Accounting for Enron need now

Read the case study “Accounting for Enron” on page 409 of the textbook, and answer the questions at the end. Be sure to completely answer the questions. You may use outside sources to support your response, but be sure to cite outside sources using APA guidelines. Please include an introduction and conclusion.

 

Other information:

 

The textbook for this course is below. I need someone who knows and tutor or teaches Business Ethics to respond to this. If you have experience in answering these type of questions let’s do business.  I have attached the case in PDF.

 

I need it back as soon as possible less than 1hr. Due 07/03/2013 @ 12:30am

 I have attached another student response. I want an essay format with an introduction to the case, the answers in a essay form and also a conclusion APA format. I need to reword it because it will be plagiarized check. Thanks

Textbook:

 

Beauchamp, T. L., Bowie, N. E., & Arnold, D. G. (2009). Ethical theory and business (8th ed.). Upper Saddle River, NJ: Prentice Hall.

Question Answers.

1. Donald Duncan had responsibilities to all of the parties mentioned and he failed in the areas of due diligence, was guilty of acting negligently, and showed a complete lack of ethics throughout his involvement with Enron. As the head auditor, Duncan had the responsibility to maintain the highest professional accounting and auditing ethics, and to lead the auditing team in a responsible, unbiased manner. Due to several factors taking place at Enron, most of which surrounded Duncan and his firm collecting in excess of $100 million per year in Enron consulting fees, a healthy, skeptical auditor/client relationship was never maintained.

All auditors, including Duncan, are to maintain an unbiased attitude and they are also required to maintain a healthy level of skepticism – knowing fraud and misstatements could be present, but not judging without the supporting evidence that would arise from a proper audit, which is another element that was never actually provided by Duncan. Duncan was responsible for providing the best professional service that he was capable of, to his employer, Arthur Andersen. Duncan also had a responsibility to Enron’s management, which was to perform a thorough, clean audit. Auditors don’t audit companies for the benefit of the company; they audit companies for the benefit of the shareholders.

Duncan had a duty to shareholders to produce a clean audit, which would have showed the stockholders were losing 

money

. When Enron collapsed, it actually was big enough to impact the market and the economy. This could have been mitigated earlier if Duncan had acted as he should have. Duncan’s actions, including the ordering of Enron documents to be shredded, were and still remain a disgrace to the accounting profession and to business ethics.

2. There is nothing inherently wrong with aggressive tactics, including aggressive accounting practices, as long as the practices remain legal. The problem in this case is that the accounting and legal practices were not legal. Nancy Temple is an attorney and knows what documents will and will not produce the most reliable forms of evidence. This was the sole reason why she ordered Duncan to start shredding Enron’s audit documents. The only point at which she ordered the Andersen staff to stop 

shredding documents

 was when the SEC gave official notice to Andersen stating that they were seizing Enron documents. An SEC investigation was foreseen, yet Temple still ordered the shredding of potential evidence, which was then instructed to staff by Duncan, as well.

As a 

corporate attorney

 of a public company, Nancy Temple acted in sole interest of her client. When investors are involved, corporate attorneys cannot act solely in their client’s best interest. Professional legal ethics would dictate that they also act in the interest of the investors. Temple failed in her duties to act as a responsible, ethical attorney.

3. Sherron Watkins owed loyalty to herself and the investors, which is exactly why she blew the whistle at Enron. When we look at her email messages, we can see that she was concerned as to what would happen with investors when all came crashing down. Sherron knew that the SPEs were going to be discovered due to how they were structured, and she knew that two of the SPEs were at the end of their lives and had to be discovered. When Watkins stated in her email messages that it would be discovered the company had been hiding their losses in the SPEs, she was thinking of her duty to the investors of such a large company.

While it holds true that employees owe loyalty to their employers, when fraud or wrongdoing are present, they owe their loyalty to protecting the investors and the public, and they do so by being a whistle blower. Sherron Watkins was subsequently named People Magazine’s “Person of the Year” that year due to the proactive role she played in blowing the whistle at Enron, which is ultimately what uncovered the Enron fraud.

4. The board owes their primary responsibilities to the investors when we’re dealing with a public company. The board of directors should have been regulated to begin with, but there was no actual law prohibiting the structure of the board to include the former CEO. The board of directors wouldn’t have possibly been able to remain unbiased and in-line with protecting shareholders and stakeholders due to their sheer makeup, which included the former CEO.

