...Ethics Case: Arthur Andersen’s Troubles Once the largest professional services firm in the world, and arguably the most respected, Arthur Andersen LLP (AA) has disappeared. The Big 5 accounting firms are now the Big 4. Why did this happen? How did it happen? What are the lessons to be learned? Arthur Andersen, a twenty-eight-year-old Northwestern University accounting professor, co-founded the firm in 1913. Tales of his integrity are legendary, and the culture of the firm was very much in his image. For example, “Just months after [Andersen] set up shop in Chicago, the president of a local railroad insisted that he approve a transaction that would have inflated earnings. Andersen told the executive there was “not enough money in the City of Chicago” to make him do it.”1 In 1954, consulting services began with the installation of the first mainframe computer at General Electric to automate its payroll systems. By 1978, AA became the largest professional services firm in the world with revenues of $546 million, and by 1984 consulting brought in more profit than auditing. In 1989, the consulting operation, wanting more control and a larger share of profit, became a separate part of a Swiss partnership from the audit operation. In 2000, following an arbitrator’s ruling that a break fee of $1 billion be paid, Andersen Consulting split completely and changed its name to Accenture. AA, the audit practice, continued to offer a limited set of related services, such as tax advice.2 Changing...
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... and the concern for consequences of business activity. Enron, a energy trader, was formed in July 1985 when Texas-based Houston Natural Gas merged with InterNorth. At first Enron was only a natural gas provider, but in 1989 Enron begun trading natural gas commodities, and in 1994 it began trading electricity. Enron was considered one of the most innovative companies of the late 20th century, after their scandal Enron became a symbol for corruption and mismanagement in businesses. The scandal started in the late 90s when Enron pushed their debt obligations to offshore partnerships, at the same time the company was reporting inaccurate trading revenues. Enron used its partnerships to sell contracts back and forth to itself and booking revenue each time. In 2001 Chairman, Kenneth Lay received an anonymous memo expressing wariness about the Fastow partnerships and warned of possible accounting scandals. On October 16th Enron announced a $638 million loss for the third quarter and took $1.2 billion reduction in shareholder equity. Enron’s accountants began shredding documents related to Enron audits. Eventually Enron was investigated on Nov. 8th; Enron revised its financial statements, which posted $586 million in losses. Enron became bankrupt on December 2nd. Enron is an example of what happens when a business is not in compliance with the rules. Enron tried moving...
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...Case 1 ENRON: WHAT CAUSED THE ETHICAL COLLAPSE? case summary | Kenneth Lay, former chairman and chief executive officer (CEO) of Enron Corp., claimed to be a moral and ethical leader and exhorted Enron’s officers and employees to be highly ethical in their decisions and actions. In addition, the Enron Code of Ethics specified that “An employee shall not conduct himself or herself in a manner which directly or indirectly would be detrimental to the best interests of the Company or in a manner which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the Company.” Enron’s ethics code was based on the values of respect, integrity, communication, and excellence. Given this code of conduct and Ken Lay’s professed commitment to business ethics, one wonders how Enron could have collapsed so dramatically? The answer to this question seems to be rooted in a combination of the failure of top leadership, a corporate culture that supported unethical behavior, and the complicity of the investment banking community. The failure of Enron’s top leadership was evident in the activities of Andrew Fastow, Jeff Skilling, and Ken Lay, all of whom faced multiple counts of criminal activity with respect to their decisions and actions at Enron. Included among these criminal charges were money laundering, wire fraud, securities fraud, conspiracy, making false statements on financial reports, and insider trading. Some of the activities...
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...business by examining a memo that was written between two Enron executives. Enron was an energies and commodities corporation who is most known for their insider trading scandal in the early 2000’s that resulted in bankruptcy. They were one of the five largest audit and accounting partnerships in the world and their financial fraud caused clients and shareholders to lose millions of dollars. In this memo Sherron Watkins, an Enron vice president addresses CEO Kenneth Lay on rumors of dirty financial deals and illegal financial practices. What information would we want to know before making a judgement about Watkins? In the memo Sherron Watkins tells Kenneth Lay that she is nervous that their company will implode in a wave of accounting errors. She asks if there is a way to undo the deals they’ve made. This commentary may reveal that she has had knowledge of these actions and may have even had the knowledge for some time. How involved is Watkins in this scandal? Has her actions or decisions whether deliberately or in negligence contributed in any way to the financial dishonesty of the company? This situation clearly raises ethical issues. It appears that Sherron Watkins is more concerned with the repercussions that could come from getting caught than she is with the questionable business practices that her corporation is involved in. In the memo Sherron does not raise question on the social ethics of the situation. Social ethics would be the responsibility Enron has to the greater...
