CaseStudyEnron'sfinancialfraudcase.docx

CaseStudy:Enron,sfinancialfraudcasePreparedby:xxxxxxxxxxxxxxx1.eadershipEthicsSeminar-BU.131.601xx/xx/xxxxTableofContentsAbstract3Introduction3Background4Findings5Recommendations6Conclusion7AbstractEnron'sfinancialfraudcaseisastudyofthecompany'smanagementandexternalauditinstitutionsinfringingshareholdersthroughcomplexfraudmeansundertheconditionofasymmetricinformation.Thefraudmeansofthiscaseisverycomplexandhidden,andthefraudprocessinvolvesmanylevelsandanglesofmoralissues.Thebreakthroughofprofessionalstandardsandmoralbottomlineofmanagersandauditpractitionershasbecomethemainthemeofthiscase.Thispaperanalyzestheprocessandcharacteristicsofthesepeople,sparticipationinfraud,analyzestheharmofthesebehaviorsinthecase,andputsforwardsometargetedsuggestionstohelplistedcompaniesimprovetheseproblems.IntroductionEnron'sfinancialfraudcaseisaresearchonthefinancialsystem,informationdisclosurestandard,externalauditsystemandrelatedpartytransactionsystemoflistedcompanies.InOctober2001,Enronreleaseditsthirdquarterfinancialstatementsandannouncedalossof$618million.OnNovember8,EnronadmittedtotheU.S.stockexchangethatithadfalselyincreaseditsprofitby$586millionandconcealedalargeamountofdebtbetween1997and2001.Enron,sfalsefinancialinfbnationmadeEnron'ssharepricefallrapidlyandeventuallygobankrupt.TheshareholdersofEnronsufferedheavylosses.TheUSSecuritiesRegulatoryCommission,governmentregulatorsandthemediaallparticipatedinandexposedtheinvestigationprocessofthecase.TherearefourmainthemesaroundthefinancialfraudincidentofEnroncompany,whichprovethatthereareinappropriatepracticesintheoperationprocessofEnroncompany.ThefirstthemeisthatEnronunreasonablyusedtheconventionthat"specialpurposeentitieswithspecialconditionsareallowedtobeexcludedfromthefinancialstatements".Byexcludingseveralspecialpurposeentitiesthatshouldbereflectedintheconsolidatedstatementsfromthefinancialstatements,Enroninflatedprofitsbynearly500millionUSdollarsandconcealedhundredsofmillionsofusdollarsOfliabilities.Thesecondthemeisthatthepersonneloflistedcompaniesandnonlistedsubsidiariesarenotindependent,andevenpart-timephenomenonisserious.Companiesavoidtaxthroughavarietyofrelatedtransactions.ThethirdthemeisthatastheexternalauditorganizationofEnron,Anxindacompanyundertakestheinternalaudit,consultingandotherworkofthecompany,whichcannotguaranteetheindependenceoftheexternalauditorganization.Thefourththemeistoconcealtheactualsituationthataffectsthecompany,soperation,withouttimelydisclosure.Basedontheabovefourthemes,thispaperarguesthatthereareavarietyofmoralandprofessionalconductchallengesinEnron'sfinancialfraudcases.Thebasicmoralconceptthatcansupportthedevelopmentofmodernsocietyandeconomyshouldbethespiritofcontract(Foot,1983).Inthemodernenterprisesystemofseparationofownershipandmanagement,theoperatorshouldabidebythecontractbetweentheenterpriseandthemanagertoprotecttheinterestsofshareholders.Managersrealizetheinternalcontroloftheenterprisebyusingtheadvantagesofinformationasymmetryandenterprisemanagementpower,whichwillleadtohugelossesfortheownersoftheenterpriseandultimatelyhinderthedevelopmentofsocialandeconomicactivities(Daniel,2008).BackgroundEnronwasfoundedinHoustonin1985.Itwasonceoneofthemostsuccessfulnaturalgascompaniesintheworld.ThehighestsharepriceofEnronreached$90.56.TheexposureoftheincidentbeganonOctober16,2001.Enronsuddenlyannouncedalossof$618millioninitsthirdquarterfinancialstatements.OnOctober22,anarticlewaspublishedontheUSstreetwebsite,inwhichitwaspointedoutthatEnronborrowed3.4billionUSdollarsthroughtwoaffiliatedtrustfundcompanies,whichledtotheinvestigationofEnronbytheUSstockexchange.Underthegreatpressureofpublicopinionandgovernmentregulatoryauthorities,Enronadmittedthatithadinflatedprofitsof$586millionandconcealedalargeamountofdebtinthefiveyearsfrom1997to2001,anditssharepricefellfrom$80to$2.ThecompanyfiledforbankruptcyonDecember2.AftertheEnronincident,theAmericanStockExchangerevisedthesecuritiestradingsystemoflistedcompanies,strengthenedtheintegrityanddiligenceobligationsofmanagers,requiredthecompany,sinformationdisclosuretobecomplete,timelyandtrue,andrequiredtheindependenceofexternalauditinstitutions.Inthiscase,manystakeholdersofthecompanysufferedheavylosses.Amongthem,Enron,sshareholderswerethemostaffected,andtheirwealthimmediatelyshrank.AstheexternalauditorganizationofEnron,thecredibilityofthecompanyhasbeengreatlyreduced,andthepersonnelinvolvedinfraudhavebeenpunished.TheEnronincidentalsoraiseddoubtsabouttheregulatorycapacityoftheU.S.stockexchange,andinvestorsalsoraiseddoubtsaboutthestockexchangeandotherlistedcompanies.FindingsThemoralissueshererelatetothefourthemesintheintroduction.Enronborrowedalotofmoneythroughthewayofstockfinancingthroughaffiliatedtrustcompanies,andexcludedthetwocompaniesfromthecompany'sconsolidatedstatements.Thecompanytakesadvantageofthesystemthatthelimitedliabilitycompanycanbeexemptedfromcorporateincometaxandevadestaxthroughrelatedtransactionswithitssubsidiaries.Anxindacompanycontinuestoundertaketheinternalauditbusinesswhenitknowsthatundertakingtheinternalauditbusinesswillaffectitsexternalauditindependence,andevendestroysthedocumentsduringtheinvestigationtoobstructtheinvestigationofthejudicialdepartment.Enrontookadvantageofinformationlocationtoconcealinformationthatwasnotconducivetoshareholders,whicheventuallyledtotheoutbreakofthecrisis.ThemoralproblemfacedbyEnron'smanagementandmajorshareholdersistotrytocontroltheenterpriseundertheconditionofasymmetricinformation.Eventhecompanystrengthensthesituationofasymmetricinformationbydeliberatelycreatingcomplexaccountingsystemandfinancialstructure.Evenprofessionalfinancialexpertscanunderstandthecompany'sfinancialreports.Inthecaseofasymmetricinformation,theoperatorhasforgottenhisdutyofdiligenceandgoodfaithtotheshareholders,andevencarriedouttherelatedpartytransactionsrecklessly.TheethicalproblemfacedbyAnxindacompanyisthatitviolatestheprinciplethattheexternalauditshouldmaintainitsindependence,undertakesbusinesseswithconflictsofinterestforthecompany,sperformance,andevenfailstoreporttheillegalactsofEnroncompany.Asanexternalauditorganization,Anxindacompanyhastheresponsibilitytodisclosethefraudandillegalbehavioroftheauditedcompanytothepublic.RecommendationsInthecaseofEnroncompany'sfinancialfraud,boththecompany'smanagersandtheexternalauditinstitutionsviolatedtheirownpracticestandardsandmoralbottomline,artificiallymanipulatedthecompany'sbusinessbehaviorandfinancialwork,andbroughthugelossestothecompany,sshareholders.Therefore,thispapersuggeststhatbusinessmanagersandexternalauditorsshouldsignapracticecommitmentwhentheyaccepttheappointment,indicatingthattheywillperformthedutiesofdiligence,integrityandduediligencetotheshareholdersoflistedcompanies.Atthesametime,theAmericanstockexchangeshouldincreasethepunishmenttotheenterprisemanagersandexternalauditors.Onceitisfoundthattheemployeeshavefraudorinsufficientability,resultinginthelossofinvestors,theyshouldbeprohibitedfromcontinuingtoworkinthisindustry.Americanstockexchangesalsoneedtoincreasetheinformationdisclosureobligationsoflistedcompanies,andrequireexternalauditinstitutionstoensureindependence,otherwisetheywillbedisqualified.ConclusionThefinancialfraudincidentofEnroncompanyintheUnitedStatesdirectlyledtothesubstantialrevisionofthestandardsofpublicofferingandtradingofsharesbyListedCompaniesintheUnitedStatesstockexchange.Thestockexchangehasmademoredetailedprovisionsontheobligationsofoperators,informationdisclosureandexternalauditinstitutionsoflistedcompanies.Inthiscase,boththemanagementofEnronandtheauditworkofAnxindaviolatetheprofessionalethics,andtheirowndesiresbreakthroughthemoralconstraints.Underthethreeconditionsofsubjectiveexistencemotivation,objectiveexistenceopportunityandfindingexcuse,thejointfraudoftunnelingshareholdersiscarriedout.ButbeforetheEnroncase,noonewouldthinkthattheoperationofEnronwouldhavesuchaseriousinternalcontrolproblem.Becausepeoplecan,tfindtheirmotivationtocheatinadvance.Referelices:Foot,P.(1983).VirtuesandVicesandOtherEssaysinMoralPhilosophy.InternationalPhilosophicalQuarterly,9,(17)211-217.Daniel,M.(2008).EconomicAnalysis,MoralPhilosophyandPublicPolicy.CambridgeBooks,4,(8)225-229.Ebrary,I.(2004).ReasonandValue:ThemesFromtheMoralPhilosophyofJosephRaz.GrazerPhilosophischeStudien,10,(20)111-117.Fraedrich,J.(2004).Theimpactofperceivedriskandmoralphilosophytypeonethicaldecisionmakinginbusinessorganizations.JournalofBusinessResearch,7,(13)419-423.Barrow,R.(2007).AnIntroductiontoMoralPhilosophyandMoralEducation.Routledge,2,(18)322-325.Stacey,J.(2005).PersonalAutonomy:NewEssaysonPersonalAutonomyanditsRoleinContemporaryMoralPhilosophy.JournalofMoralPhilosophy,11,(3)266-271.