'Limitatitons of the Accounting Code of Ethics\r'

'Professional regard ass, ethics, and attitudes. (AC 423) Group assignment QUESTION: With the favour of hindsight, what advice would you consider aband aced the Enron Board to eliminate the 2001 disaster? sort MEMBERS 1. Augustine KuparaR082559R 2. Tonderai NyamadzawoR082987G 3. Simbarashe ChakaR089613J 4 Brighton Nzvuvu R089824H 5. Walter DangerR082990X 6. Simon ChigwandaR075968L 7. Ashley MurisaR082991Y 8. Frank Garatsa R082988H 9. Presely NheweyembwaR076037L 10. Peter DonaldR055241G 11. Shingirayi GweteR089773H flat coat Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp.By wee 2001, Enron had grown into the 7th largest U. S. Comp each(prenominal), and the largest U. S. buyer/ trafficker of natural gas and electricity. It was heavily problematic in qualification brokering, electronic zippo trading, world(prenominal) commodity and options trading, etc. in 2001 Enron started to file major signs of trouble by announcing a considerable third-quarter loss of $618 million. On October 22, 2001, the Securities and Exchange accusation (SEC) petitionan an inquiry into Enron’s news key practices and later that family the go with filed for Bankruptcy.Key probes revealed many shortcomings which include the single-valued function of Byzantine & dubious story schemes to decrease Enron’s evaluate allowances; to inflate Enron’s in keep an eye on and profits; to inflate Enron’s convey price and credit rating; to disguise losings in off-balance-sheet subsidiaries; to engineer off-balance-sheet schemes to move m peerlessy to themselves, friends, and family; to double-dealingly misrepresent Enron’s mo scratchary Enron alike used interlocking dubious energy trading schemes for instance the â€Å"Death Star” Energy calling Strategy which was aimed at taking advantage of a loophole in the market rules administration energy trading in California.Thi s strain allow for attempt to advice the Enron Board to rescind the 2001 disaster with the advantage of hindsight by pore on the major beas in the paragraphs which hail RECOMMENDATIONS THE BOARD OF DIRECTORS AND ITS FIDUCIARY DUTIES The Board, as the headword of the organization is speculate to execute its duties and roles professionally and accommodate veritable that the conjunction is survive efficiently and strongly. It’s supposed to economic consumption all e genuinelyplacesight over all the trading trading trading operations of the organization.These duties includes adopting of in collective strategy, annual budget and complete make-upal structure, ensuring that risk trouble structures ar in place, the fellowship is complying with the relevant laws and regulations and that adequate go overs ar in place, to puzzle aside(a) oversight over charge operations, to act as a communication channel between precaution and sh arholders and to reass ure that monetary cultivation of the organisation is reliable and credible. There is invite to ensure that the mount is properly structured so that t it adds value to the organization.This means that it was supposed to submit a chair, at least iodine the elements is monetaryly literate and virtually of its members argon non-executive directors. This would ensure that an free locating is brought into the tabular array’s operations that would realize experience and expertise to the carte The carte du jour supposed to follow its code of make in carrying emerge their duties. This ensures that all the activities it under generates atomic number 18 in the best fill of the shareholders non themselves.For showcase, in carrying out their duties, all the table members are supposed to exhibit delinquent care and diligence, to be honest and loyal, to cypher confidentiality on the organizational information and to split any conflict of absorb. Some of the tabula r array members had financial interests in the particular innovation Entities (SPEs) fashioning large profits further they did non dis belt up this conflict of interest to the carte. This would compromise their objectivity and independence in carrying out their duties.Some of the members of the board were non drill due care and diligence in their operations. They were aware of the un honourable and risky trans serve operations that were taking place deep down the organisation but they in any casek no action and did non bring it to the attention of the board. These include minutes by dint of SPEs and the salaried of wildcat bonuses to senior officials. They even connived with the fecal mattervassors to structure and fulfil some of the illegal transactions that were aimed at falsifying the effect and position of the organisation.The board is also supposed to collapse a nonher(prenominal) special(a) sub directions that are aimed at enhancing the operations of th e board in areas that need special attention. These include the clearvass military commission that is aimed at pull offing the congenital and out-of-door inspect functions and the hire commissioning that entrust be prudent for the salaries and allowances of managers and other senior officials. The role of a caller’s board of directors is to oversee corporate counsel to interests of shareholders.However, in 1999 Enron’s board waived hold dear the conflict of interest rules to allow chief financial policeman Andrew Fastow to create private partnerships to do concern with the firm? Transactions involving these partnerships concealed debts and losses that would vex had a signifi ratt wedge on Enron’s reported profits. Enron’s collapse raises the issue of how to reinforce directors’ energy and allow for to challenge questionable traffic by corporate managers. Specific questions guide self-direct or â€Å"outside” directors. monetary fund exchange rules strike that a certain(a) percentage of board members be unaffiliated with the firm and its management. ) Should the way outside directors are selected be changed or regulated? Directors are elected by shareholders, but