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Introduction
Recent years, companies pay more and more attention to business ethics and problems caused by violation of ethical and moral rules. The law is a guarantor of social stability. The law provides for collective safety and security. The ethics is a crucial element of every profession because it reflects social mores. And often the law demonstrates imperfections and uncertainties. The ethics, above all, embodies social principles, ideals that must not be violated easily or at all. In the realm of white-collar crime, in which personal enrichment is surely a major factor, there are also motivational complications. Accounting scandals in the USA unveiled a problem of business ethics in accounting profession and possible violations affected all countries around the world. After Enron and WorldCom accounting scandals, many UK firms established strict codes of ethics for accountants in order to avoid violation of standards and unethical behavior. A major dimension of white-collar crime, one especially pertinent to working accountants who daily face the temptations of altering information in the pursuit of gain, is the factor of divided loyalties.
Enron
The case of Enron Corporation was one of the most vivid example of accounting errors and unethical behavior followed by the companys management. This case had a great impact on other companies and auditing and reporting standards and procedures (Healy and Palepu 2009). After the collapse of the energy company Enron in January 2002, financial statements seem a lot less hard and objective than they once did. Enron caused many problems occurred among equity shareholders, as a company with an equity market capitalization of over $70 billion became worthless in just over a year (Burton 2002). The Enron fiasco focused attention on US accounting practices, and highlighted the relationship between companies and the accounting firms who as auditors were meant to confirm the accuracy of financial statements. For many years corporate governance experts had worried over potential conflicts of interest when accounting firms acted as both consultants and auditors to the same firm, but these conflicts burst out into the open after Enron. The auditors to Enron were Arthur Andersen, one of the top five firms who dominate the global accounting market (SEC Says Corporate 2002).
WorldCom
The case of WorldCom and immoral practices of its leader Bernard Ebbers (who used he common stock of the company for personal gain) shows that violation of accounting principles and issues can lead to bankruptcy and legal responsibility of the companys executive team. WorldComs collapse was also a calamity to many of its employees, who not only lost their jobs, but saw the value of their 401k pension plans invested in WorldCom stock disappear. Inquiries into WorldComs collapse indicated that it resulted from major failures of corporate governance. Certain senior WorldCom executives appeared to have made significant profits from secret deals made with the company. The board of directors appeared to have failed to control such behavior, just as it rubber-stamped the production of accounts that failed to disclose material factors such as significant off-balance sheet debt. The Enron board also seemed to ignore reports from middle ranking executives exposing dubious practices. In February 2002 US Treasury Secretary Paul ONeil announced changes in the law making it easier to punish corporate executives guilty of misleading shareholders (Kaplan and Kiron 2007).
Capital Market Assess and Participation
The fallout from Enrons collapse left Andersen facing legal challenges including a criminal charge from the US Department of Justice. About the same time, the SEC announced that it might seize the profits of company executives who made profits by selling company stock while earnings were inflated. It noted that Enron executives had sold $1 billion in company shares before the share price collapsed on news that charges would reduce earnings by $585 million, and revelations of off-balance-sheet debt The SEC also announced that it would assess the performance of the audit committee of any company whose financial reporting was investigated by the SEC (Socially Responsible Firm Publishes 2002). In March 2002 Domini Social Investments (DSI) issued new proxy voting guidelines that had been revised in the light of Enron (Socially Responsible Firm Publishes 2002).
The damage to WorldComs reputation also led to a number of its major clients replacing it with alternative auditors. The new guidelines stated that DSI would vote against the appointment of auditors who were not independent, while it would also vote against companies whose boards did not have a majority of non-executive directors. Applying modern theories of ethics and social corporate responsibility, it is evident that WorldCom violated ethics and moral standards. In terms of utilitarian approach, WorldCom behaved wrong as it ruined life of many people and deprived them stable work. In terms of Christian ethics, telling the truth is the root of all contracts. It is also fundamental to criminal law; that is why we swear (sometimes on the Bible) to be honest in a criminal trial. The law reflects our social mores: school desegregation is an illustration. And often the law demonstrates our imperfections and uncertainties (Kaplan and Kiron 2007). That is why affirmative action is such a controversial topic. Our society, and thus our law, is not yet settled on this difficult problem. The law, above all, embodies social principles, ideals that must not be violated easily or at all. Just as biblical authority tell us, thou shalt not steal, so does secular law prohibit burglary and theft (Healy and Palepu 2009).
