Accounting Scandal and Ethics, Essay Example

A BBC article published in August 2002 gives readers a quick introduction to the Enron scandal (BBC). The analysis of the article also allows us to understand how accounting principles and ethical standards were violated by the management and the auditors. First of all, accounting statements are meant to give readers and investors an honest financial picture of the company. Accounting principles also require statement preparers to use methods that give the most realistic picture of the economic reality of the underlying transaction. But Enron not only misrepresented profits but also hid debts, thus, its financial statements gave a misleading picture of the company’s financial condition.

Similarly, company’s auditor Arthur Andersen had a responsibility to carefully audit the company’s financial statements and give honest opinion in the audit report. But the company didn’t only fail to do its duty but its Chief Auditor David Duncan even tried to destroy documents related to the case. Arthur Andersen also provided consulting services to Enron and it should not have taken both roles due to conflict of interest.

The article also demonstrates that management often fails to do its job of ensuring that accounting statements are accurate and faithfully represent all transactions. Even though the company’s whistleblower Sherron Watkins claimed that Chairman Kenneth Lay was misled, Kenneth Lay did have a fiduciary duty to study company’s financial statements and seek explanations for major transactions if he didn’t understand them. The company’s shareholders and potential investors trusted that the management was truthfully representing the company’s financial reality in the financial statements and they could rely on the financial statements for their investment strategy.

Reference

BBC. Enron scandal at-a-glance. 22 August 2002. 23 September 2012 <http://news.bbc.co.uk/2/hi/business/1780075.stm>.