simply in precise unusual destiny these are â€Å"Soviet-style” elections, where management’s intend of candidates receives nearly unanimous approval. Should in that respect be restrictions on indirect compensation in the form of, say, consulting contracts or donations to charities where independent board members serve?Should the personal liability of directors in oddballs of corporate fraud be step-up? Do the rules requiring members of the board’s visit committee to be â€Å"financially literate” ensure that the board will clutch the innovative and complex financial and accounting strategies employed by companies like Enron. several(prenominal) of the tender reform bills cited above would require the visit committee of a familiarity’s board of directors to take a more active role in the selection and supervision of analyse work.Enron should take over kept an element of professionalism; the board of directors should show independence in decision making. The partnership must not have got any close alliance whatsoever with its meeters. A strict and good clay of corporate plaque should have been set out , which sets out a nett system of duties of apiece director. They should have set out a system of segregation of duties that sees each director have an independent duty. canvass COMMITTEE Any issuanceive audit committee must have been in place at Enron comprising of purely independent non-executive directors.Members should have an understanding of inhering control system and financial and sustainability reporting experience. This committee reviews the accounting practices and approve the financial statements as integrated reporting. Thus the financial report s of Enron would not have been allowed to be published out front the approval of the Audit Committee. Review the effectualness of the interior control environment as hearty as oversight over the internal and extraneous audit.The Audit Committee recommend to the Board of Directors the engagement, removal and liaise the terminuss and profits with the orthogonal tender. The issue of non-audit function, it is also the responsibility of the committee to define the indemnity and approve the contracts. Hence the pure independent audit committee it would have not allow Arthur Andersen to exercise multiple roles at Enron. Reports Management are received and reviewed to clog whether in line with the approved internal Audit plan and the grapheme and imprimatur of the external audit function.Risk management is also pivotal in this committee so as to champion the fraud awareness. As an internal hearer, Sherron Watkins should have not directed her anonymous letter to the chairman of the board, Kenneth assign but to the committee which oversee the internal control system. The Chief Accounting Officer, Richard A Causey who was getting money through the Special Purpose Entities had been once an auditor at Arthur Andersen an issue which should have been closely examined. An effective Audit Committee consider confidential reporting to facilitate whistle blowing.Overall, Audit committee have a unite assurance role thus monitor the relations between internal and external audit to reduce duplication efforts as well as enhances transparency. AUDITOR ROTATION. The release Of Auditor whirling Is Of Significant To The shade Of Financial Reports. Auditors Should Be Rotated any Few Years To Prevent broad Term, Close Ties Between The Enron And The Arthur Andersen Firm. Arthur Andersen is the firm that audited Enron’s books from its inception in 1985 (it was also global crossing auditor).Also there was questionable proceeding of personnel from between the two com panies Richard A Causey, the Chief Accounting Officer had come to Enron afterwardward working on Enron audits for Andersen this creates a strong relationship, Familiarity threats and it is easy to can interact with Andersen in perpetuating double-faced activities. Time should be put at least triad old age forwards a member can join Enron from auditing firm. Long term audit client relationships significantly increase the like hood of an unqualified sagacity or significantly reduce the auditor’s willingness to qualify the audit reports.Mandatory audit rotation is ideal in maintaining the value of an audit for both the internal and external users. Although recurring auditors have got an advantage to Enron of that they will be auditing the personal line of credit they know very well its environment and internal controls thereby reducing the chances of the auditor making an audit risk which is the risk that the auditor will give a wrong credence that the financial state ments are not materially misstated when in actual fact they are materially misstated. , however the disadvantages seemingly preponderate the costs of retaining the audits. ensure to Wallace, 1980 and De Angelo (1981) audit quality is a market assessed joint probability that an auditor will both discover a breach in the client’s accounting system and report the breach. According to Shockley (1982) a extensive auditor client relationship can have the effect of complacency, lack of innovation, less rigorous audit procedures and a l earn confidence in the client may arise after long association with the client. It also gives auditor cadence to develop a close relationship with the client in this case Enron employees..After a number of years there is some kind of turning paint a picture in the auditor and client relationship which can be detrimental to the auditor’s independence. Before the decision to prove there is need to assess the quality of the audit client and this can be through in the following shipway according to Shockley and Holt 1983, firstly the perceptions of users should be analysed, the set of the audit services has to be analysed and in this case Andersen’s firm was receiving a greater percentage of its revenue from Enron indeed there is dependent on the company.The character of the audit opinion has to be