Unfortunately, there was a complete lack of regulation in place at the time of Enron. We have only seen tighter regulations that were actually developed because of Enron, including the creation of the Public Company Accounting Oversight Board (PCAOB), the creation of the Sarbanes-Oxley Act (SOX), and tighter regulation and monitoring imposed by the SEC. In addition, when Enron’s board of directors was in operation, the board wouldn’t have followed any regulations or laws due to the fact that they were aware their creation was biased, and because they knew of the frauds that were taking place at Enron. Regulations would have had zero impact on the board, even if there had been regulations in place overseeing the makeup or activities of the board of directors. All codes of conduct and internal policies that the board of directors was bound to at Enron were also violated.

5. Government regulators owe their responsibilities to the investors, just as the board of directors does. The companies are nothing without their investors, particularly a company the size of Enron, which needs investors for capital, to operate. This means that the regulators, the auditors, and the board of directors must be looking out for the investors, as their primary responsibility. The investors aren’t inside running the company, so they don’t have the ability to actually see what is transpiring inside of the company. This is where regulation comes in – investors count on regulators, laws, and management to ensure that the company is being run effectively and in the best interest of the investors.

We see the responsibility that government regulators owe the market, which is why SOX was created. When Enron crashed, it actually took a toll on the market. Just as legislation was created to protect the market after the Great Depression, we see regulation created after Enron to again protect the market. Unfortunately, if there had been greater regulation and governmental control in place before this happened, it could have mitigated a lot of the destruction and damages that resulted from Enron.

The government regulators owe the same duties to the general public – to protect the public. There is no reason at all why companies this size shouldn’t be monitored. The accounting practices that were taking place inside of Enron were blatant, and they were paying their auditing firm in excess of $100 million per year in non-audit related fees, which were consulting fees. There is no excuse for a complete lack of governmental control over the practices that were taking place at Enron. While there are regulations in place now which protect the investors and the public, in the case of Enron, it came much too late.

6. Accounting and law are professions. Enron and Arthur Andersen are businesses. In a profession, we see certain elements that are required. Most professions require a professional license, whether it’s a CPA license, a license to practice law, or some other type of license. In a profession, ongoing training and development, mainly in the form of continuing education, is required. A business runs as its own entity. The purpose of a business is to generate revenue in order to provide a return on investment for shareholders.

From Joseph R. Desjardins andJohnJ. McCall, Contemporary Issues in Business Ethics, 5th ed. (Belmont, CA: Thompson
Wadsworth, 2005).

CASE 2. Accounting for Enron

Enron Corporation has come to symbolize
the worst of recent corporate corruption scan-
dals. Billions of dollars were lost by investors,
and thousands of people lost their jobs and

their retirement savings when the one-time
seventh-largest United States corporation
went bankrupt, the largest bankruptcy in
history at the time, as a result·of the fraud

410 Ethical Issues in Finance and Accounting

created by its highest-ranking executives. But
the story of Enron is also the story of a failed
watchdog system designed to prevent such
fraud. Auditors, attorneys, and government
officials who had responsibilities to protect
investors and ensure the integrity of finan-
cial markets systematically failed to live up to
their responsibilities.

Enron’s collapse began in 2001 when some
independent stock analysts and journalists
publicly raised questions about the value of
Enron’s stock. At that time, Enron’s stock was
trading at more than $80 a share, and Enron’s
CEOJeffrey Skilling was publicly claiming that
it ought to be valued at well over $100 a share.
During the summer of2001, several Enron in-
siders, including Vice Chair Clifford Baxter,
Treasurer Jeff McMahon, and Vice President
Sherron Watkins, all expressed doubts inter-
nally about Enron’s financial practices. Dur-
ing this same period, other Enron insiders,
including CEO Skilling and Board Chair and
former CEO Kenneth Lay, Enron’s corporate
counsel, and several board, members were sell-
ing millions of shares of Enron stock.

In October 2001 when Arthur Andersen au-
ditors finally reversed their previous decisions
and restated Enron’s financial situations, the
collapse of Enronbegan in earnest. ByDecem-
ber, when its stock was worth just pennies a
share, Enron declared bankruptcy and dis-
missed over 4,000 employees.

