In the twenty-first century, corporate abuse and accounting fraud have been widespread occurrences in many companies. According to Markham (2012), this is due to misinterpretation of financial statements by companies’ accountants and auditors. In the case of the Enron debacle, the executive worked with the auditors (Andersen auditing agency) in altering the company’s financial information; an attribute that is unprofessional and contrary to the Corporate social responsibilities of workers of any particular firm, as shown by Brooks & Dunn (2009). This has become a common occurrence among executives who are heading prominent firms across the globe who neglect moral ethics required in the financial industry. Upon taking over Enron Corporation in 1985, Kenneth was expected to lead it to success as he promised. It is ironical that he works against his own words of promising to develop the firm more. Instead, he supports the use of unscrupulous financial and accounting practices that later destroys the firms’ image.
It was alleged that under the leadership of Jeffrey Skilling, he was able to develop a staff of executives through which they utilized the accounting loopholes in the calculation of the firms’ statements. This poor financial reporting facilitated the hiding of billions in debt from the failed deals and projects. The process was boosted by the chief financial Officer Andrew Fastow and the other executives who played the role of misleading Enron’s board of directors and audit committee of high-risk accounting issues as well as pressure on Andersen to ignore the issues being undertaken in the corporation as shown by MacDonald & Hughes, (2009). They presented information that did not highlight the true image of the firm as the reports released were misinterpreted to bring out a prospering image of the company that was false. The false representation enabled them to benefit from the cash provided by the stakeholders without considering the future impact on the net investment of the stakeholders of ENRON.
According to Anon, (2017), Enron firm had instilled a proper management control system that comprised of a risk-assessment and control group and Enron performance review system that was perceived to be working effectively until the demise of the firm. Anon (2017), expounds that Jeff Skilling as the C.E.O applied several methods that played a role in reshaping of the firms’ culture which enabled him to exploit and ‘bend the rules’ where they were able to sabotage the management control systems in place. It was during his tenure when a term like ‘creative risk-taking and revolution’ circumnavigated the firms’ ethical adherence. The firm invested its cash heavily into projects that were very risky, and some were even out of their business environment. The projects did not yield the expected returns by the management, as an aspect that affected the cash flow of the firm eventually. Management of the firms’ cash was at risk as the top level employees ignored the required cash control measures instituted by the firm (Rezaee, 2011).
As a result of improper cash control measures, there was a need to ensure adherence of the required cash control measures that would ensure the stakeholders’ welfare is at stake as narrated by Brooks & Dunn, (2009). All the employees on managerial level ought to account accurately for all the cash transactions transacted in their respective departments. This will ensure proper cash flows and easy management of the available balance for budgeting by the departments. The firm invested all its cash into projects to the extent that its cash liquidity was not able to settle its current liabilities. A firm must retain cash that will be able to settle its current liabilities as they mature. It is important for every firm to ensure all its revenue and expenditures are recorded effectively as they occur and in different books on their respective projects. This will aid in the analysis and evaluation of the projects invested in by the company. Just like Enron, it is vital to put in place strict measures that can detect and curb any loss involved in cash handling in the form of theft or fraud by employees of the firm. This can be attained by insuring that the firm maintains an updated record of all cash and expenditure receipts for accounting purposes. Also, the employees should be given specific roles whereby an employee receiving cash should not be the one recording the transaction in the firms’ books of accounting and those receiving cash must not be the one disbursing it to the departments respectively. The records should be audited on a regular basis by internal auditors who will verify the authenticity of all the provided documents. The Provision of reliable and accurate financial and accounting information relating to the running of the company to all the investors during the Annual General Meeting is a vital issue that was not fully observed by the management as the chief financial officers provided information that did not highlight the true financial image of the firm as required by Brooks & Dunn, (2007). Enron should have established a proper accounting and financial system in reporting its financial statements that would be transparent to all the stakeholders to safeguard the cash generated.
Anon, (2017). Enron Scandal: The fall of a Wall Street darling. (Online) Available at: https://www.investopedia.com/updates/enron-scandal-summary
Brooks, L, J & Dunn, P. (2009). Business & Professional Ethics for Directors, Executives & Accountants. Stamford: Cengage Learning.
MacDonald, S. & Hughes, J. (2009). Separating fools from their money: a history of American financial scandals. New Brunswick: Transaction Publishers.
Markham, J. (2012). A financial history of modern U.S. corporate scandals: from Enron to reform. Armonk, N.Y. [U.A]: Sharpe.
Rezaee, Z. (2011). Financial services firms: governance, regulations, valuations, mergers, and acquisitions. Hoboken, N.J: Wiley.