Preventive Steps Towards Non Occurrence of Enron and World Com Episodes

William A. Niskanen (July 2002) discussed the issues of collapse of the Enron Corporation, which is led to two broad concerns. Firstly, it’s reflected by weakness in the stock markets and the foreign exchange value of the dollar, even though almost all of the subsequent economic news has been better than expected. Secondly, this effect has already led to increased demands for regulation of accounting, auditing and corporate governance and increased criticism of any proposal for privatisation.  The articles highlighted that the major debacles of collapse of Enron because of a consequences of the combination of too much debt and some unusually risky major investments. Moreover, author described that Enron did not collapse because it break the rules but their broader interest in investment and financial weaknesses brought into the catastrophe. Author identified that there is something is seriously wrong in corporate America. General shareholders, now a majority of Americans, have a financial interest in correcting the conditions that led to these problems. They are more concerned about maintaining the necessary popular and political support for a market economy has a special political stake in correcting these conditions.  The authors further pointed that most of the related markets learn a lesson on or after the collapse of Enron.  The primary business lesson from the experience of several companies is that it is unwise for highly leveraged company to trade in the very volatile markets for energy futures. Furthermore, the collapse of Enron it’s cause by extensive use of SPEs (Special Purpose Entities) to increase the use of debt to finance specific activities. The articles further talk about the issues that has been broadly ignored in discussion about the implications of the Enron collapse is that the current U.S. tax code biases the decisions by all corporations in several ways that increase the probability of bankruptcy. The limitations of these articles are only focused on the government and political perspective. It failed to highlight the important roles of Enron player that fall short to set out the corrective plan to prevail this debacle.  

Luis Frisoni Jr. (2002) inscribe that terrorist attacks of on September 11th have had a devastating effect on the US economy. Ever-greater shareholders expectations, analyst demands that companies produce outstanding quarterly earnings and highly questionable corporate practices have resulted in volatile stock prices, unrealistic valuations and unsettling   confidence on rumours and gossips. The articles highlighted that incidences of Enron and WorldCom and the question that have arisen from the corporate practises of market sees that public has become sceptical about the credibility of corporate financial statements. Authors believe that failure of Enron and WorldCom must goes to improperly manage by regulators, corporate management and auditors. The author illustrated that the main tasks should now be to established an adequate information model for market value formation, a new accounting and information model that will allow for maximum disclosure and transparency. The Formation Factors of Value (FFV) that determine the capitalisation value, or market price of companies can be classified according to whether they are financial or non-financial factors.  The article also describes that the traditional accounting techniques facing a problem in the capital market. Because it lacks specific, reliable information and generally accepted valuation criteria, the market produces but these evaluation are largely subjective. The author mentioned that the stability and health of economies worldwide depend, ultimately, on the transparency and integrity of their respective regulatory and financial reporting systems. Besides the creation of a new accounting model on non-financial FFVs it is also vital that adequate corporate risk management systems are put in place. The author impressed that in future accountants must posses the qualities, abilities and qualifications in order to operate successfully in a technology-enabled, global marketplace and revamp the current professional education syllabus accordingly. The limitation of the article is that the authors were only looking at non-financial factors to solve the internal accounting control. It failed to emphasise on credibility of shareholders and corporate financial elements.

John Conley (Aug, 2002) describes the importance of weather risk management in US market. Enron is the seventh largest company in the United States and it was the largest and most dominant trader in the weather risk transfer market before this giant US company collapse. Furthermore, its bankruptcy put a sizable hole in the available capacity to insure, trade or hedge weather risks. “No uncertain terms that the weather risk trading market would power on in effectiveness for the energy industry, at the very least, remaining untainted by the tentacles of scandals wrapped around almost every other aspect of Enron’s business (Harvey Padewar)”. After all, the result of Enron collapse was not unaffected the global market because of the expanding and the preventive action taken by several financial body worldwide. The articles mentioned that the loss of Enron to the weather risk management market was felt on two fronts, which are capacity and publicity. “ There was a lot of anxiety in this market and we’d all been in Enron shadow as far as the number of transaction and market dominance over Enron collapse (Lynda Clemmons)”. “Undoubtedly, Enron played a key role in developing and leading this market but Enron’s troubles escalated, the other active traders began to cover their positions early in the autumn (Warren Isom)”.  The authors also discussed key research findings and granted that demise of Enron has not blunted the weather risk transfer and much of the business remains largely in the energy sector. “These companies know the exact dollar impact of deviations in the weather on their businesses (Chris Phelan)”. The author also describe that most companies have a risk management culture born from managing energy price exposures whereas managing weather risks was not a big leap of faith. However, the articles did not focus on implications of weather trading by foreign companies on Enron Trading. Author also failed to highlight the consequences and impact of weather trading risk on small and medium company, which directly involve in Enron transactions.