analysed it has a greater impact on the combine with which we can place to the auditing firm. COMPLIANCE TO write up STANDARDS AND REGULATIONS The Enron was abstruse several accounting issues, one concerns the creation of special purpose entities (SPEs), these were established for the special purpose of covering Enron`s losses and there were also creation used to transfer debts outside of the company and would not show up on the balance sheet at year end . The SPEs were supposed to be independent companies however they were headed by Enron former employees, and backed, ultimately, by Enron stock.The second issu e was that Enron was also involved in other accounting greases for example Enron took advantage of the limitations in the standards governing the energy business therefore over wanted assets and selling some of decreasing assets to the SPEs at huge mark-ups and there realising the profits in the financial statements. As a resulted of these accounting misappropriations, Enron produced favourable financial statements leading to unapproved bonuses universe claimed by employees and directors also providing themselves with obscenely bighearted stock option grants.The Securities and Exchange Commission (SEC) governs the activities of companies registered on the New York stock exchange. Enron`s management should follow the regulations stated by SEC and also to prepare its financial statement according to the generally received accounting principles (GAAP). The accounting information produced by Enron should have been restated to show a honorable financial position of the company. The SPEs should be liquidated no further transactions should be carried out between Enron and its related parties. In correcting its transactions Enron should other external auditors other than Arthur Andersen.These investigations should be carried confidentially so as to hold dear the manage the situation and also to protect Enron`s reputation. COMPENSATION TO EXECUTIVES AND OTHER military group Effects of over paying directors it is results in directors losing focus of their core business, that acting their stewardship and answerability functions . Through good corporate governance directors via the agency theory are responsible to the shareholders. Directors are independent form management; they are responsible for making sure management are carrying out their fiduciary duties.However if they are over compensated they are more likely to be inclined to favour management over shareholders, as they is a rise of a self-concern threat With no proper observe of the board through a remuneration committee, overpaying results bad corporate governance which hazard the companies risk management. It results in problems not been brought to light, allowing them not been addressed. As directors ignore their duties and focus on short term profits and kind of than maximising company growth in the long term, this reduces their ability to focus on strategic issues and establishment of unrealistic standards of performance.Decision-making is greatly affected as they will be they will be destruction of the authority line by the two boards who will be responsible for the overall well existence of the company. As decision making will have been affected corporate and accounting practises will greatly be affected, which will increase the chances of fraud and error. These susceptibility include recording profits earlier and recognising expenses late. Overpaying also results in changes in the estimable culture of the organisation, as the board can select bad managers to run the business because they will be sharing a common perception.Which is lack of concern for long run of the business? Rather the advice would be for Enron to have a director’s board which contains an equal mix of executive and non-executive directors. This would be to ensure independence and accountability at the highest level, this also reduces egoism threats . It allows for a board which bumps itself from the management of the business Rotation of members at frequent intervals to allow for drop-off in familiarity threats if members of the board stay for too long ,e. . more than five years they might become familiar with the management Establishment of remuneration committee which monitors the payment of executives, this ensures that directors are paid according to the tasks performed and not for un necessity duties INDEPENDENCE Independence is when one makes decisions honestly and truth full(a)y both in fact and in appearance and avoids internal and external pressures whi ch may influence the force of a decision under review.The Enron scandal showed a number of independence issues being pretermited by the management of the company and instead concentrated on fraudulent profit making strategies which should have been avoided. These fraudulent activities involved the management of the company and their external auditors (Arthur Andersen), the company’s lawyers, consultants and lenders. The advice that l would have given to the management of Enron concerning independent issues was that they should have at first allowed every employee to exercise his or her duties without influence from anyone either internally or external.The management of Enron should have exercised their duties of stewardship to their principles without paying much attention to their excessive and selfish interest of maximising wealth at the expense of their shareholders. The actions by Mr Ken recline of forcing all employees to book their corporate give-up the ghost thro ugh his sister’s go away agency was nowhere near independence but only self-interest and greed to accumulate wealth. The board members should have critically analysed the source of the monies they were receiving so as to occur facts to justify the revenues.Instead they were only concerned closely their packages and approved every idea the management would put before them without taking into affection the effects of