week 4 discusion thread

Dear Class,

One of the greatest things about online learning is how we can use the world-wide web to increase our learning potential. The amount of information on the internet is exponential! I highly recommend that you learn to tap this information source, but in doing so, I ask that you use good business and educational practices in quoting and citing your sources.

Here are some IMPORTANT rules and considerations to use when using web-research in your thread posts in my class!

· DO include the URL (web address) that you took the information from. (Hit enter after pasting in the URL and it will become a hyperlink to the source for other students.)

· DO include quotation marks or <<>> around quoted (i.e. copied and pasted) material.

· DO introduce the quoted material with YOUR OWN WORDS about why you are providing that quotation.

· DO limit the quoted material to a paragraph or less (a snippet) to entice the reader into following the URL (link) you then provide.

· DO use an 80/20 rule of thumb for posting that is, for every sentence of quoted material, you should give us at least 4 sentences from you. AT LEAST give us a few sentences to orient us to why this quote is appropriately contained in your post. Worst case: use a 50/50 rule but in no event should you simply copy and paste in paragraphs from a website with no orienting material from you. As the % of your words to quoted material decreases, so too will the value of the post decrease.

What will I do if you “copy and paste” from a book or website, in contradiction of the above guidelines?

1. If the problem is simply that you have “too much” copy and paste, but you have included the URL, this will affect the “quality” of your post-and your post will likely be a “low quality” post. Avoid this problem by only providing a “snippet”-i.e. 2-3 sentences of quoted material…and then provide YOUR OWN WORDS about why that is important. INCLUDE the URL!

2.

If you do not include a cite to the website or book from which your post information came, OR if you do not use quotation marks or some other method to show that the material was not written by you, then the issue will become one of Academic Integrity and I am required to turn it into the committee, subject to the rules on Academic Integrity in the student handbook.

Please let me know if you have questions about this class policy.

1) Read the article “Ethics In Accounting: The Consequences Of The Enron Scandal.” This article is part of the readings for the week and can be found through the DeVry online library. Let’s point fingers for a minute. Who is to blame for Enron? The executives? The Board of Directors? The auditors? Tell us what you think!

2) TCO 4.  Given the pervasiveness of ethical issues in business and society today, explain the forces responsible for the changes in the public’s expectations for corporate ethical behavior, as well as the public’s expectations of accountants who audit these corporations (navy).

Enron shows how an aggressive corporate culture that rewards high performance and gets rid of the weak links can backfire.  Why did Enron’s culture encourage fierce competition, not only among employees from rival firms, but also among Enron employees themselves?

3) Read the article “Ethics In Accounting.” This article is part of the readings for the week and can be found through the DeVry online library. The first sentence of the article says “Ethics in Accounting is one of the most important, yet most misunderstood, concerns in the world of business today.” Do you agree or disagree with this statement?

4)

Class, Explain how these virtues relate to an auditors’ intention to make ethical decisions.

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ETHICS IN ACCOUNTING: THE CONSEQUENCES OF THE
ENRON SCANDAL

ETICA ÎN CONTABILITATE: CONSECINŢE PRIVIND
SCANDALUL ENRON

L. CERNUŞCA1

1“Aurel Vlaicu” University Arad, Romania; luciancernusa@gmail.com

Abstract: The article discusses the Enron scandal and its immediate
consequences as well as the new legislation issued as a result of several
fraud scandals: Sarbanes-Oxley Act.
Enron Corp. is known as one of the largest scandals in U.S. history. As a
result of the investigations and after a long trial, Enron’s former chief
executive, Jeffrey Skilling was sentenced to 24 years in jail.

Key terms: Enron, Sarbanes-Oxley Act, effects, ethics, compliance, costs

INTRODUCTION

Enron, “a provider of products and services related to natural gas,
electricity and communications to wholesale and retail costumers” (Chary,
112) represented one of the largest fraud scandals in history. As a result of
the fraud investigations, the company was forced to file for bankruptcy in
December 2001.

Up to end of 2000, no one pointed fingers at Enron. For 2000, the
corporation reported $101 billion revenue and the auditors gave a clean
report. But, at this stage, Enron announced its intention that during the third
quarter of 2001, it would book a loss of $1.01 billion and, at the same time,
reducing shareholders’ funds by $1.2 billion as a result of correcting
accounting errors in the past.

After a long trial, Andrew Fastow, the former Enron finance
executive has been sentenced to six years in prison. Fastow pleaded guilty
for fraud and money laundering in 2004 and also became the chief
whiteness in the trial against Jeffrey Skilling and Ken Lay. His testimony
helped convict Lay (who died in July 2006 after a heart-attack) and Skilling,

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who was sentenced to 24 years in jail. In May 2006, the latter was found
guilty on 19 counts of conspiracy, fraud and inside trading over Enron
scandal. Skilling was found to have orchestrated a series of deals and
financial scheme which later lead to loses as they hide debts from investors.
Michael Kopper, former executive at Enron, was sentenced to 37 months in
jail. Kopper pleaded guilty in 2002 to wire fraud and money laundering and
his testimony helped convict Fastow. Michael Koenig, another former
executive, served 18 months in jail as he helped present false accounts to
investors.

