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Dec 27 2021
Social Responsibility and Concept of Ethic as prevention of Corporate Fraud: the “Enron Case”.
Social Responsibility and Concept of Ethic as prevention of Corporate Fraud: the
“Enron Case”.
Auditing – Management Fraud
SEPTEMBER 22, 2017
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
Introduction
Social responsibility and concept of ethic as prevention of corporate fraud is an important
debate and discussion which has come off late as a major topic for discussion. The reason
ehind this is that many of the predecessor companies have contributed to the suspicion in the
minds of the stakeholders wherein mass scale corporate level fraud have taken place and
many of the stakeholders have been deprived out of their money and more than what they
could have imagined.
The social responsibility which is vested in the hands of the corporate bodies have been
abused in the past by corporate executives for their own interest Vis a Vis firm interest. They
have went beyond the lines of ethic which are drawn for them to act within that limit. This
has led to many nations building strong walls of ethic and fraud prevention by imposing
stringent norms, collaborating nations to exchange vital information and etc. as measure to
cu
corporate frauds.
In the present paper, we will be discussing about the corporate social responsibility, a
ief
story about what Enron was, key values, false image of the company, true facts which were
hidden and the actions of fraud, how the role of creative accounting and off-shore companies
are in place and unethical relationships with the environment. Lastly, we will conclude the
paper without comments and conclusions.
The Roots of Corporate Social Responsibility
With the increasing high profile collapses, Corporate Governance has become of utmost
importance. Renowned cases like that of Enron, WorldCom, Parmalat, HIH Insurance, etc
have put in a lot of pressure to strengthen the corporate governance regulations in various
countries, like Sa
anes-Oxley Act in US, Clause 49 of Listing Agreement by SEBI in India,
Audit Reform and Corporate Disclosure Act 2004 in Australia.
Following the collapse of HIH Insurance, the Government was keen on
inging in a law
eform in regard to principles on best practices and regulations regarding corporate
governance. This resulted in the issue of “CLERP 9 Bill” which became law on 1 July 2004
in Australia. Today ASX governs the functioning and sets the requirements for Audit
Committees for the publicly listed companies.
In order to establish a proper corporate governance structure it is necessary to have a well
functioning Audit Committee. Audit Committee not just looks after the fair presentation of
the financial statements and reviewing auditor‟s independence, but also seeks to
communicate formally with the directors and report any adversities. They check the
effectiveness of the internal control in the entity and perform other functions subject to
oard‟s directions. Audit Committees are generally formed with people with financial
expertise, which enables them to perform their functions well. Studies also suggest that
annually 4 meetings also improve the AC‟s functioning. Recommendation 4.1 of ASX CGC
(2007) provides the AC‟s structure to consist of only non-executive directors, majority of
who are independent directors, and at least 3 members. This results in independence of Audit
Committee‟s functioning which provides more reliability in respect to Corporate Governance
issues. (Munro, 2008)
Enron: Brief story of the company
Enron, formed in 1985, was indulged extensively in the energy, services and commodities
sector. The company followed creative accounting system to falsely portray a better image
although in reality it was actually flooded with debts. Enron was a case of misleading
accounts, improper accounting system and poor management. The Enron scandal destroyed
its accounting firm Anderson completely. Anderson was accused of having removed
documents related to its audit of Enron. Post Enron people began losing confidence in
financial reporting since the main reason for its downfall was directly related to the
company‟s financial statements and its accountants and auditors. Its plight led to more
attention towards issues such as transparency and disclosure and focused on proper disclosure
of material items that affect the company at present or in near future. Companies were
instructed to make auditors completely independent. Law-
eaking companies were ba
ed
from entering into government contracts.
The Identity of the Group: the Key Values
“The Enron fraud case is extremely complex. Some say Enron's demise is rooted in the fact
that in 1992, Jeff Skilling, then president of Enron's trading operations, convinced federal
egulators to permit Enron to use an accounting method known as „market to market‟. ”
(http:
money.howstuffworks.com/cooking-books7.htm) .This method was previously used
y such trade related organizations and
okerage related companies only. With the
introduction of such a technique the prices and the value of securities was started being
ecorded on a daily basis in order to compute the profits and losses. This technique was used
y the Enron Corporation to their good effect as they were allowed to show the estimated
earnings from long term energy related contracts as present earnings. These earnings relate to
the amount of money that remains uncollected for many years. Hence through this method,
the company was able to inflate their earnings and attract further investments into it. This
made it really difficult to estimate the real earnings of the company. I
espective of the fact
that the company‟s stock valuation was high, it was not paying enough taxes. Skilling, then
president of Enron, justified it as tax savings as a result of well good accounting planning.
Enron started to but new business ventures that looked quite promising and at the same time
acquired many off balance sheet entities like LJM, LJM2 and other different ones,...