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1、CaseStudy:Enron,sfinancialfraudcasePreparedby:xxxxxxxxxxxxxxx1.eadershipEthicsSeminar-BU.131.601xx/xx/xxxxTableofContentsAbstract3Introduction3Background4Findings5Recommendations6Conclusion7AbstractEnronsfinancialfraudcaseisastudyofthecompanysmanagementandexternalauditinstitutionsinfringingsharehold
2、ersthroughcomplexfraudmeansundertheconditionofasymmetricinformation.Thefraudmeansofthiscaseisverycomplexandhidden,andthefraudprocessinvolvesmanylevelsandanglesofmoralissues.Thebreakthroughofprofessionalstandardsandmoralbottomlineofmanagersandauditpractitionershasbecomethemainthemeofthiscase.Thispape
3、ranalyzestheprocessandcharacteristicsofthesepeople,sparticipationinfraud,analyzestheharmofthesebehaviorsinthecase,andputsforwardsometargetedsuggestionstohelplistedcompaniesimprovetheseproblems.IntroductionEnronsfinancialfraudcaseisaresearchonthefinancialsystem,informationdisclosurestandard,externala
4、uditsystemandrelatedpartytransactionsystemoflistedcompanies.InOctober2001,Enronreleaseditsthirdquarterfinancialstatementsandannouncedalossof$618million.OnNovember8,EnronadmittedtotheU.S.stockexchangethatithadfalselyincreaseditsprofitby$586millionandconcealedalargeamountofdebtbetween1997and2001.Enron
5、,sfalsefinancialinfbnationmadeEnronssharepricefallrapidlyandeventuallygobankrupt.TheshareholdersofEnronsufferedheavylosses.TheUSSecuritiesRegulatoryCommission,governmentregulatorsandthemediaallparticipatedinandexposedtheinvestigationprocessofthecase.Therearefourmainthemesaroundthefinancialfraudincid
6、entofEnroncompany,whichprovethatthereareinappropriatepracticesintheoperationprocessofEnroncompany.ThefirstthemeisthatEnronunreasonablyusedtheconventionthatspecialpurposeentitieswithspecialconditionsareallowedtobeexcludedfromthefinancialstatements.Byexcludingseveralspecialpurposeentitiesthatshouldber
7、eflectedintheconsolidatedstatementsfromthefinancialstatements,Enroninflatedprofitsbynearly500millionUSdollarsandconcealedhundredsofmillionsofusdollarsOfliabilities.Thesecondthemeisthatthepersonneloflistedcompaniesandnonlistedsubsidiariesarenotindependent,andevenpart-timephenomenonisserious.Companies
8、avoidtaxthroughavarietyofrelatedtransactions.ThethirdthemeisthatastheexternalauditorganizationofEnron,Anxindacompanyundertakestheinternalaudit,consultingandotherworkofthecompany,whichcannotguaranteetheindependenceoftheexternalauditorganization.Thefourththemeistoconcealtheactualsituationthataffectsth
9、ecompany,soperation,withouttimelydisclosure.Basedontheabovefourthemes,thispaperarguesthatthereareavarietyofmoralandprofessionalconductchallengesinEnronsfinancialfraudcases.Thebasicmoralconceptthatcansupportthedevelopmentofmodernsocietyandeconomyshouldbethespiritofcontract(Foot,1983).Inthemodernenter
10、prisesystemofseparationofownershipandmanagement,theoperatorshouldabidebythecontractbetweentheenterpriseandthemanagertoprotecttheinterestsofshareholders.Managersrealizetheinternalcontroloftheenterprisebyusingtheadvantagesofinformationasymmetryandenterprisemanagementpower,whichwillleadtohugelossesfort
11、heownersoftheenterpriseandultimatelyhinderthedevelopmentofsocialandeconomicactivities(Daniel,2008).BackgroundEnronwasfoundedinHoustonin1985.Itwasonceoneofthemostsuccessfulnaturalgascompaniesintheworld.ThehighestsharepriceofEnronreached$90.56.TheexposureoftheincidentbeganonOctober16,2001.Enronsuddenl
12、yannouncedalossof$618millioninitsthirdquarterfinancialstatements.OnOctober22,anarticlewaspublishedontheUSstreetwebsite,inwhichitwaspointedoutthatEnronborrowed3.4billionUSdollarsthroughtwoaffiliatedtrustfundcompanies,whichledtotheinvestigationofEnronbytheUSstockexchange.Underthegreatpressureofpublico
13、pinionandgovernmentregulatoryauthorities,Enronadmittedthatithadinflatedprofitsof$586millionandconcealedalargeamountofdebtinthefiveyearsfrom1997to2001,anditssharepricefellfrom$80to$2.ThecompanyfiledforbankruptcyonDecember2.AftertheEnronincident,theAmericanStockExchangerevisedthesecuritiestradingsyste
14、moflistedcompanies,strengthenedtheintegrityanddiligenceobligationsofmanagers,requiredthecompany,sinformationdisclosuretobecomplete,timelyandtrue,andrequiredtheindependenceofexternalauditinstitutions.Inthiscase,manystakeholdersofthecompanysufferedheavylosses.Amongthem,Enron,sshareholderswerethemostaf