After the Enron scandal, one of the debates was conducted around
the ethical behaviour of executives. Although there are a number of factors
that influence ethical behaviour, none were powerful enough to change the
ethical behaviour. As stated by Weeks & Nantel, the only factor that could
change the ethical behaviour is a properly devised distributed, promoted and
enforced code of ethics, updated on a regular basis, which can act as a
catalyst in an organisation to comply to ethical standards (Weeks & Nantel,
1992).

Enron did have a Code of Ethics, a nearly 65 pages document which
probably made employees think that the company they are working for is a
pure and clean organisation. The Code begins with a letter from Enron’s
founder, Kenneth Lay, who assures employees he conducts business “in
accordance with all applicable laws and in a moral and honest manner”
(apud Michael Miller). Also, the Code states: “We know Enron enjoys a
reputation for fairness and honesty that is respected. Enron’s reputation
finally depends on its people, you and me.” (apud Michael Miller). The
Code is based on several values, such as respect, integrity and
communication. Sadly, Enron’s executives didn’t comply to any of the
Code’s requirements.

The Enron scandal led to huge losses to company creditors, investors
and employees but the reasons why the scandal took place had little effect
on other parties (Sosnoff, 2002).

The initial government response to the Enron bankruptcy was to
impose new regulations that would give employees more flexibility to sell
the company’s stock in their 401(k) retirement plans. The new regulation
would allow employees to sell any company stock contributed to 401(k)
after 3 years.

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Enron followed a rule that allows a company to prevent employees
to sell company stock, including 401(k), before the age of 50 (Stevenson &
Labaton, 2002). Obviously, this was a very questionable practice when a
company chooses to preserve its stock value at the expense of its employees.
At one point, the Enron employees had 60% of their 401(k) in Enron stock,
causing them to lose more than $1 billion, as the share price fell from more
than $90 in August 2000 to less than $1 when the company declared
bankruptcy.

Clearly, after the Enron scandal, investor sentiment was not
expressed as public outrage but it affected the valuation of public firms and
the US stock market and hence creating a need to improve investor
confidence in US financial markets.
The revelation of “unethical” accounting policies by Enron and other firms
(such as WorldCom) and the continuous weakness of the stock market, have
determined political and public support for free-market policies. It has
already led to increased regulations of accounting and auditing authorized
by the Sarbanes-Oxley Act and an increase in criticism of privatisation.

The most significant changes brought on by the Sarbanes-Oxley Act
include (Joseph T. Wells, 334):
 The creation of the Public Company Accounting Oversight Board;
 Requirements for senior financial officers to certify SEC filings;
 New standards for auditor committee independence and for auditor

independence;
 Enhanced financial disclosure requirements;
 New protection for those who disclose frauds;
 Enhanced penalties for white-collar crime.

According to Gifford, SOX is a result of public demand to “do
something” about a problem of concern regarding American corporations
(2004). However, the major potential problem of the Act is that senior
corporate managers may be held liable for the illegal actions of their
subordinates that these managers did not direct or even know about.

An FD Morgen-Walke survey showed that 40% of portfolio
managers and investors said that SOX reforms are insufficient to enhance
accountability, while 56% say they are unconvinced that a public
accountability board will be more effective than the old system. However,

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more than 53% believe that Enron-like scandals are not just work of a “few
bad apples”, as the Bush administration indicated. But the investors see the
SOX as a step in the right direction. Two out of three investors said that
CEO/CFO certifications enforced and the penalties imposed would improve
the accuracy of financial reporting (Smart Pros, 2002).

Sarbanes-Oxley Act compliance is mandatory; therefore resources
must be allocated to its implementation. As a result, the diversion of funds
from other potentially profitable endeavours may result in improper
investment which can further result in loss of value or innovation to
companies. Furthermore, companies lose productivity with the necessity of
allocating employees to compliance instead of their usual profitable activity.
Also, some of the resources required to implement the Act cannot be
included in rate of investment (ROI) calculations, hence in meeting ROI
targets, the Act may fall short of acceptable levels.

As a result of SOX, as found by a Wharton School study, delisting of
public companies tripled in 2003 from 2002 ((Leuz, et, al., 2004). The study
found that most companies de-listed their shares in an attempt to avoid high
costs of complying with the Act, mostly because some smaller companies
listing costs were as much as $500,000 to comply.

Controversial or not, SOX “has often been described as the most
important corporate reform legislation in the United States since the
Securities and Exchange Act of 1934” (Business Law Online).