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...Whistle blowing is an act to disclose an organizational wrongdoing to parties that can take action. Sherron Watkins was the vice president of Enron Corporation that became a whistle blower in 2001. She sent an anonymous memo to Enron Chairman Kenneth Lay regarding the misstatements on the financial report. Enron hired lawyers from Vinson & Elkins to do an investigation on the financial misstatement allegations (Ackman, 2002). According to the memo from the investigations, after Watkins identified herself Lay held a meeting with her to discuss about her concerns regarding her allegations. The memo failed to indicate what Lay told Watkins. The investigation from Vinson & Elkins concluded that the questionable transaction that Watkins was concern about appeared proper (Ackman, 2002). Dan Ackman from Forbes argued that her action was not considered as whistle-blowing because she did not send the memo to parties that can take disciplinary action but actually provided legal cover for Kenneth Lay. Also, the fact that Watkins warned Lay about the misstatement of financial report indicates that Lay was not aware about the problem and did not do it on purpose. Watkins tries to put the blame mostly on Enron’s auditor Arthur Andersen and Vinson & Elkins and continued to provide cover to Lay and the board. Attitudes towards Whistle Blowing In today’s society, whistle blowing is viewed as misconduct and usually will cost a person’s job. In Watkins case, she said that Enron’s former Chief...
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...Professor Young March 5, 2011 Enron was an old line energy company, owning electric power production facilities and natural gas pipelines. It engaged in several acquisitions during the late 1980s and the 1990s that dramatically increased its size. Its acquisitions included power companies in the U.S. and abroad, as well as investments in various energy and technology companies. In the 1990s, Enron reorganized itself as an energy trading company, whose primary form of business was to trade in various energy vehicles, including contracts to provide electric power in the future at pre-determined prices and similar contracts to deliver natural gas, water rights, wind power systems, broad band transmission systems, insurance, and other products. 1. Describe how Enron could have been structured differently to avoid such action. Enron, like most public companies was required by law to describe its party transaction to shareholders and the members of the investing public in several different disclosure documents. Overall, Enron failed to disclose facts that were important for understanding the substance of the transaction. Although they did disclose that there were large transactions that the CFA had interest. Enron did not give the CFO’s actual or expected benefits from these transactions or provide complete financial statements. The organizational structure could have been different by not changing the original structure. When Enron decided to change its structure by...
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...Enron Corporation was established in 1985 by Ken Lay after merging Houston Natural Gas and Internorth, it has more than 20,000 employees and it's one of the seven largest electricity, natural gas company. Before it went to bankruptcy, Enron claimed revenues of almost $101 billion in 2000, placed Enron at sixth on the Fortune Global 500, it also named "America's most innovative company" for the past six years(1996-2001). In 10/22/2001, The "street.com website pronounced a message revealed the complex financial transaction between Enron and Osprey Co., through Osprey, Enron debited 340 billion dollars"○1 which never appeared in the financial statement. At the same time, SEC began to investigate Enron, thus, the Enron's accounting scandal finally above the water. The first person who became the whistleblower disclosure Enron's financial fraud was Watkins and Cooper, although the CFO asked cooper to postpone her investigation, Cooper still doing her audit to alert the board about the financial statement problems, at the meantime, Watkins outlined the problems in a memo to Ken Lay, "but by the time Watkins and Cooper blew the whistle, much damage had already been done and the shareholders and employees were the ultimate losers."○2 Whistleblower program is very important to minimum a corporation's hazardous activities, but the blower often face some awkward situations, such as fear of the manager's retaliation, fear to be treat as a betrayer by the workmates, unwilling to be...
