The goal of a large number of criminal acts is to obtain as much as profit for the individual or group that carries out the act. Just like bribery or robbery, accounting scandals that shock telecommunications industry within the past two years, also have similar intention that is to make money to benefit a person or a group of people through illegal acts while disguising their illegal origin.
Concerning the accounting scandals in Enron, in this paper, we will elaborate the story of Enron and World Com scandals discussing how the company’s situation relates to bankruptcy, insurance, and/or employment law.
2. Accounting Scandals
Enron, Global-Crossing, and WorldCom recent cases have become a history in finance and telecommunication areas. The history tells us how fragile the monitoring process of the company’s financial system is. The situation leads to accountancy scandals that hurt investors, employees, and the industries.
In many reports on Houston Chronicle, we can conclude that the case of Enron emerged as the company and its auditor cooked up the books to show bogus profits. This is done so to attract the public so that they are interested to invest their money during the company’s initial public offering (IPO). Previously, the company has already performed manipulation of commodity prices in order to obtain huge profits due to unregulated energy derivative market.
Moreover, the bankers also join this bogey as they have been giving loans and would like to reduce their risk hoping that Enron would obtain much money from IPO so that Enron can fulfill their obligation to the bank.
Therefore, in this accountancy scandals there are at least three actors: the first is Enron, the company that has a pile of debt that was off balance sheet. The second actors are auditors; they acted as consultants that helped the Enron to write a fake figure of the company’s profit in the book. The third actors are bankers that issued good analyst reports for Enron financial performance and acted as underwriter.
By doing so, Enron can raise much money to pay their loans to banks and back to the evil business when Enron run out of money again. Amazingly, within three years, the fake report gives Enron over $10 billion of investors’ money. The illegal action like cases of MicroStrategy and Xerox has caused the declining public trust on stock markets and auditors (AFL-CIO, 2007; Turner, 2002).
3. Bankruptcy and Insurance
The case of Enron, WorldCom and other accounting scandals still leave public with many questions regarding the way the companies try to recover from the scandals especially when it comes to fair treatment for the hurt employees.
The term “fair” refers to equal treatment for CEO and their workers. Remember the shocking Enron case a few months ago that many of people fail to recognize what went wrong at Enron, an energy-trading giant and once the seventh-largest company in U.S.
The lawsuits and official investigations on Enron show that the bankruptcy has sent more than 6,100 of Enron employees into unemployment. In addition, it also causes serious fault at workers’ health care and retirement savings—for many, their life savings—because worker 401(k) plans were halted while the company stock price tumbled (AFL-CIO, 2007).
Although the company’s performance went bankrupt, however, the Enron’s executive still obtain bonus checks for more than $55 million, in addition to $50 million in bonuses just weeks earlier. The Enron’s case is one example of increasing “pay gap” between CEOs and workers (AFL-CIO, 2007).
Moreover, she also points out that the Project 911 turned out to give many benefits for Enron’s management instead of giving benefits for workers. In the Project 911, Enron was to pay the company’s executives $105 million worth of bonuses prior to the company’s bankruptcy filing in December 2001 (Steffy, 2005).
However, according to the new bankruptcy law, which President Bush signed in April, a company might give their executives excessive compensation in the form of retention bonuses only if they have another job offer. It means that under new law, executives will not be paid to stay until they show proof they intend to leave (Steffy, 2005)
The new law had driven the bankruptcy court to approve $38.2 million in additional retention bonuses in 2002 and another $29 million in 2003. The situation soon raises critics since the come with an inherent paradox. At the management level, the company took questioned decision to reward the very few people who drove the company into collapse. In other words, Enron was enticing a failed management to stay (Steffy, 2005).
This situation refers to moral crisis since the company was paying attention to bonuses for the company’s executives instead of taking care of their employees. Although the case of Enron has become symbol of wrong model of corporate America, few observers expect it to become a lasting symbol (Ivanovich, 2002).
In short, the first thing American companies should do is providing variable compensation scheme in which employees’ benefits will increase as the companies’ benefits increase as well. Therefore, employees will fee fairly treated and in turn increase their motivation.
4. Employment Law
The cases on Enron and WorldCom present new atmosphere regarding the employment law since it involves whistle blower, a person who disclose the scandals. Since whistle blowing leads to negative impact for the blower, it is imperative that any person that intends to whistle blowing to do it effectively. Sherron Watkins, the person who discloses the scandals at Enron, is one example of whistle blower.
In addition, whistle- blowing also greatly affects the executives of a company who are given information from an employee. In order to protect the whistle blower, Sarbanes-Oxley Act rule out there should be no discrimination against employees who disclose the wrongdoing in a company (Hails, n.d.).
Amidst the fierce situation at Enron, Congress is still busy passing new laws in response to the latest news about corporate misdeeds. In fact, this is really not the best solution to the problem of corporate fraud at Enron.
Considering that whistle blowing leads to negative impact for the blower as it happens at Enron case, it is imperative that any person that intends to whistle blowing to do it effectively. Below is guideline that helps an employee to determine whether a situation merits whistle blowing:
a) Magnitude of consequences
A person intends to conduct whistle blowing consider the impact of a action that he consider as wrongdoing. If only one person will be harmed by an action, it does not call for any whistle blowing action (England, 2007)
b) Probability of effect
The person must be sure that a wrongdoing happens or will happen that requires for whistle blowing. If he is not sure about the situation, he had better not perform whistle blowing (England, 2007)
c) Temporal immediacy
The person must think the urgency to whistle blowing. If he considers it is urgent to prevent greater losses, he can conduct whistle blowing immediately (England, 2007)
In addition, lots of accounting scandals incidences have driven NYSE to issue new guidelines intended to enhance the accountability and integrity and of NYSE-listed companies by strengthening the corporate governance and disclosure practices of those companies. Harvey Pitt, SEC chairperson, the person behind the birth of the guidelines, asks NYSE to review its corporate governance listing standards.
Based on the facts, since most scandals involve insider, therefore senior managers should personally liable for criminal charges and damages. Concerning this issue, congress also has passed the Sarbanes Corporate Accountability Bill that one of its main provisions includes the fact that the chief executive officer and chief financial officer now have to sign off on a company’s financial records and may assume criminal liability if they are wrong.
Under such circumstances, in the event that such scandals exist, investors and employees should not bear the responsibility for their own actions. This is because in this developed economy, people from all over the world have been willing to invest in ‘pieces of paper’ because of a basic trust that there are systems in place to make the ‘pieces of paper’ valuable. Therefore, it is the government’s responsibility to maintain people trust to invest in a piece of paper by providing an oversight system that works to protect the investor.
Learning from these events, it is government’s responsibility to improve standards, controls and accountabilities. While companies should improve their employees moral in order to prevent any financial scandals in the future. This is imperative since most business schools lack of morality in their curriculum.