Limitatitons of the Accounting Code of Ethics

Professional value, ethics, and attitudes. (AC 423) base Assignment QUESTION With the payoff of hindsight, what advice would you suck in given the Enron Board to stay off the 2001 disaster? GROUP MEMBERS 1. Augustine KuparaR082559R 2. Tonderai NyamadzawoR082987G 3. Simbarashe ChakaR089613J 4 Brighton Nzvuvu R089824H 5. Walter DangerR082990X 6. Simon ChigwandaR075968L 7. Ashley MurisaR082991Y 8. Frank Garatsa R082988H 9. Presely NheweyembwaR076037L 10. Peter DonaldR055241G 11. Shingirayi GweteR089773H BACKGROUND Enron tush was formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp.By ahead of time 2001, Enron had grown into the 7th galacticst U. S. Company, and the largest U. S. dealer/seller of natural gas and electricity. It was heavily involved in energy brokering, electronic energy trading, global good and options trading, etc. in 2001 Enron started to show major signs of trouble by announcing a huge third-quarter loss of $618 million. On October 22, 2001, the Securities and Exchange Commission (SEC) began an inquiry into Enrons method of account pr figure step to the foreices and later that year the confederation filed for Bankruptcy.Key investigations revealed many shortcomings which admit the do of interwoven & dubious score schemes to veer Enrons tax payments to flourish Enrons in convey and net to inflate Enrons memory price and recognition rating to hide losings in off-balance-sheet subsidiaries to engineer off-balance-sheet schemes to funnel gold to themselves, friends, and family to subterfugeulently misrepresent Enrons fiscal Enron also apply complex dubious energy trading schemes for instance the Death Star strength Trading Strategy which was aimed at taking advantage of a loophole in the market rules g overning energy trading in California.This essay altogetherow for attempt to advice the Enron Board to avoid the 2001 disaster with the advantage of hindsight by counsel on the major argonas in t he paragraphs which follow RECOMMENDATIONS THE BOARD OF DIRECTORS AND ITS FIDUCIARY DUTIES The Board, as the head of the brass instrument is supposed to execute its duties and roles professionally and hit confident(predicate) that the caller-up is blend in efficiently and aftermathively. Its supposed to exercise reverting over all the operations of the organization.These duties includes adopting of corporate strategy, annual budget and semi-formal organisational structure, ensuring that put on the line focussing structures ar in adjust, the company is complying with the relevant laws and regulations and that suitable bids are in turn outer space, to exercise oversight over precaution operations, to act as a communication channel among heed and shareholders and to visualize that pecuniary information of the organisation is reliable and credible. There is need to command that the mesa is properly structured so that t it adds value to the organization.This manne r that it was supposed to ready a chair, at least one the members is monetaryly literate and just about of its members are non- executive director directors. This would ensure that an fencesitter perspective is brought into the get a extensives operations that would down experience and expertise to the control panel The carte du jour supposed to follow its code of conduct in carrying step up their duties. This ensures that all the activities it undertakes are in the best interest of the shareholders not themselves.For example, in carrying out their duties, all the board members are supposed to exhibit due apprehension and diligence, to be honest and loyal, to exercise orphicity on the organizational information and to expose any conflict of interest. Some of the board members had financial interests in the finicky Purpose Entities (SPEs) fashioning large profits but they did not let on this conflict of interest to the board. This would compromise their objectivity and independence in carrying out their duties.Some of the members of the board were not exercising due care and diligence in their operations. They were aware of the unhonorable and risky business operations that were taking place within the organisation but they took no action and did not bring it to the worry of the board. These included transactions by SPEs and the paying of unauthorised bonuses to cured officials. They even connived with the lavatoryvasors to structure and perform some of the illegal transactions that were aimed at falsifying the effect and position of the organisation.The board is also supposed to learn new(prenominal) special sub committals that are aimed at enhancing the operations of the board in areas that need special attention. These include the Audit Committee that is aimed at bring offing the familiar and outer scrutinise functions and the Remuneration Committee that erect be responsible for(p) for the salaries and allowances of managers an d other senior officials. The role of a companys board of directors is to oversee corporate management to interests of shareholders.However, in 1999 Enrons board waived cheer the conflict of interest rules to allow chief financial officer Andrew Fastow to arrive at private partnerships to do business with the firm? Transactions involving these partnerships concealed debts and losses that would get had a significant impact on Enrons report profits. Enrons collapse raises the come forward of how to reinforce directors capability and ordain to altercate questionable dealings by corporate managers. Specific questions involve separatist or external directors. Stock exchange rules require that a sure office of board members be unaffiliated with the firm and its management. ) Should the way remote directors are selected be changed or regulated? Directors are elected by shareholders, but except in in truth unusual circumstances these are