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...Memo of law Question/Issue Presented What evidence can be found during a legal discovery and how does this affect the record-keeping policy of a business organization? Applicable Law and Ethical Standards Newby v. Enron Corp. , 2002 U.S. Dist. LEXIS 28397 (S.D. Tex. May 1, 2002) Newby v. Enron Corp. (In re Enron Cor... , 2003 U.S. Dist. LEXIS 1668, Fed. Sec. L. Rep. (CCH) P92404 (S.D. Tex. Jan. 28, 2003) United States v. Arthur Andersen LLP , 2002 U.S. Dist. LEXIS 26870 (S.D. Tex. May 24, 2002) 18 USCS § 1512 Discussion/Analysis (of Law and Facts) During a legal discovery which includes the procedures of Deposition, Interrogatories and Production of Documents there can be different evidence found depending on the area of work the business organization is involved in. An example could be that a company tried to create false documents with the intent to seem like a good investment or to avoid paying taxes. During a deposition evidence can be found that people questioned tell conflicting stories. It is crucial to be able to deliver the right documents requested during a discovery. Therefore, it is important to have an organized record-keeping policy for any organization. Furthermore, a business should keep its records as correct as possible and not be tempted to give in to fraud, changing documents or destroying important documents. A company should follow the law to keep the required documents. It would be a crime to hide, destroy and/or withhold subpoenaed...
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...Ethical Culture Project PART 1: Enron displayed all four cultural dimensions which are: high-risk taking, outcome orientation, aggressiveness, and low/no people orientation as a company. Kenny Lay, who was the CEO and Chairman from 1985-2002, displayed high-risk taking during the Vahalla scandal. He had two oil traders, Louis Borget and Tom Mastroeni that would make bets for Enron on whether the price of oil would rise or fall. This is a risky market because you can lose ten times your original investment, and it was hard to make the amount of money legitimately that they were at the time. Borget and Mastroeni were gambling with Enron’s money. Jeff Skilling organized high-risk company trips where he would plan dangerous activities that Enron employees would participate in. Andy Fastow, Enron’s chief financial officer, wanted to please his boss, Skilling, so he tried to increase Enron’s stock up even though they were 30 million dollars in debt. He got hundreds of special companies to prop up Enron’s stock by making Enron debt disappear. To outside investors it looked like cash was coming in, but Enron was hiding their debt in Fastow’s companies so investors couldn’t see it. Fastow was participating in outcome orientation, and Skilling encouraged him to do so. Skilling created a very aggressive company culture for Enron by implementing a performance review committee (PRC) that people were graded a one to a five and 10% people had to be a five and if they were they would be fired...
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...cheating. This caused a culture of deception. Employees were measured on their abilities to cheat. In such an environment, the people who never cheated were regarded as odd. For example, Margaret Ceconi, an employee with Enron Energy Service, once wrote a memo about the truth of accounting issues of Enron; she was later counseled on employee morale * Because of competition in workplace between employees. Competition environment can cause mistakes and cheating because employees don't tend to cooperative and less communicated with each other. They become selfish. Even they don't ask questions for each other because asking the question was regarded as a weak. Then, they will not share resources or information with each other because of competition. So in Enron, no persons asking questions and no one want to answer questions. Because of this working environment, few employees at Enron actually understood their jobs. As a result, they just tried to hide errors and made their work look good. In addition, they ignored the errors and cheatings of others. They never mentioned their doubts about others’ works. Because they thought if others were not actually wrong, the person who mentioned questions would be laugh at. So employees at Enron were quie * Enron emphasized too much on the financial goals. The person who can achieve the budget numbers would...
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...Shannon O’Neal Business Law 2 Paper #1 Thesis Statement: An analysis of Enron and its monumental collapse shows how this once well-established business had to file bankruptcy; fraud, tampering with financial records, deceiving employees and stockholders, embezzlement, and upper management practicing unethical business practices all proved to be key components in Enron’s downfall. Enron was a company that despite its long-term success fell apart in the end due to lack of internal controls and misguided executives and management. Corruption, scandal, theft, and inefficiency all led to the bankruptcy of a once well-established business that today, still has a tarnished reputation that will never recover. Had upper management been ethically balanced, this White Collar crime could have been avoided along with billions of dollars lost, thousands of jobs lost, and people’s trust in the financial industry destroyed. White Collar Crime is defined as non-violent, financially-based criminal activity typically undertaken within a setting in which its participants retain advanced education with regard to employment that is considered to be prestigious (Laws.Com). Enron and its top leaders not only misrepresented earnings reports, but embezzled funds from its investors making this company’s scandal the most notorious business failure in history. Enron’s fraudulent business practices affected thousands of people, and the laws that were broken, along with the crimes that were attempted...