Asian Wall Street Journal (2002) describe that WorldCom intends to sell nonessential assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company. These articles report the company, which has $35 billion in annual revenue, now is nearly out of money and filed under chapter 11 of the U.S. Bankruptcy Code. The protection filling entirely shields the company from its creditors. As apart of the court process, WorldCom creditors, including bondholders and banks, will jockey for payment. The articles further elaborate the bankruptcy almost certainly will wipe out common shareholders, who are last in line among stakeholders in such a proceeding. The analysts’ shows that WorldCom’s assets today may be valued at less than $15 billion compare to market capitalization of about $120 billion at its peak in summer of 1999. These articles mentioned that the first thing WorldCom will do now that it has filed will be to ask the bankruptcy court judge to approve a $2 billion bank loan in the form of senior secured debtor-in-possession financing. Furthermore, WorldCom intend to sell nonessential assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company.  The articles also illustrate that it has secured $750 million of the $2 billion to use in the interim and plans to continue serving its residential and businesses customer. However, they faces a major challenge to hang on to creditors, as some have begun voicing concern that the company’s financial condition could affect service. One of the stipulation the banks made is that WorldCom hire a chief restructuring officer to marshal WorldCom through what has the potential to be a overwhelming reorganization. Articles also mentioned that another step would be for WorldCom to seek authority to pay bills outstanding to some creditors so-called critical trade vendors before it pays bills owed to other creditors. That step is taken to ensure good relations and critical service. The limitation of these articles is fail to mentioned the flow of the secured loan from bank. Articles never mentioned the purpose of the loan whether to be payback to creditors or as an expansion of the WorldCom.

James E.Orlikoff and Monte Dube (June 2002) describe that recently the American Governance & Leadership Group and the law firm of McDermott held a national teleconference that presented the case for expanded liability and accountability for non-profit corporations as a result of the business failure of the AHERF, Enron and WorldCom Debacle. This article focuses on the main points of this teleconference and the valuable advice of several non-profit governance and legal experts extended to boards and CEOs who would like to avoid having their organization become the next AHERF, Enron and WorldCom. The authors commented that new awareness among the populace the fundamental question that was raised by the high-profile debacles was this incredulous layman’s question of, “Where was the board?”.  The articles describe there are few things how this organisation affect not-for-profit years, firstly this organisation has already changed, in part, the landscape and the ground rules for not-for-profits and secondly they know from history that bad facts make bad law and expecting in increasing scrutiny from not-for –profit stakeholders. The authors mentioned that there should be nothing wrong with a dissenting vote. The fact thet there is a cultural inhibition to dissent is a very significant warning sign of ineffective governance processes. Furthermore, authors believed that this marketplace vulnerability is an even greater risk for healthcare organization boards than the potential risk boards than the potential risk of liability. Boards have to be very careful not to over-react to the AHERF-Enron-WorldCom lesson, focusing on micromanagement and focusing on retrospective monitoring of what has occurred. Another concern created by the fallout from AHERF-Enron-WorldCom is the fairly recent reluctance of qualified individuals to become board members because of the risks involved. Whereby this is happening in both the corporate and non-profit sectors. However, the questions of who ensure the system integrity and monitoring the board of directors from the fraudulent aspect were departed.

