Lessons from Enron: Bad Management, Negative Consequences

One of the guile little examples of bad counsel, Enrons collapse according to the economist (2002) was a result of bad precaution and poor purpose-making of the canvased invoice true Andersen in discourse the account of the companionship. The primary root of Enrons collapse was bad direction and the condition of the management to delegate scrutinizeing and method of be responsibilities to a firm that they have elect. The dependence of the scrutiniseing firm on the management in force creates the break in the accounting and auditing moral philosophy in order non to stomach an all- as well as important account much(prenominal) as Enron, they would need to abide by the decisions of the management.The leave out of volitionpower of Andersen to question the unethical practices of Enron do it flagitious in the same air as Enrons managers. This led a domino and cascading effect in the somatic world of America the disposal scrambling to catch for opposite compan ies who are overly concealing in their auditors books, the deadening of the auditing and accounting profession, lack of trust in companies, and investor apprehension. The collapse of Enron was largely a decision by the lift management which besides involves its accountants to provide a bogus instruction of finances to make Enron confront ilk a profitable association.Auditors of Enron on the new(prenominal) hand, have sought to protect the conjunction by shredding incriminating documents. From an agency speculation perspective, the role of the Enrons top management to that of the shareholders is one that is governed by the principle that managers willing act in a mien that will benefit the owners or shareholders of the comp each (Abrahamson and Park, 1994). In essence, what happened to Enron was that the managers or the agents gained too a good deal power and the shareholders did not perform its help of overseeing the op date of referencetions of their company.Fundam entally, what the shareholders and the managers who did not suck commence in the Enron s squirtdal could have by means of was to have the government to appoint an auditing or accounting firm that will monitoring device the monetary movement of the company. In this way, accountants and auditors will not be obliged to embrace what the top managers would want them to do. Managers need to be wary of decisions made by the top management or their colleagues. To a substantial extent, appointments should be made independent of the managers.In an era where auditing and accounting fraud are prevalent, managers can protect themselves by safeguarding their companies among their peers. References Abrahamson, E. and Park, C. (1994) Concealment of blackball organizational outcomes An agency theory perspective. academy of Management Journal, 37 1302-1334. Barefoot, JA. (2002). What can you bunco from Enron? How to know if you are creating a clime of rule-breaking. ABA Banking Journal, 94. The Economist. (2002) The Lessons from Enron. 362, 8259 9-10. Retrieved 1 July at http//www.csupomona. edu/smemerson/PLS499%20Greed_Need/Enron. doc. Appendix 1. Enron phrase Title THE LESSONS FROM ENRON , Economist, 0013-0613, February 9, 2002, Vol. 362, Issue 8259 Database Academic inquisition Elite Section Leaders THE LESSONS FROM ENRON afterwards the energy firms collapse, the entire auditing regime ineluctably radical change THE mess good keeps spreading. Two months after Enron filed for Chapter 11, the reverberations from the Texas-based energy-trading firms negativekruptcy cleverness have been expected to fade instead, they are growing.On Capitol Hill, politicians are engaged in an fact-finding orgy not seen since Whitewater, with the cull pinned diversely on the companys managers, its directors, its auditors and its bankers, as well as on the Bush administration then on anybody except the hundreds of congressmen who queued up to subscribe campaign cash from Enron . The only wanting ingredient in the scandalso remoteis sex. The effects are also touching Wall Street. In the prehistorical(a) few hebdomads, investors have shifted their trouble to other companies, making a frenzied appear for any dodgy accounting that capacity reveal the next Enron.Canny traders have base a lucrative new dodging swap a firms stock compendious and then spread rumours about its accounts. such(prenominal) companies as Tyco, PNC Financial Services, Invensys and veritable(a) the biggest of the lot, worldwide Electric, have all suffered. Last week Global Crossing, a telecoms firm, went bust amid claims of obscure accounts. This week shares in Elan, an Irish-based drug maker, were pummelled by worries over its accounting policies. All this power create the impression that corporate financial reports, the quality of company profits and the step of auditing in America have curtly and simultaneously deteriorated.Yet that would be wide of the signal the d eterioration has actually been apparent for roughly years. A growing body of express does indeed suggest that Enron was a strangely egregious case of bad management, jerry-built accounts, shoddy auditing and, quite probably, out proper fraud. tho the bigger lessons that Enron offers for accounting and corporate establishment have long been familiar from foregoing scandals, in America and elsewhere. That makes it all the much urgent to respond now with the right reforms.Uncooking the books The place to start is auditing. Accurate company accounts are a keystone for any proper capital market, not least Americas. Andersen, the firm that audited Enrons books from its inception in 1985 (it was also Global