such decisions. This was a clear threat to the board’s independency since they were to choose on whether to be ethical or satisfy their insatiable need for wealth. These high earnings were also received by most of the company’s executives, finance, legal and accounting professionals and they made them to overlook the questionable accounting practices which were yielding these huge packages.The management also needed to take note of their auditor’s operations when carrying out his mandate, there was need to single out duties between audi ting and non-auditing services. Arthur Andersen should have been engaged to one assignment only of auditing and leave the non-auditing services to other so that independent decisions could be made. The board should have rotated their auditors after a reasonable period of time to avoid familiarity and some associated threats to independence.There was need for the board to also discuss the issues of their auditor’s remuneration and other packages they offered so that they could match with the current market trends this would reduce the auditor’s dependency and force them to report any anomalies within the operations of the company. spot of Sell-Side Analysts Sell-side psychoanalysts have received considerable check for failing to provide an earlier model of problems at Enron.On October 31, 2001, just two months before the company filed for bankruptcy, the mean analyst recommendation listed on First Call (which compiles and distributes analyst recommendations) for Enr on was 1. 9 out of 5, where 1 is a â€Å"strong buy” and 5 is a â€Å"sell. ” Even after the accounting problems had been denote in October 2001, reputable institutions such as Lehman Brothers, UBS Warburg and Merrill Lynch issued â€Å"strong buy” or â€Å"buy” recommendations for Enron. Analysts should have not been backward to recognize the problems at Enron.The analysts should not have financial incentives to recommend Enron to their clients. Investment banks earned more than $125 million in underwriting fees from Enron in the period 1998 to 2000, and many of the financial analysts working at these banks received bonuses for their efforts in supporting investment banking. Sell-side analysts must be independent and avoid any self-interest threats which may arise. Corporate Culture Enron has been expound as having a culture of dignity that led people to believe that they could dole out increasingly greater risk without encountering any danger.Accor ding to Sherron Watkins, â€Å"Enron’s unspoken message was, ‘ ferment the numbers, make the numbers, make the numbersâ€if you steal, if you cheat, just don’t get caught. If you do, beg for a second chance, and you’ll get one. ’” Enron’s corporate culture did little to win the values of respect and integrity. These values were undermined through the company’s emphasis on decentralization, its employee performance appraisals, and its compensation program. Each Enron ingredient and business unit was kept separate from the others, and as a result very few people in the organization had a â€Å"big picture” emplacement of the company’s operations.Accompanying this emphasis on decentralization were insufficient operational and financial controls as well as â€Å"a distracted, hands-off chairman, a compliant board of directors, and an impotent staff of accountants, auditors, and lawyers. ” Jeff Skilling impl emented a very rigorous and threatening performance evaluation extremity for all Enron employees. know as â€Å"rank and yank,” the annual process utilized peer evaluations, and each of the company’s divisions was arbitrarily forced to burn up the lowest ranking one-fifth of its employees.Employees frequently ranked their peers lower in pose to enhance their own positions in the company. Enron’s compensation plan â€Å"seemed oriented toward enriching executives kinda than generating profits for shareholders” and encouraged people to terminate rules and inflate the value of contracts even though no actual cash was generated. Enron’s bonus program encouraged the use of non-standard accounting practices and the inflated valuation of deals on the company’s books. Indeed, deal ostentation became widespread within the company as partnerships were created solely to hide losses and avoid the consequences of owning up to problems.Conclusion I n conclusion, one can see that a variety of perspectives can be applied to the Enron scandal which could have averted the 2001 disaster. If those charged with the governance of the entity had taken necessary steps in line with what is depict in this essay, the corporation would not have collapsed. However even if Enron and its outside accountants and lawyers had done nothing improper, the sudden collapse of such a large corporation would suggest basic problems with the U. S. ystem of securities regulation, which is based on the full and accurate disclosure of all financial information that market participants need to make informed investment decisions. The overarching issue elevated by Enron is how to improve the quality of information available about public corporations. References * shilling Lyke. CRS Report RS21120, Auditing and its Regulators: Proposals for Reform After Enron. * articulatio COMMITTEE ON TAXATION, 2003 Report of investigation of Enron corporation and related entities regarding federal tax and compensation issues, and policy recommendations McLean, Bethany. 2001. â€Å"Is Enron Overpriced? ” Fortune. * capital of Minnesota D. Miller, Brief History of Enron (accessed 27 November 2012) http://www. freegrab. net/enronhist. htm * Paul M. Healy and Krishna G. Palepu, (2003) The Fall of Enron * Powers, William C. , Raymond S. Troubh and Herbert S. Winokur. 2002. â€Å"Report of probe by the Special Investigative Committee of the Board of Directors of Enron Corp. ” * Steven C. Currall Marc J. Epstein 2003. Lessons From the Rise and Fall of Enron * Watkins, S. , 2002. email to Eron Chairman Kenneth Lay,\r\n'