Andrew Hill, Joshua Chaffin and Stephen Fidler (March 2002) describe that there is a growing suspicion that at the heart of the once-mighty energy trader was a financial hole while questioning of Enron directors and officials. Authors mentioned the combination of aggressiveness accounting, off-balance-sheet deals and nagging of employees and advisers, allowed Enron management to create a virtual company with virtual profit. The articles examine that Enron inflated revenues, for example by treating the turnover of trading through its online subsidiary as revenue. Enron reinforce profits by booking income immediately on contracts that would take up to 10 years to complete. In addition, Enron shifted debts into partnerships it created and in effect controlled, even though defined by auditors as off balance sheet which masked the poorly performing assets with rapid deal making. According to Prof. Frank Partnoy, Enron entered into derivatives transactions with these entities to shield volatile assets from quarterly financial reporting and to inflate artificially the value of certain Enron assets.  The articles determine that in the case of assets, such as long-term energy contract, in which there was no transparent trading, Enron had to estimate fair value. Enron pointed the judgment is necessarily required in interpreting market data and the use of different market assumptions or estimation methodologies may effect the estimated fair value amounts. The articles highlighted that Enron forecast a $36.8m profit over the 10-year deal and used Mark-to-market accounting to book $23.4 m before it had ever turned on Quaker’s lights. Under accounting rules, such treatment is permitted for commodities, such as natural gas and electricity but the rules are more restrictive when it comes to services. Authors added that the profits from these activities are supposed to be booked on a more conservatives “accrual” basis. However, the articles were failed to identify the actual format of financial accounting standard.  The article should have sought to present a more off balance sheet items.

Emerald (2002) describe that unethical, immoral or downright illegal dealings that go on within an organisation was the frightening substance in Enron scandal. As business ethics becomes of increasing concern, take a look the validity of establishing a policy for whistle blowing.  Articles mentioned that Sherron Watkins playing a role as a whistleblowers at Enron scandals. But even when CEOs or directors play no part in unethical behaviour, they have still been known to dismiss whistleblowers as troublemakers.  The survey shows from the external perspectives that tend to see whistleblowers in a positive light, but it is only retrospectively that they are transformed from company pest to public hero. The articles further focuses on Corporate Social Responsibility reports and shareholders accountability and the role of the employees. Articles mentioned that this is the time for introducing code of ethics for whistle blowing to protect both the organization and the employee. However, there must be necessary ascertain what constitutes a genuine whistleblowers concern. Justifiable requirements are:

1. It stems from appropriate moral motives of preventing unnecessary harm to others;
2. That the whistleblowers use all available internal procedures for rectifying the problematic behaviour before public disclosure, although special circumstances may preclude this;
3. That the whistleblower have “evidence that would persuade a reasonable person”;
4. That the whistleblower act in accordance with his or her responsibility for “avoiding and/or exposing moral violations”;
5. That the whistleblower’s action has some reasonable chance of success.

The articles also discussed about the recommendation of checklist by the Audit Commission for Local Government which include the context below:

1. Involve your employee; listen to their sense of right and wrong.
2. When you find serious malpractice, deal with openly.
3. Make it clear that the organisation is committed to tackle fraud and abuse, whether the perpetrators are inside or outside.
4. Employees need to know what practices are unacceptable.
5. Get staff union to back and promote this approach.

The research only draws few samples from the whistleblower and changing the ethics, which may affect   entire of organization. It also failed to illustrate the factors and barriers of successful ethical sourcing strategies.

        

StevenPearlstein (2002) reports on the response of the political system to the recent wave of corporate scandals. The article applauds the quick response to the scandals, noting that several executives now face trials and that the president has signed a new bill regulating corporate behavior, which it describes as "one of the most comprehensive pieces of regulation since the Carter administration."

