399 Accounting Theory Essay

Submitted By abby0130
Words: 1391
Pages: 6

Under the unprepared external environment change atmosphere, Enron did not ready for facing the challenges but switch the leader in an inappropriate timing.
The challenges have been occasioned by shifts in the market structures from being a government regulated public utility, to a deregulated free market, and the current free market structure (Dillard, 2011).According to the case of “collapse of Enron” three ethical issues could be concluded as deregulation, integrity of leader and dishonesty aggressive culture.
Ethical issues
The key ethical issues that led to the downfall of Enron Company are: * The first ethical issue leading at Enron Company is deregulation. The board of director and manager they did not access their duties. Management did not effectively control the financial risks. During the auditing or financing procedure, the internal control did not work well to complete the auditing and financial reports effectively. Skilling’s dictatorial management plus ignoring the laws and regulations leading the whole organization to the end of cliff edge. So many people involved in this financial scandal including the CFO Andrew Fastow being charged guilty to various criminal offences. The internal control mechanisms did not work at all. The audit reports did not reflect the real audit level. The accounting issue is Skilling circumvented internal controls by manipulating accounting and auditing statistic numbers which create bubbles.
For example, Skilling controls over almost all facts of organization, particularly regarding its accounting procedures. Earnings management was accomplished largely using special purpose entities, accounting “reserves for contingencies “and mark-to-market accounting ,which recorded profits from long-term deals immediately and ,therefore, emphasized short-term results. The “cowboy capitalism” put pressure on the traders for short-term output. * The second ethical issue lacking at Enron Company is there is integrity of the leaders. There was a conflict interest which encourage by Skilling. When the external auditor does their audit procedures receive the extra extensive consulting fee. The relationship between director and auditor is extremely close personally that leading the invalid auditing process. Because of Skilling and the business unit leaders keep change the financial and audit record in a shady way, there is no chance for the firm to find out the potential risk earlier.. Skilling always change financial records to impress the analysts. (free ,2007) Compare to Kinder’s realistic leadership style, Skilling encourage blind loyalty to achieve the targets. Not only Skilling himself, but also unit leaders and employees learn to manipulate the system. Another critical trait of skilling’s leadership style was the importance of reward and status .the purpose of compensation plan is to enrich the executives, not to enhance profits or increase share holder value. Skilling’s leadership style had emerged over a number of years. “Skilling impressed lay when he proposed forming a “Gas Bank”, which took advantage of the fact that the short-term demand and supply for gas was chronically out of balance” (free,2007) * The third ethical issue affecting Enron Company is Dishonesty organization culture which Lack of transparence. This is the fundamental failure of morality.. Dishonesty organization culture affects many working areas. Under the ambition of Skilling and his Skilling style leadership, the whole atmosphere of the organization is too aggressive to control. Enron’s ‘rank-and-yank ‘machinations created “an environment where employees were afraid to express their opinions or to question unethical and potentially illegal business practices”. Enron has an obligation to follow company policies, to ensure accurate financial reporting, and to protect workers’ safety. Employees were encouraged to be ruthless in achieving their targets in disregard for the rules of their professions. The