Market Dynamics and Regulatory Oversight
For cases of both corporations show that the law is both a set of structures for social stability and a set of moral guideposts. When the law is broken, in the cases that reach a court, the moral drama of a society trying to right a wrong. Loyalty to the truth embodied in the very notion of objectivity-is fundamental to accounting (Duska and Duska 2002). Accounting firms have placed emphasis upon marketing as a function of the firm. While auditing may be the bread and butter of an accounting organization, increasingly we find that consulting is where the profits lie in the accounting profession. In fact, concern has frequently been expressed that competitive pressure, particularly price competition, is reducing the audit to a mere commodity. With pride in a quality audit and the attending external and internal rewards in danger of extinction, the audit could be reduced to nothing more than a means to entry for lucrative management advisory service work. Following deontology, Enron also violated ethical principles as its failure led to collapse of the corporation. The principle is veracity (truth telling); the assumption about consequences is that airing a grievance will lead to conflict resolution and that all parties, including society per se, will be better off if legal and moral norms are adhered to (Duska and Duska 2002).
Leadership and Organizational Culture
The case of WorldCom shows that the company was rules by weak and inexperienced leaders unable to predict and foreshadow changes and coming failure. Inadequate organizational structure and lack of ethical principles, prevented the company from ethics audit and control. Though independence and objectivity are basic to accounting practice, the sources of data and thus the bases for financial interpretationmost often reside with the client. If audits were designed to detect all fraud they would become prohibitively expensive (Kaplan and Kiron 2007). When routine conflicts of moral duties and ethical behavior arisewhen the role of accounting professionals, for example, impinges upon ones personal values the struggle for a solution to a dilemma is no less difficult. Conflicts of moral duty come in various shapes, sizes, and intensities. Managers cannot anticipate all such problems. But what such conflicts have in common is both situational and philosophical (Healy and Palepu 2009).
After the failure of the WorldCom in mi 2000 and the energy giant Enron in January 2002, financial statements seem a lot less hard and objective than they once did. Enron caused widespread distress among equity shareholders, as a company with an equity market capitalization of over $70 billion became worthless in just over a year (Burton 2002). The failure of Enron is a result of ineffective leadership skills and lack of managerial control overt he companys resources and activities. Lack of shared vision, strong ethical and cultural values of managerial staff are the main causes of collapse and legal responsibilities (Kaplan and Kiron 2007). Enron and WorldComs collapse was also a disaster to many of its employees, who not only lost their jobs, but saw the value of their 401k pension plans invested in Enron stock disappear. Inquiries into Enrons failure indicated that it resulted from major failures of corporate governance. Lack of communication between employees and managers lead to undesirable consequences for both the company and its staff. In March 2002 Domini Social Investments (DSI) issued alternative voting guidelines that had been revised in the light of Enron (Socially Responsible Firm Publishes 2002).
Conclusion
These facts prove that Enron and WorldCom did not follow the main principles of organizational behavior based on trust, fair treatment of all employees and ethics. Indeed, the Enron disaster focused attention on US accounting practices, and highlighted the relationship between companies and the accounting organizations who as auditors were meant to confirm the accuracy of financial reporting. Enron and WorldCom disregarded planning and control functions of the organization. The fallout from Enrons failure left Andersen facing legal challenges including a criminal charge from the US Department of Justice. About the same time, the SEC announced that it might hold the profits of company leaders who made profits by selling company stock while earnings were inflated. It noted that Enron leaders and managers had sold $1 billion in company shares before the share price collapsed on news that charges would decrease earnings by $585 million, and revelations of off-balance-sheet debt. The main problem of Enron and WorldComs was lack of moral, ethical and social responsibility values of the companys executive team. The failure of Enron and WorldCom led to the damage to their reputation. The new ethical guidelines stated that DSI would vote against the engagement of auditors who were not clearly independent, while it would also vote against that organization whose boards did not have a majority of non-executive directors. The Failure of Enron and WorldComs vividly portrays that a company should follow theories of organizational behavior and strict ethical norms established by the industry in order to meet interests of shareholders and avoid financial collapse and legal claims.
References
Duska, R. F., Duska, B. S. (2002). Accounting Ethics. Wiley-Blackwell.
Burton Malkiel, (2002). The Lessons o Enron, Wall Street Journal.
Healy, P., Palepu, K. (2009). The Fall of Enron . Harvard Business Review, pp. 1-17.
Kaplan, R., Kiron, D. (2007). Accounting Fraud at WorldCom. Harvard Business Review, pp. 1-17.
SEC Says Corporate Audit Panels under Scrutiny in Agency Probes, (2002). Bloomberg newswire.
Socially Responsible Firm Publishes 7th Annual Proxy Voting Guidelines Tightening Auditor Independence Requirements in Wake of Enron Collapse, (2002). Bloomberg newswire.
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