The article presents only the views of experts who support this position. It could have found experts who feel that the measures taken to date are grossly inadequate. For example, due to the power of entrenched interest groups, Congress has taken no action to require that stock options be treated as an expense, even though a large number of the nation's leading financial experts insists that this would be the proper accounting method. Congress has also taken no measures to curb the practice whereby corporations place their workers' pensions into their own stock. Virtually every financial analyst agrees that it is an inappropriate investment practice to have large amounts of a company's stock in its pension. (For this reason, the amount of a company's stock has long been restricted to 10 percent of the total fund in traditional defined benefit plans.) But, on this measure as well, entrenched interest groups have prevented congressional action, even though the workers at both Enron and WorldCom fell victim to precisely this practice. In short, given recent events, it would have been a simple matter to write a story that presented the exact opposite perspective from the one given in this article. The article should have sought to present a more balanced picture.

ICAEW (2001), in its guide to professional ethics refers to integrity, objectivity and independence. No definition is offered of integrity and independence but objectivity is defined as ‘the state of mind which has regard to all consideration relevant to the task in hand but no other. It is sometimes describe as “independence of mind”’. The IFAC definitions are more comprehensive. Independence of mind is defined as: ‘the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity, and exercise objectivity and professional scepticism’. Independence in appearance is define by IFAC as: ‘the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, would reasonably conclude that a firm’s, or a member of the assurance team’s integrity, objectivity or professional scepticism had been compromised’. EC (2001) claims ‘ integrity cannot be evaluated in advance’. Some experimental researchers have studied these concepts by considering auditors’ moral development and found that the level of moral development of the individual auditor can affect audit outcomes (Sweeney and Roberts, 1997, Falk, Lynn, Mestelman and Shehata, 1999). Falk et al. find, in an experiment carried out with students, that the biggest threat to independent behaviour is the risk of losing a client. This consistent with Beattie et al (1999) who find, from a questionnaire survey of UK audit engagement partners (AEPs) and finance directors (FDs), that the two most frequently cited factors which are perceived to undermined auditors’ independence are: ‘partners’ income depends on the retention of a specific client’ and ‘10% or more of the firms’ total revenue come from one client’. The two most frequently cited factors which are believed to enhanced independence are: ‘the existence of an audit committee composed of non-executive directors, the majority of whom are independent’; and ‘big-six firm’. The limitation for independence of they is now being only four major firms, following the recent collapses of Andersen, is not yet fully understood.

Jepperson (1998) suggests that one effect of the big firms making efforts to differentiate themselves and add value to audit by adopting the business risk assessment process is that the risk becoming more closely identified with the objectives of management, and they consequently risk compromising their approach, the auditor acquires a better knowledge and understanding of the business. Power (2000) continues this argument by suggesting that much greater responsibility for compliance is being forced onto the company through regulatory initiatives, particularly the developments in corporate governance requirements and risk management. If the role of the auditor becomes one of involvement in the design of compliance systems within the company, then independence may be marginalized. This issue emerges as one of the factors in the West Management case (SEC, 2001). Over many years, practitioners and academics have struggled to find definitions for independence in the audit context. Perhaps the best-known definition in the academic literature is that of De Angelo (1981, p.186) ‘ the conditional probability of reporting a discovered breach’. Others include: ‘the ability to resist client pressure’ (Knapp 1985); ‘an attitude/state of mind’ (Schuetze,1994); ‘a function of character with the integrity and trustworthiness being key’ (Magill and Previtts, 1991). More recent definitions contained in pronouncements from various representatives bodies of the profession worldwide extend the definition of a state of mind: ‘ freedom from those pressures and other factors that compromise, or can reasonably be expected to compromise, an auditors’ ability to make unbiased audit decisions. However, the limitation of this books are did not define the integrities of auditors.  