In recent years, researchers have begun to examine the market
reaction to the passage of the Sarbanes-Oxley Act. Li, Pincus, and Rego
(2004) find significantly positive stock returns associated with SOX’s final
provisions, while Rezaee and Jain (2003) show a positive stock price
reaction on several days before the passage of SOX.

Several studies showed that customers believe it’s important for a
business to seek out ways to employ good governance and that companies
have a more positive image if they are doing something to make the world a
better place. (Ptacek & Salazar, 1997; Weeks & Nantel, 1992). However,
the public’s scepticism towards the actual results remains high.

Obviously, no system of controls can prevent all misconduct, but a
company can demonstrate that it has satisfied its obligation to implement
good procedures and hence has a better chance to receive leniency.

A survey by Oversight Systems Inc. (2004) asked what impact SOX
compliance had on shareholders value. 37% of respondents say SOX

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increase shareholder value as investors know they operate as an ethical
business, while 25% of those questioned report that SOX boosts shareholder
value by building overall confidence in the market. But the survey also
showed the negative impact of SOX on the stock value. 33% of respondents
say that SOX compliance created costs that suppress the stock prices, while
14% say that SOX decreased their ability to pay out dividends as
compliance costs are draining their earnings.

A 2003 study by AMR Research found out that as much as 85% of
public companies are planning changes in their IT systems in order to
support compliances to SOX To analyze the effect on SOX on shares,
Gompers, Ishii and Metrick (2003) construct a governance index to capture
the extent of shareholders’ protection in a corporation using some of the
governance rules. The researchers show that the relationship between
shareholders and executives is defined by the rules of corporate governance.

John, Litov, and Yeung (2004), in a research, show that an increase
in investor protection reduces executives’ inclination to bypass risky
projects that could bring value to the company. This suggests that SOX
should lead to an increase in risk-taking by companies with weak
shareholder rights.

SOX applied to all companies in the United States. Of all the
provisions, only two apply to nonprofits. However, these two provisions
quickly sparked debates whether nonprofits should adhere to certain
provisions of the Act. The provisions that apply to nonprofits refer to the
Independent Audit Committee, auditor responsibilities, certified financial
statements, “whistleblower” protection, document destruction policy,
disclosure and insider transactions and conflicts of interest.

Although the debate regarding SOX compliance and effects have
been mostly about United States companies, little focus has been placed on
effects of SOX compliance on the global trade. The Act requires companies
involved in international trade to establish control for import-export
operations and global supply chain. The processes must be published in
annual and quarterly reports to investors. Furthermore, companies have to
report their efforts to “identify, assess and respond to risk such as terrorist
attacks” (Field, 2004). Wrongful declarations and errors in valuation of
import-export operations will face legal action under the new Act as well as
under the Customs and Border Protection, the Department of Commerce and

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the Food and Drug Administration and other agencies. According to SOX,
companies involved in international trade have to disclose all off-balance
sheet transactions, obligations and arrangements. Failure to comply, results
in delisting the company by the SEC or barring of international trade.

CONCLUSIONS

It’s hard to believe that anything good would come out after a
scandal such as Enron. However, even with the loss of million of jobs and
thousands of dollars, the lessons to be learned from Enron might be a
valuable by-product of the entire scandal. As a result of the scandal, the
Sarbanes-Oxley Act forced companies to better control their accounting
policies and make financial information more reliable. The scandal brought
attention to the financial statement fraud by executives and, as a result, good
governance has become a priority for most companies, while the focus on
ethics in financial reporting has increased investors confidence in some
companies.

The Sarbanes-Oxley Act has obviously had an impact on the
managerial structure and government regulations of the public company.
The Act attempts to regulate what would normally be personal ethical
decisions in a corporate world where ethics are not really of any interest
anymore. SOX is an excellent step towards regulating corporate governance
and is comparable to the legislation implemented in Europe.

Sarbanes Oxley Act has both positive and negative effects. The Act
has a predominating positive effect of increased investor confidence in the
US financial market but also creates costs that result in lowered productivity
of public companies and dilution of the dominant US financial services
market.

REFERENCES

1. BERGEN LARA. (2005). The Sarbanes-Oxley Act of 2002 and its
Effects on American Businesses. University of Massachusetts
Boston. USA.

2. CHARY, VRK. (2004 ). Ethics in Accounting. Global Cases and
Experiences. Punjagutta. The ICFAI University Press, India.

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41

3. JOHN C.COATES IV. (2007).The Goals and Promise of the Sarbanes-
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7. GIFFORD, R.H. (2004). Regulation and unintended consequences:
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9. JOHN, KOSE, LUBOMIR LITOV, and BERNARD YEUNG.(2004).
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25. *** The CPA Journal, vol. 74, no. 6: 6-8

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