Soviet-style elections, where managements slate of candidates receives pricyly unanimous approval. Should on that point be restrictions on indirect honorarium in the form of, say, consulting contracts or assumeations to charities where commutative board members serve?Should the personal liability of directors in cases of corporate fraud be developmentd? Do the rules requiring members of the boards study perpetration to be financially literate ensure that the board allow for hold the line the innovative and complex financial and accounting strategies employed by companies alike Enron. Several of the canvassor reform bills cited above would require the audit committee of a pottys board of directors to take a to a greater extent active role in the selection and supervision of audit work.Enron should devote kept an element of professionalism the board of directors should show independence in finale make. The company must not have any close alliance whatsoever with its hearers. A strict and good arranging of corporate giving medication should have been set out , which sets out a clear system of duties of each director. They should have set out a system of requisition of duties that sees each director have an independent duty. AUDIT COMMITTEE whatever effective audit committee must have been in place at Enron comprising of purely independent non-executive directors.Members should have an understanding of intragroup control system and financial and sustainability reporting experience. This committee reviews the accounting practices and approve the financial statements as integrated reporting. Thus the financial reports of Enron would not have been allowed to be published before the approval of the Audit Committee. Review the effectiveness of the internal control environment as sound as oversight over the internal and external audit.The Audit Committee recommend to the Board of Directors the engagement, removal and liaise the terms and hires with the external tender. The burn of no n-audit function, it is also the responsibility of the committee to define the policy and approve the contracts. Hence the pure independent audit committee it would have not allow Arthur Andersen to exercise multiple roles at Enron. narrations Management are received and reviewed to check whether in line with the approved internal Audit plan and the graphic symbol and effectiveness of the external audit function.Risk management is also pivotal in this committee so as to champion the fraud awareness. As an internal auditor, Sherron Watkins should have not enjoin her anonymous letter to the chairman of the board, Kenneth Lay but to the committee which oversee the internal control system. The Chief Accounting Officer, Richard A Causey who was getting coin through the Special Purpose Entities had been once an auditor at Arthur Andersen an issue which should have been closely examined. An effective Audit Committee consider confidential reporting to facilitate whistle blowing.Overal l, Audit committee have a combined assurance role thus monitoring the relations between internal and external audit to reduce duplication efforts as wholesome as enhances transparency. AUDITOR ROTATION. The Issue Of Auditor Rotation Is Of Significant To The reference Of Financial Reports. Auditors Should Be Rotated Every Few Years To go along Long Term, Close Ties Between The Enron And The Arthur Andersen Firm. Arthur Andersen is the firm that audited Enrons books from its inception in 1985 (it was also global crossing auditor).Also there was questionable movement of force out from between the two companies Richard A Causey, the Chief Accounting Officer had come to Enron after working on Enron audits for Andersen this creates a strong kindred, Familiarity threats and it is easy to can collude with Andersen in perpetuating fraudulent activities. Time should be put at least three years before a member can join Enron from auditing firm. Long term audit guest relationships signific antly increase the like hood of an unqualified opinion or significantly reduce the auditors willingness to qualify the audit reports.Mandatory audit rotation is paragon in maintaining the value of an audit for both the internal and external users. Although pass auditors have got an advantage to Enron of that they will be auditing the business they know very well its environment and internal controls thereby reducing the chances of the auditor making an audit risk which is the risk that the auditor will give a wrong opinion that the financial statements are not materially misstated when in demonstrable fact they are materially misstated. , however the disadvantages seemingly outweigh the costs of retaining the audits.According to Wallace, 1980 and De Angelo (1981) audit quality is a market assessed joint hazard that an auditor will both discover a breach in the clients accounting system and report the breach. According to Shockley (1982) a long auditor client relationship can ha ve the effect of complacency, wish of innovation, less rigorous audit procedures and a learned combine in the client may arise after long linkup with the client. It also gives auditor time to develop a close relationship with the client in this case Enron employees..After a number of years there is some kind of turning point in the auditor and client relationship which can be detrimental to the auditors independence. onward the decisiveness to rotate there is need to assess the quality of the audit client and this can be done in the following ways correspond to Shockley and Holt 1983, firstly the perceptions of users should be analysed, the pricing of the audit services has to be analysed and in this case Andersens firm was receiving a greater percentage of its revenue from Enron hence there is dependent on the company.The nature of the audit opinion has to be analysed it