Enron Accounting Scandal
Looking for the degeneration of business and accounting conduct that led to the Enron scandal in the climate of the 1990s-early 2000 might be too late. As early as 1980, according to Zeff (2003), there had been a visible deterioration of professional values in accounting, at least. He attributed this to the effects of astonishing growth in the profession and competitive pressures beginning to be felt in a formerly stodgy business arena. He noted that it had "created in some CPAs attitudes that are intensely commercial and nearly devoid of the high-principled conduct that we have come to expect of a true professional" (Zeff 2003, p. 267ff). He might have been writing those words in 2005, because despite Enron and WorldCom and Martha Stewart, the dot-com bust, the IPO whirlwind and the market crash of 2000, it is difficult to see any evidence that the "preoccupation with the bottom line" has returned to the civility, respect, courtesy, mutual respect and fairness Zeff proposes existed before 1980. This is not simply convenient opinion expressed in the aftermath of an accounting disaster with major financial and sociological impact. In fact, by 1985, "FASB Vice Chairman Robert T. Sprouse wrote that the qualit
The result of this 'system,' was "NO BAD NEWS" (Prentice 2003, p 417ff). Enron was literally 'pulling profits out of thin air,' both on accounting and behavioral bases, but due to behavioral factors described by Prentice, "no Enron employee would want to believe this, nor be prone to question when their CEOs were repeatedly telling them that nothing was wrong" (Prentice 2003, p. 417ff.) When Jeffrey Skilling resigned and Kenneth Lay returned, telling the employees there was no reason for worry, 'cognitive dissonance' filled in the blanks": "employees' beliefs were anchored on the vision of Enron as an invincible corporate giant and new information would tend not to be processed in such a way as to move employees sufficiently far from that belief" (Prentice 2003, p. 417ff). Prentice did not specifically address these behavioral and cognitive issues as they applied to the auditors, lawyers or bankers specifically, but he notes that, in addition to behavioral theory, normative theory would also be operative, so that findings would have a very high degree of consistency with the findings for employees (2003, p. 417ff). Even beyond the accountancy issues-the state of the industry, competition, etc.-there is the nature of the Enron executives to include in the mix. A rationality assumption, Prentice notes, would lead to: "The St. Petersburg paradox explains some of the unprecedented increases in the prices of high-tech growth stocks in the late 1990s. During that period, the Federal Reserve System's discount rate was near a historical low.... Moreover, purchasers of growth stocks assumed that g, the growth rate of a typical high-tech company, would remain high in perpetuity" (Szekely and 2004, p. 225ff). Federal Reserve Chairman Alan Greenspan had predicted "prolonged contractions" (Szekely and 2004, p. 225ff) in stock prices, a reasonable expectation after the binge buying engaged in by purchasers who forgot the simple truism that underlies the St. Petersburg Paradox: what goes up must come down. Zeff noted that beginning in the 1990s, "CEOs felt increasing pressures for revenue and earnings performance" (2003, p. 267ff). Zeff contended that the cause for this dilution of stringency might have been a reluctance by the major firms (and Enron's Arthur Anderson was certainly one) to express accounting opinions that might be offensive to their clients. A year earlier, Donald J. Kirk FASB chairman and former audit partner of Price Waterhouse had been concerned that the industry was already on a path toward producing financial statements that were not credible, and that the industry could no longer ensure that "the additional services offered by accounting firms don't detract from the firms' major responsibility of auditing financial statements or impinge on their independence. (Kirk 1984, 29, quoted by Zeff 2003, p. 267ff). As early as 1978, the Big Eight firms had gained entry to the top ten U.S. consulting firms by virtue of their gross billings for consulting services; indeed, by 1990, fees from consulting had reached 44 percent of total gross fees for Arthur Andersen/Andersen Consulting, a good twenty points higher than the percentage for the other Big Six firms. (Note: The Big Eight had contracted by merger, a factor that gives credence to claims that competition within the accounting industry exacerbated the questionable practices Sprouse identified in 1985. By 1998, the Big Six were the Big Five, after Price Waterhouse merged with Coopers & Lybrand to create PricewaterhouseCoopers.)
Some common words found in the essay are:
Arthur Andersen, Indeed Prentice, Enron Prentice, EOL October, Skilling Fastow, Kenneth Lay, Street Pollyannas, Price Waterhouse, Airlines Guide, Introduction Looking, 2003 417ff, prentice 2003 417ff, prentice 2003, prentice notes, 2003 267ff, zeff 2003, accounting firms, zeff 2003 267ff, arthur andersen, prentice notes people, petersburg paradox, notes people tend, cognitive dissonance, accounting practices, szekely 2004 225ff,
Approximate Word count = 3994
Approximate Pages = 16 (250 words per page double spaced)
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