Enron’s collapse was mirrored by the col-
lapse of its auditing firm, Arthur Andersen.
Once one of the “Big Five” accounting firms,
Arthur Andersen was driven out of business
by its role in the Enron scandal. On January 9,
2002, the United States Justice Department
announced that it had begun a criminal inves-
tigation into Arthur Andersen’s activities re-
lated to Enron. At the time, Arthur Andersen
was already on probation by the SEC for its
questionable accounting practices in previous
scandals at Sunbeam Corporation and Waste
Management. The next day,Andersen admit-

ted that it had shredded thousands of docu-
ments related to its Enron audits. Five days
later, Andersen fired David Duncan, an
Andersen partner and head auditor for Enron.
Soon after, the Justice Department indicted
Arthur Andersen on charges of obstruction of
justice. Finally, on June 15, 2002, Arthur
Andersen was found guilty in a criminal trial
of obstructing justice by shredding evidence
relating to the Enron scandal and, as a result,
the firm agreed to cease auditing public com-
panies by August 3l.

Records show that as early as May 1998,
Andersen’s auditors were expressing grave con-
cerns about Enron’s financial practices. On
that date, in an e-mail to David Duncan,
Benjamin Neuhausen, a member ofAndersen’s
Professional Standards Group, expressed his
thoughts on the Special Purpose Entities
(SPEs) that were at the heart of the Enron
scandal. “Setting aside the accounting, [sic]
idea of a venture entity managed by CFO is
terrible from a business point of view. Con-
flicts of interest galore. Why would any direc-
tor in his or her right mind ever approve such
a scheme?” Neuhausen then went on to high-
light the many accounting problems with the
SPEs being managed by Enron CFO Andrew
Fastow. Duncan replied, “But first, on your
point 1 (i.e. the whole thing is a bad idea), I
really couldn’t agree more.” Nevertheless, the
Andersen auditors continued to cooperate
with Enron by attesting to the soundness of
Enron’s financial statements.

In February 2001, more than a dozen
Andersen auditors once again met to discuss
the financial status of Enron’s SPEs. Evidence
shows that Andersen’s auditors had serious
concerns about the validity of Enron’s finan-
cial self-portrait. In light of these concerns,
they considered dropping Enron as an audit
client. Michael Jones, one of Andersen’s
Houston employees, summarized the meeting
in an e-mail to David Duncan, who also partie-
ipated.Jones’ notes reveal “significantdiscussion

.as held regarding the related party transac-
ions with LJM” (one of Enron’s Special Pur-
pose Entities). Apparently, several Andersen
auditors thought that LJM costs should not be
ept off of Enrorr’s books. Jones goes on to

say, “The discussion focused on Fastow’s con-
.cts of in terest in his capacity as CFO and the

:”JM manager, the amount of earnings that
Fastow receives for his services and participa-
tion in LJM, the disclosures of the transaction
in the financial footnotes, and Enrori’s BOD’s
~oard of Directors] viewsregarding the trans-
actions.” Enron’s activities were described as
“intelligent gambling,” and Andersen’s audi-
ors acknowledged “Enrori’s reliance on its
current credit rating to maintain itself,” its “de-
pendence” on a supporting audit to meet its fi-
nancial objectives, and “the fact that Enron
often is creating industries and markets and
transactions for which there are no specific
rules [and therefore] which requires signifi-
cant judgment.” Enron was also described as
“aggressive” in the way it structured its finan-
cial statements.

But the risks of Enron were not the only is-
sues discussed at that meeting. Andersen’s au-
ditors realized that Andersen was also doing
significant consulting business with Enron,
business that could be jeopardized by an un-
favorable audit. “We discussed whether there
vould be a perceived independence issue
solely considering our level of fees. We dis-
cussed that the concerns should not be on
the magnitude of the fees but in the nature
of the fees. We discussed that it would not
be unforeseeable that fees could reach $100
million per year. Such amounts did not trou-
ble the participants as long as the- nature of
me services was not an issue.” In the end,
Andersen decided that the risks were worth
laking. “Ultimately the conclusion was reached
to retain Enron as a client citing that it ap-
peared that we had the appropriate people
and processes in place to serve Enron and
manage our risks.”

Ethical Issues in Finance and Accounting 411

Less than a year later, Enrori’s third-quarter
financial report would reflect Andersen’s new
and different judgment concerning the SPEs.
On October 16,Enron reported a quarterly loss
of$618 million and announced mat as a result
of Andersen’s auditing decisions, they would
take a $1.2 billion reduction in shareholder eq-
uity.Within one week, the SEC announced that
it had opened an investigation into Enron’s ac-
counting practices. By the end of October,
Enron’s stock was trading atjust $10 per share,
an almost a 90% drop in 18 months.