has a greater impact on the assent with which we can place to the auditing firm. COMPLIANCE TO ACCOUNTING STANDARDS AND REGULATIONS The Enron was involved several accounting issues, one concerns the creation of special office entities (SPEs), these were established for the special purpose of covering Enrons losses and there were also being used to transfer debts outside of the company and would not show up on the balance sheet at year end . The SPEs were supposed to be independent companies however they were headed by Enron former employees, and backed, ultimately, by Enron stock.The second issue was that Enron was also involved in other accounting soils for example Enron took advantage of the limitations in the standards governing the energy business therefore over determine assets and selling some of decreasing assets to the SPEs at huge mark-ups and there realising the profits in the financial statements. As a resulted of these accounting misappropriations, Enron produced favourable financial statements leading to unapproved bonuses being claimed by employees and directors also p roviding themselves with obscenely generous stock option grants.The Securities and Exchange Commission (SEC) governs the activities of companies registered on the New York stock exchange. Enrons management should follow the regulations stated by SEC and also to rail its financial statement according to the generally accepted accounting principles (GAAP). The accounting information produced by Enron should have been restated to show a fair financial position of the company. The SPEs should be liquidated no further transactions should be carried out between Enron and its related parties. In correcting its transactions Enron should other external auditors other than Arthur Andersen.These investigations should be carried confidentially so as to protect the manage the space and also to protect Enrons reputation. COMPENSATION TO EXECUTIVES AND OTHER PERSONNEL set up of over paying directors it is results in directors losing focus of their core business, that acting their stewardship an d right functions . Through good corporate governance directors via the agency theory are responsible to the shareholders. Directors are independent form management they are responsible for making sure management are carrying out their fiduciary duties.However if they are over compensated they are more likely to be wedded to favour management over shareholders, as they is a rise of a self-interest threat With no proper monitoring of the board through a remuneration committee, overpaying results bad corporate governance which affect the companies risk management. It results in problems not been brought to light, allowing them not been addressed. As directors ignore their duties and focus on short term profits and rather than maximising company proceeds in the long term, this reduces their ability to focus on strategic issues and psychiatric hospital of unrealistic standards of performance.Decision-making is greatly affected as they will be they will be destruction of the authori ty line by the two boards who will be responsible for the overall well being of the company. As decision making will have been affected corporate and accounting practises will greatly be affected, which will increase the chances of fraud and error. These might include recording profits earlier and recognising set downs late. Overpaying also results in changes in the ethical culture of the organisation, as the board can select bad managers to run the business because they will be sharing a common perception.Which is lack of concern for long run of the business? Rather the advice would be for Enron to have a directors board which contains an equal mix of executive and non-executive directors. This would be to ensure independence and accountability at the gameest level, this also reduces self-interest threats . It allows for a board which separates itself from the management of the business Rotation of members at patronage intervals to allow for reduction in familiarity threats if m embers of the board stay for too long ,e. . more than five years they might become familiar with the management Establishment of remuneration committee which monitors the payment of executives, this ensures that directors are paid according to the tasks performed and not for unnecessary duties INDEPENDENCE Independence is when one makes decisions honestly and truthfully both in fact and in appearance and avoids internal and external pressures which may influence the outcome of a decision under review.The Enron scandal showed a number of independency issues being overlooked by the management of the company and instead concentrated on fraudulent profit making strategies which should have been avoided. These fraudulent activities involved the management of the company and their external auditors (Arthur Andersen), the companys lawyers, consultants and lenders. The advice that l would have given to the management of Enron concerning independent issues was that they should have at first allowed every employee to exercise his or her duties without influence from anyone all internally or external.The management of Enron should have exercised their duties of stewardship to their principles without paying much attention to their excessive and self-centred interest of maximising wealth at the expense of their shareholders. The actions by Mr Ken Lay of forcing all employees to book their corporate decease through his sisters travel agency was nowhere near independency but only self-interest and greed to accumulate wealth. The board members should have critically analysed the source of the monies they were receiving so as to find facts to loose the revenues.Instead they were only concerned about their packages and approved every idea the management would put before them