfuls of stock options, has too often pushed such checks aside. It is time for another effort to realign the system to function more in shareholders interests. Companies need stronger non-executive directors, paid enough to devote proper attention to the job genuinely independent audit and remuneration committees more powerful internal auditors and a separation of the jobs of chairman and chief executive.If corporate America cannot deliver better governance, as well as better audit, it will have only itself to blame when the public backlash proves both fierce and unpleasant. 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