It is fair to say that Andersen overestimated
their ability to manage the risks of Enron.
Several decisions made by Andersen’s profes-
sional staff during October proved to be dis-
astrous for the company. On October 12, as
Andersen prepared for the public release of
the new financial statements, Andersen attor-
ney Nancy Temple advised head auditor
David Duncan to get “in compliance” with
Andersen’s document retention policy. Be-
cause Andersen’s document retention policy
included directions to destroy documents
that were no longer needed, Duncan inter-
preted that advice to mean that he should
have Enron-related documents destroyed.
Duncan then instructed Andersen employ-
ees to shred Enron documents. Duncan has
acknowledged that he and others at Andersen
were aware of a possible SEC investigation at
me time.

Four days later, on October 16, Duncan
shared a draft of a press release on Enron
with Temple. In her role as Andersen attor-
ney, Temple advised changing the press re-
lease to delete some language that might
suggest that Andersen’s audit was not in com-
pliance with Generally Accepted Accounting
Principles (GAAP), as well as certain refer-
ences to discussions within Andersen’s legal
group concerning Enron. Temple concluded
her e-mail by promising to “consult further
within the legal group as to whether we
should do anything more to protect ourselves

412 Ethical Issues in Finance and Accounting

from potential Section 10 issues” (Section 10
refers to SEC rules that require auditors to
report illicit client activity). In early Novem-
ber, two weeks after they began shredding
documents, Andersen received a federal sub-
poena for documents related to Enron. Only
at this point did Temple advise Andersen to
write a memo advising auditors at Andersen
to “keep everything, do not destroy anything.”
By the end of November, the SEC investiga-
tion was officially expanded to include Arthur
Andersen.

At one time, Sherron Watkins was an
Arthur Andersen auditor who worked on the
Enron account. In 1993, she left Andersen to
join Enron, working for Andrew Fastow in
Enron’s finance, international, broadband,
and finally, its corporate development divi-
sion. Thus, for 18 years she participated in a
wide range of Enron’s business activities. In
August 2001, shortly after Jeffrey Skilling re-
signed as Enron’s CEO, she wrote a memo to
Kenneth Lay.Watkins became widely known
as the Enron whistle-blower as a result ofthis
memo, despite the fact that she had not ex-
pressed concerns earlier and she did not
share her concerns with anyone outside of
the company. In part, her memo to Lay reads
as follows:

Has Enron become a risky place to work? For
those of us who didn’t get rich over the last few
years, can we afford to stay?

Skilling’s abrupt departure will raise suspi-
cions of accounting improprieties and valuation
issues. Enron has been very aggressive in its
accounting-most notably the Raptor transac-
tions and the Condor vehicle. We do have valu-
ation issues with our international assets and
possibly some of our EES MTM positions.

The spotlight will be on us, the market just
can’t accept that Skilling is leaving his dream
job. I think that the valuation issues can be fixed
and reported with other good willwrite-downs to
occur in 2002. How do we fix the Raptor and
Condor deals? They unwind in 2002 and 2003,
we will have to pony up Enron stock and that
won’t go unnoticed ….

It sure looks to the layman on the street that
we are hiding losses in a related company and
will compensate that company with Enron stock
in the future. I am incredibly nervous that we will
implode in a wave of accounting scandals. My 8
years of Enron work history will be worth nothing
on my resume, the business world will consider
the past successes as nothing but an elaborate ac-
counting hoax. Skilling is resigning now for “per-
sonal reasons” but I would think he wasn’t
having fun, looked down the road and knew this
stuff was unfixable and would rather abandon
ship now than resign in shame in 2 years ….

Is there a way our accounting gurus can un-
wind these deals now? I have thought and
thought about a way to do this, but I keep bump-
ing into one big problem-we booked the Con-
dor and Raptor deals in 1999 and 2000, we
enjoyed wonderfully high stock price, many ex-
ecutives sold stock, we then try and reverse or fIx
the deals in 2001, and it’s a bit like robbing the
bank in one year and trying to pay it back two
years later. Nice try, but investors were hurt, they
bought at $70 and $80 a share looking for $120
a share and now they’re at $38 or worse. We are
under too much scrutiny and there are proba-
bly one or two disgruntled “redeployed” em-
ployees who know enough about the “funny”
accounting to get us in trouble. What do we do?
I know this question cannot be addressed in the
all-employee meeting, but can you give some
assurances that you and Causey will sit down
and take a good hard objective look at what is
going to happen to Condor and Raptor in 2002
and 2003? ..

