Accounting Ethics: The Enron Scandal Research Paper

Loyalty to the client was clearly placed above loyalty to the overall public good and the standards of the profession. "Enron paid Andersen $25 million for its audit…and $27 million for 'consulting' and other services" which meant that Anderson had a substantial financial stake in retaining Enron as a client (Kadlec 2002). The Enron case illustrates the difficulty of self-policing within the industry. Today, providing additional services besides the audit itself is considered an ethical 'red flag' for an accounting firm (Verschoor 2012).

In retrospect, it is difficult to see how the Enron case could have had a happy ending, given that its business model was based upon fraud and deceiving investors. The best case scenario would have been for Anderson not to take the case at all. That is why effective pre-screening of clients is so important. "Practitioners must assess the ethical environment found within potential and existing clients and business partners" (Romal & Hibschweiler 2004). According to Sarbanes-Oxley Act, CFOs must sign a code of ethics. If no such requirement exists, the company must provide an explanation as to why. There seemed to be a clear conflict of interest in the firm taking the case at all. "Two of Enron's senior financial executives had previously worked for Andersen in Houston: Richard Causey, Enron's chief accounting officer, and Jeffrey McMahon, chief financial officer" (Kadlec 2002). The root of the scandal did not lie in the hands of certain employees uncertain of Anderson's expectations regarding corporate ethical standards: rather top personnel at the accounting company actively impressed upon employees that they were to do all they could to keep Enron solvent, versus doing a competent and rigorous audit.

Sarbanes-Oxley Section 404 has also tried to make it easier for investors to evaluate the solvency and ethics of a company even before a formal audit is issued. SOX "requires public companies to disclose whether or not they have adopted a code of ethics applicable to their senior financial officers" to the public and "for companies listed on the New York Stock Exchange (NYSE), this requirement has been expanded to require listed companies to adopt and disclose on their websites a code of business conduct and ethics for directors, officers, and employees and to promptly disclose any waivers of the code for directors or executive officers" (Verschoor 2012). However, despite more than a decade of SOX enforcement, according to PCAOB Chairman James Doty, "inspections continue to reveal an unacceptable level of deficiencies" and there is a "gap between the purpose of the audit and its fulfillment…firms' cultures still impliedly encourage auditors to sell services to their audit clients and, if so, legal or illegal, whether such goals undermine the appropriate state of mind for auditors" (Verschoor 2012).

The conflict of interest remains that if an accounting firm is being noted for being very ethically rigorous, many companies will look elsewhere. A firm that is known for turning a blind eye to ethical issues may not be praised openly, but many companies will actively seek its services. Also, since all PCAOB findings are confidential, there is no PR incentive for a company to exercise undue scrutiny, so long as it does not engage in openly illegal activities (Verschoor 2012). The statistics regarding PCAOB firm inspections are troubling: a 20% rate of audit failure "more than double the rate in the 2009 inspections," although this could be due to improved scrutiny, not necessarily to poorer ethical standards overall (Verschoor 2012). Regardless, despite SOX legislation, the American accounting community clearly has a 'long way to go' in terms of improving its ethical standards.

References

Enron scandal at-a-glance. (2002). BBC. Retrieved:

http://news.bbc.co.uk/2/hi/business/1780075.stm

Kadlec, Daniel. (2002). Enron: Who's accountable? Time. Retrieved:

http://www.time.com/time/magazine/article/0,9171,1001636,00.html#ixzz2RTOXm6cx

Romal, Jane B. Arlene M. Hibschweiler. (2004). Improving professional Ethics: Steps for implementing change. CPA Journal, 58. Retrieved:

http://www.nysscpa.org/cpajournal/2004/604/essentials/p58.htm

Verschoor, Curtis. (2012). Has SOX been successful. Accounting…