without taking into consideration the effects of such decisions. This was a clear threat to the boards independency since they were to choose on whether to be ethical or satisfy their insatiable need fo r wealth. These high earnings were also received by most of the companys executives, finance, legal and accounting professionals and they made them to overlook the questionable accounting practices which were obedient these huge packages.The management also needed to take note of their auditors operations when carrying out his mandate, there was need to segregate duties between auditing and non-auditing services. Arthur Andersen should have been engaged to one assignment only of auditing and leave the non-auditing services to other so that independent decisions could be made. The board should have go around their auditors after a reasonable period of time to avoid familiarity and some associated threats to independence.There was need for the board to also discuss the issues of their auditors remuneration and other packages they offered so that they could match with the current market trends this would reduce the auditors dependency and force them to report any anomalies within the operations of the company. Role of Sell-Side Analysts Sell-side analysts have received considerable criticism for failing to provide an earlier warning of problems at Enron.On October 31, 2001, just two months before the company filed for bankruptcy, the mean analyst recommendation listed on First Call (which compiles and distributes analyst recommendations) for Enron was 1. 9 out of 5, where 1 is a strong buy and 5 is a sell. Even after the accounting problems had been announced in October 2001, esteemed institutions such as Lehman Brothers, UBS Warburg and Merrill Lynch issued strong buy or buy recommendations for Enron. Analysts should have not been slow to recognize the problems at Enron.The analysts should not have financial incentives to recommend Enron to their clients. Investment banks earned more than $125 million in underwriting fees from Enron in the period 1998 to 2000, and many of the financial analysts working at these banks received bonuses for their efforts in su pporting investment banking. Sell-side analysts must be independent and avoid any self-interest threats which may arise. Corporate Culture Enron has been expound as having a culture of arrogance that led volume to opine that they could handle increasingly greater risk without encountering any danger.According to Sherron Watkins, Enrons unarticulate message was, Make the numbers, make the numbers, make the numbersif you steal, if you cheat, just dont get caught. If you do, beg for a second chance, and youll get one. Enrons corporate culture did little to promote the values of respect and integrity. These values were undermined through the companys dialect on decentralization, its employee performance appraisals, and its compensation program. Each Enron division and business unit was kept separate from the others, and as a result very few people in the organization had a big picture perspective of the companys operations.Accompanying this emphasis on decentralization were insuffi cient operational and financial controls as well as a distracted, hands-off chairman, a compliant board of directors, and an unfertile staff of accountants, auditors, and lawyers. Jeff Skilling implemented a very rigorous and threatening performance evaluation process for all Enron employees. Known as rank and yank, the annual process utilized peer evaluations, and each of the companys divisions was haphazard forced to fire the lowest ranking one-fifth of its employees.Employees frequently bedded their peers lower in order to enhance their own positions in the company. Enrons compensation plan seemed oriented toward enriching executives rather than generating profits for shareholders and encouraged people to break rules and inflate the value of contracts even though no actual cash was generated. Enrons bonus program encouraged the use of non-standard accounting practices and the inflated valuation of deals on the companys books. Indeed, deal pomposity became widespread within t he company as partnerships were created solely to hide losses and avoid the consequences of owning up to problems.Conclusion In conclusion, one can see that a variety of perspectives can be applied to the Enron scandal which could have averted the 2001 disaster. If those charged with the governance of the entity had taken necessary steps in line with what is describe in this essay, the corporation would not have collapsed. However even if Enron and its outside accountants and lawyers had done nothing improper, the sudden collapse of such a large corporation would suggest basic problems with the U. S. ystem of securities regulation, which is based on the full and straight disclosure of all financial information that market participants need to make informed investment decisions. The overarching issue raised by Enron is how to improve the quality of information available about public corporations. References * Bob Lyke. CRS Report RS21120, Auditing and its Regulators Proposals for amend After Enron. * JOINT COMMITTEE ON TAXATION, 2003 Report of investigation of Enron corporation and related entities regarding federal tax and compensation issues, and policy recommendations McLean, Bethany. 2001. Is Enron Overpriced? Fortune. * capital of Minnesota D. Miller, Brief History of Enron (accessed 27 November 2012) http//www. freegrab. net/enronhist. htm * Paul M. Healy and Krishna G. Palepu, (2003) The Fall of Enron * Powers, William C. , Raymond S. Troubh and Herbert S. Winokur. 2002. Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. * Steven C. Currall Marc J. Epstein 2003. Lessons From the stand up and Fall of Enron * Watkins, S. , 2002. Email to Eron Chairman Kenneth Lay,