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...1. Was Watkins an ethical hero in taking these steps? Watkins was definitely not an ethical hero. First, she made it clear in the first half of her memo that she was concerned about getting caught, and explicitly asked if there was any way their “accounting gurus” could wind things down and basically cover their tracks. Second, she went to no one other than Kenneth Lay, the CEO of the company; anyone, in this day and age, who believes that CEOs are deaf, dumb, and blind to what's going on under their noses is incredibly naïve – and this, Watkins was not. Third, she started having suspicions about unethical practices as early as 1996, years before she wrote anything to Lay (How Could 29); if she was truly ethical, she would have reported these things when she first became aware of them. Finally, she cashed in her own stocks because she knew Enron's were about to tank, and continued to work in an unethical fashion when she did not get resolution from Lay (Ganske B05), which are not the practices of someone concerned with the ethics of a situation. 2. What facts would you want to know before making a judgment about Watkins? What ethical issues does this situation raise? If I knew nothing about Watkins other than the fact she “blew the whistle” on corrupt practices at Enron, I would want to know when she did so, to whom, and why. I would also want to know what she was gaining from the unethical practices that were occurring (e.g. monetary rewards, status), as well as the risk...
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...The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a federal agency that provides protection for investors and regulates the bulk of the securities industry including: U.S. stock exchanges, options markets, and other electronic exchanges and securities markets. The Securities Exchange Act of 1934 created the laws that regulated it. The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the U.S. The commission's division of enforcement investigates possible violations of federal securities related laws and can take civil action with other law enforcement agencies when it comes to criminal cases. The market crash of 1929 and subsequent Great Depression took a toll on the public's trust in capital markets. Investors looking to go from rags to riches turned to the stock market during the roaring 20s. According to the SEC, an estimated $50 billion in new securities were offered, and half became worthless. Congress passed the Securities Act of 1933 and The Securities Exchange Act of 1934 (which created the SEC) in an effort to restore confidence in the markets. Publicly traded companies were now obligated to disclose investment risks and provide full information about the state of their business. Brokers, dealers and exchanges were now legally required to put the interests of the investors first and treat them in a fair and honest manner. Congress established the SEC to enforce these laws for the sake...
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...Sherron Watkins—Revelations of a Letter Who Is Sherron Watkins? Sherron Watkins gained fame as the so-called “whistle-blower” in the Enron accounting scandal. “Enron hid billions of dollars in debts and operating losses inside private partnerships and dizzyingly complex accousnting schemes that were intended to pump up the buzz about the company and support its inflated stock price.” Watkins wrote two letters, one anonymously, to Enron’s chairman, Kenneth Lay. In those letters she “exposed top officials—perhaps including Lay himself—who for months had been trying to hide a mountain of debt, and started a chain reaction of events that brought down the company.” Watkins had a “flair for numbers” and the training and expertise to recognize a “funny accounting scheme.” She received an accounting degree from the University of Texas at Austin in 1981 and a master’s degree in accounting in 1982, after which she went to work for Arthur Andersen’s Houston office. Watkins transferred to Andersen’s New York City office and then subsequently returned to Houston in the early 1990s to work for Enron. Eight years after joining Enron, Watkins had risen to the position of vice president for corporate development. According to one retrospective account of the Enron scandal, Watkins “understood that something very bad was going on, something everyone else seemed to think was perfectly okay, and that public revelation would be disastrous.” Somehow Watkins “was able to escape the groupthink...
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...reforms since the time of Franklin D. Roosevelt” by President George W. Bush when he signed it into law. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the law. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco, WorldCom and Arthur Andersen LLP. These scandals cost investors billions of dollars when the share prices of affected companies collapsed and shook public confidence in the nation's securities markets. The Sarbanes-Oxley Act of 2002 and Its Effect on the Accounting Profession Enron, World Com and Arthur Andersen LLP, three names that have long become synonymous with deceptive accounting practices and lack of transparency, were but a few of the catalysts to the hastily enactment of the Sarbanes-Oxley Act of 2002. More commonly known as SOX, it was enacted on July 29, 2002 and signed into law on July 30, 2002 by President Bush. It’s also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House). Sarbanes-Oxley’s named after sponsors U.S. Senator Paul Sarbanes...
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