Crossings auditor), has been suggesting that its failings are representative of the satisfying professions. In fact, Andersen seems to have been unusually culpable over Enron shredding of incriminating documents just forwards of the investigators is not soon enough a general habit.But it is also true that this is only the in style(p) of a string of corporate scandals involving terrible audit failures, from Maxwell and Polly Peck in Britain, through Metallgesellschaft in Germany, to Cendant, Sunbeam and eat up Management in America. In the past four years alone, over 700 American companies have been forced to restate their accounts. At the heart of these audit failures lies a point of business relationships that are bedevilled by wilful incentives and conflicts of interest. In theory, a companys auditors are ordained independently by its shareholders, to whom they report.In practice, they are chosen by the companys bosses, to whom they all too ofttimes become beholden. Accounting firms frequently sell consulting services to their audit clients outer auditors whitethorn be hired to senior management positions or as immanent auditors it is far too easy to play on an individual audit partners fear of losing a lucrative audit assignment. Against suc h a background, it is little wonder that the quality of the audit often suffers. What should be done? The near radical change would be to take responsibility for audits away from buck private accounting firms alto get downher and give it, lock, stock and barrel, to the government.Perhaps such a change may yet become requisite. But it would run risks in terms of the quality of auditors and it is not eer so obvious that a government agency would manage to escape the conflicts and mistakes to which private firms have so often fall prey. As an intermediate step, however, a simpler vestige is to take the job of choosing the auditors away from a companys bosses. Instead, a government agencymeaning, in America, the Securities and Exchange Commission (SEC)would appoint the auditors, even if on the basis of a bring up recommended by the company, which would continue to pay the audit fee.Harvey Pitt, the new chairman of the Securities and Exchange Commission, is not yet willing to be an ything like so radical. He has been widely attacked because, when he acted in the past as a lawyer for a number of accounting firms, he helped to fend off both(prenominal)(prenominal) reforms. Yet he now seems gain to make at least some of the other changes that the Enron scandal has shown to be necessary (see pages 67-70. ) Among these are much maddenedr statutory mandate of the auditing profession, including disciplinary powers with real bite.Hitherto, auditors have managed to get away with the fiction of self-regulation, some(prenominal) through peer reappraisal and by edental professional and oversight bodies that they themselves have dominated. in that respect should also be a ban on accounting firms offering (often to a greater extent profitable) consulting and other services to their audit clients. some other good idea is mandatory rotation, all four years or so, both of audit partnersso that individuals do not become too committed to their clientsand of audit fir ms. The most effective peer review happens when one firm comes in to look at a predecessors books.The SEC should also ban the practice of companies hiring managers and internal auditors from their external audit firms. In search of let out standards Then there is the issue of accounting standards themselves. Enrons behaviour has confirmed that in some areas, notably the treatment of off-balance-sheet dodges, American accounting standards are too lax date in others they are so normative that they have lost sight of broader principles. sometime(prenominal) attempts by the Financial Accounting Standards climb on to improve standards have often been stymied by vociferous lobbying.It is time for the SEC itself to visit more rigorous standards, although that should often be through sound principles (including paying less attention to single numbers for earnings) or else than overly detailed rules. It would also be good to come up with internationally agreed standards. Although audi t is the most press area for change, it is not the only one. The Enron walloping has shown that all is not well with the ecesis of many big American companies. oer the years all sorts of checks and balances have been created to correspond that company bosses, who supposedly act as agents for shareholders, their principals, actually do so.Yet the cult of the almighty head executive, armed with sackfuls of stock options, has too often pushed such checks aside. It is time for another(prenominal) effort to realign the system to draw more in shareholders interests. Companies need stronger non-executive directors, paid enough to devote proper attention to the job genuinely independent audit and remuneration committees more powerful internal auditors and a separation of the jobs of chairman and chief executive.If corporate America cannot deliver break out governance, as well as mitigate audit, it will have only itself to blame when the public backlash proves both fierce and unplea sant. PHOTO (COLOR) ________________________________________ Copyright of The Economist is the topographic point of Economist Newspaper Limited and its surfeit may not be copied or emailed to multiple sites or posted to a listserv without the copyright holders express written permission. However, users may print, download, or email articles for individual use. denotation Economist, 2/9/2002, Vol. 362 Issue 8259, p9, 2p, 1c. souvenir Number 6056697