I realize that we have had a lot of smart peo-
ple looking at this and a lot of accountants in-
cluding AA & Co. have blessed the accounting
treatment. None of that will protect Enron if
these transactions are ever disclosed in the bright
light of day. (Please review the late 90s problems
of Waste Management where AA paid $130 mil-
lion plus in litigation re questionable accounting
practices.) …

I firmly believe that executive management of
the company must have a clear and precise
knowledge of these transactions and they must
have the transactions reviewed by objective ex-
perts in the fields of securities law and account-
ing. I believe Ken Lay deserves the right to judge
for himself what he believes the probabilities of
discovery to be and the estimated damages to
the company from those discoveries and decide
one of two courses of action:

l. The probability of discoveryis low enough
and the estimated damage too great; there-
fore we find a way to quietly and quickly
reverse, unwind, write down these posi-
tions/transactions.

2. The probability of discovery is too great,
the estimated damages to the company
too great; therefore, we must quantify, de-
velop damage containment plans and
disclose.

I firmly believe that the probability of discovery
significantly increased with Skilling’s shocking
departure. Too many people are looking for a
smoking gun …. There is a veil of secrecy
around LJM and Raptor. Employees question
our accounting propriety consistently and con-
stantly. This alone is cause for concern ….
I have heard one manager-level employee from
the principal investments group say, “I know
it would be devastating to all of us, but I wish
we would get caught. We’re such a crooked

” 1company….

Another group of Enron insiders who
were in position and had a responsibility to
protect investors from fraud was Enron’s
Board of Directors, and particularly the
Board’s audit committee. In theory and in
law, the board’s primary responsibility is to
represent the interests of shareholders. In
practice, the board seemed less than vigilant
in fulfilling these responsibilities. Enron’s
board approved of Andrew Fastow’s violation
ofthe corporate conflicts of interest prohibi-
tion when he negotiated contracts between
Enron and the SPEs in which he was heavily
invested and from which he profited tremen-
dously. As Benjamin Neuhausen, one of An-
dersen’s Enron accountants, claimed, the
“idea of a venture en ti ty managed by CFO is
terrible from a business point of view. Con-
flicts of interest galore. Why would any direc-
tor in his or her right mind ever approve such
a scheme?”

The final line of defense against corporate
fraud should be government officials and reg-
ulators. Arthur Levitt, chairman of the SEC
throughout the 1990s, strongly criticized the

Ethical Issues in Finance and Accounting 413

dual auditing and consulting activities of the
big accounting firms as involving conflicts of
interest. Congress ignored his advice, appar-
ently convinced by the lobbying efforts of the
accounting profession to allow audit firms to
continue working as consultants to the firms
they audited.

The federal government was also actively
dismantling a wide range of financial regu-
latory protections during the 1990s. During
the first Bush Administration, the federal
government deregulated the energy indus-
try, ostensibly to spur economic growth ac-
cording to free market principles. One of
the leading advocates for this deregulation
was Wendy Gramm, who at the time was
chairwoman of the U.S. Commodity Futures
Trading Commission. Gramm’s husband is
Phil Gramm, then U.S. Senator from Texas
and a member of the Senate banking, fi-
nance, and budget committees that sup-
ported this deregulation. Senator Gramm
had received over $100,000 in campaign con-
tributions from Enron during his last two Sen-
ate campaigns. When Wendy Gramm left
government in 1992, she joined Enron’s
Board of Directors as a member of their audit
committee.

Questions

1. What responsibilities did DavidDuncan owe
to Arthur Andersen? To Enrori’s manage-
ment? To Enron’s stockholders? To the ac-
counting profession?

2. What are the ethical responsibilities of a cor-
porate attorney, such as Nancy Temple, who
works for an “aggressive” client wishing to
push the envelope oflegality?

3. Under what conditions should an employee
such as Sherron Watkins blow the whistle to
outside authorities? To whom did she owe
loyalty?

4. Towhom does me board of directorsowetheir
primary responsibility?Can you mink of any
lawor regulations that would help ensure mat
boards meet their primary responsibilities?

414 Ethical Issues in Finance and Accounting

5. What responsibilities do government regula-
tors owe to business? To the market? To the
general public?

6. Are accounting and law professions or.busi-
nesses? What is the difference?

NOTES

1. From a report released by the U.S. House of
Representatives Energy Committee, February
2002.