15、fected,andtheirwealthimmediatelyshrank.AstheexternalauditorganizationofEnron,thecredibilityofthecompanyhasbeengreatlyreduced,andthepersonnelinvolvedinfraudhavebeenpunished.TheEnronincidentalsoraiseddoubtsabouttheregulatorycapacityoftheU.S.stockexchange,andinvestorsalsoraiseddoubtsaboutthestockexchan
16、geandotherlistedcompanies.FindingsThemoralissueshererelatetothefourthemesintheintroduction.Enronborrowedalotofmoneythroughthewayofstockfinancingthroughaffiliatedtrustcompanies,andexcludedthetwocompaniesfromthecompanysconsolidatedstatements.Thecompanytakesadvantageofthesystemthatthelimitedliabilityco
17、mpanycanbeexemptedfromcorporateincometaxandevadestaxthroughrelatedtransactionswithitssubsidiaries.Anxindacompanycontinuestoundertaketheinternalauditbusinesswhenitknowsthatundertakingtheinternalauditbusinesswillaffectitsexternalauditindependence,andevendestroysthedocumentsduringtheinvestigationtoobst
18、ructtheinvestigationofthejudicialdepartment.Enrontookadvantageofinformationlocationtoconcealinformationthatwasnotconducivetoshareholders,whicheventuallyledtotheoutbreakofthecrisis.ThemoralproblemfacedbyEnronsmanagementandmajorshareholdersistotrytocontroltheenterpriseundertheconditionofasymmetricinfo
19、rmation.Eventhecompanystrengthensthesituationofasymmetricinformationbydeliberatelycreatingcomplexaccountingsystemandfinancialstructure.Evenprofessionalfinancialexpertscanunderstandthecompanysfinancialreports.Inthecaseofasymmetricinformation,theoperatorhasforgottenhisdutyofdiligenceandgoodfaithtothes
20、hareholders,andevencarriedouttherelatedpartytransactionsrecklessly.TheethicalproblemfacedbyAnxindacompanyisthatitviolatestheprinciplethattheexternalauditshouldmaintainitsindependence,undertakesbusinesseswithconflictsofinterestforthecompany,sperformance,andevenfailstoreporttheillegalactsofEnroncompan
21、y.Asanexternalauditorganization,Anxindacompanyhastheresponsibilitytodisclosethefraudandillegalbehavioroftheauditedcompanytothepublic.RecommendationsInthecaseofEnroncompanysfinancialfraud,boththecompanysmanagersandtheexternalauditinstitutionsviolatedtheirownpracticestandardsandmoralbottomline,artific
22、iallymanipulatedthecompanysbusinessbehaviorandfinancialwork,andbroughthugelossestothecompany,sshareholders.Therefore,thispapersuggeststhatbusinessmanagersandexternalauditorsshouldsignapracticecommitmentwhentheyaccepttheappointment,indicatingthattheywillperformthedutiesofdiligence,integrityandduedili
23、gencetotheshareholdersoflistedcompanies.Atthesametime,theAmericanstockexchangeshouldincreasethepunishmenttotheenterprisemanagersandexternalauditors.Onceitisfoundthattheemployeeshavefraudorinsufficientability,resultinginthelossofinvestors,theyshouldbeprohibitedfromcontinuingtoworkinthisindustry.Ameri
24、canstockexchangesalsoneedtoincreasetheinformationdisclosureobligationsoflistedcompanies,andrequireexternalauditinstitutionstoensureindependence,otherwisetheywillbedisqualified.ConclusionThefinancialfraudincidentofEnroncompanyintheUnitedStatesdirectlyledtothesubstantialrevisionofthestandardsofpublico
25、fferingandtradingofsharesbyListedCompaniesintheUnitedStatesstockexchange.Thestockexchangehasmademoredetailedprovisionsontheobligationsofoperators,informationdisclosureandexternalauditinstitutionsoflistedcompanies.Inthiscase,boththemanagementofEnronandtheauditworkofAnxindaviolatetheprofessionalethics
26、,andtheirowndesiresbreakthroughthemoralconstraints.Underthethreeconditionsofsubjectiveexistencemotivation,objectiveexistenceopportunityandfindingexcuse,thejointfraudoftunnelingshareholdersiscarriedout.ButbeforetheEnroncase,noonewouldthinkthattheoperationofEnronwouldhavesuchaseriousinternalcontrolpro
27、blem.Becausepeoplecan,tfindtheirmotivationtocheatinadvance.Referelices:Foot,P.(1983).VirtuesandVicesandOtherEssaysinMoralPhilosophy.InternationalPhilosophicalQuarterly,9,(17)211-217.Daniel,M.(2008).EconomicAnalysis,MoralPhilosophyandPublicPolicy.CambridgeBooks,4,(8)225-229.Ebrary,I.(2004).ReasonandV
28、alue:ThemesFromtheMoralPhilosophyofJosephRaz.GrazerPhilosophischeStudien,10,(20)111-117.Fraedrich,J.(2004).Theimpactofperceivedriskandmoralphilosophytypeonethicaldecisionmakinginbusinessorganizations.JournalofBusinessResearch,7,(13)419-423.Barrow,R.(2007).AnIntroductiontoMoralPhilosophyandMoralEducation.Routledge,2,(18)322-325.Stacey,J.(2005).PersonalAutonomy:NewEssaysonPersonalAutonomyanditsRoleinContemporaryMoralPhilosophy.JournalofMoralPhilosophy,11,(3)266-271.