Henry Sender and Shawn Young (2002) describe that the committee will play a critical role in determining the fate of WorldCom, which now is operating under U.S. bankruptcy protection. As chosen by Carolyn Schwartz, the U.S. trustee for the Southern District of New York, the panel will consist of 15 members made up of holders of debt issued by WorldCom and two of its subsidiaries, as well as two banks and two trade creditors.  Meanwhile the articles mentioned that the WorldCom shares would move to Pink Sheets LLC, which provides pricing and financial information for over-the-counter securities. The articles further focus that the federal regulators continue to probe WorldCom’s accounting, Mississippi Secretary of State Eric Clark subpoenaed the records of WorldCom auditors Arthur Andersen LLP and KPMG LLP as part of a continuing probe into whether WorldCom broke state securities law by trolling for investors while using false financial numbers. Authors explored that Andersen audited WorldCom during the period in which the company’s alleged accounting fraud took place; WorldCom hired KPMG after firing Andersen earlier this year for its role in the Enron debacle.  Meanwhile articles elaborated that there are significant gulfs among the committee members, particularly within the bondholders’ group. While struggles between different groups of creditors are part of any bankruptcy process, the fight here will be bitter because of the large sums at stake. The article mentioned that WorldCom owed its bondholders, lenders and suppliers nearly $41 billion. Authors illustrated that the committee include some of the most-experienced distressed-debt players, including Cerberus Asset Management LP and Elliot Management Corp. In addition, some large institutional investors, such as Metropolitan Life and New York Life Investment LLC are on the committee, along with the indentured trustees for the three different note issuers: WorldCom and subsidiaries MCI International Telecommunications Corp. and Intermedia Communications Inc. However the limitation of this article did not mentioned more details about Andersen firing. Furthermore the articles fail to elaborate the role of KPMG in WorldCom debacles.          

Asian Wall Street Journal (2002) wrote that an irregularity was initially picked up during a routine internal audit conducted soon after the ouster of WorldCom’s chief executive, Bernard J. Ebbers, in April. Articles mentioned that WorldCom Official turned the matter over to the company’s audit committee and its auditors, newly hired KPMG LLP, who determined that the issue was serious enough to alert the SEC. The article further illustrate that the agency already launched its own investigation into WorldCom in February. Furthermore the U.S. stocks plunged with the Nasdaq Composite Index hitting a five-year low. WorldCom halted at 83 cents, a far stretch from its high of $64.50 in june 1999. In addition, bonds of WorldCom also plunged were down nearly 30 points to the midteens from the low 40s. Articles identified that many details of WorldCom’s accounting improprieties remained unclear. In its statement, WorldCom said only that “certain transfers from line cost expenses to capital accounts” weren’t made according to generally accepted accounting principles. Articles state that the amount of these transfers totalled $3.8 billion for the four quarters of 2001 and the first quarter 2002. It remained unclear how the company’s banks will handle the news of the accounting problems, and whether the pending restatement puts the company in default of its bank covenants. The implications of banks stocks will tumble on fears that institutions with exposures to the phone company would be affected. This article also revealed that the company’s crisis deepened when one of WorldCom’s internal auditors discovered that starting in early 2001, huge expenses related to building out company’s telecom network weren’t being treated as a regular costs but were being treated as a capital expense, according to people close to the situation.  That resulted in a significant boosting of the company’s earnings before interest, taxes, depreciation and amortization, which WorldCom used as a critical gauge of its growth.  The articles failed to observe the current situation of WorldCom preventive plan to overcome its creditors dilemmas. It’s should mentioned the outcome of the Chapter 11 protection plan more widely against by creditors.

Corey Rosen (July 2002) describe that the issue of stock options, especially for top executive, has become a front-page national issue. Unfortunately, this debate has often been fuelled more by gut reaction than data on just what makes stock options work or fall. The author further explicate that stock options have gone from a relatively obscure and usually small part of executive compensation to an often-unearned windfall of staggering proportions. The articles mentioned that between 20% and 25% of public companies now make options available to most or all of their full-time employees, and some extend them to part-timer as well. Most companies now give out options on a periodic basis, so while employees have some options that may never regain any value, and they also get new options that will have value in the future. A recent study show that companies that grant options to most or all employees show a 17% improvement in productivity over what would have been expected had they not set up such plan (Douglas Kruse and Joseph Blasi). Furthermore many of the advocates for stock options use the fact that they are now get a benefit for ordinary workers to defend stock options against the various slings and arrows now being launched at them politically and economically. The implication of this grant are not specifically tied to above-average corporate performance. The author highlighted that prohibiting executives form exercising their option until they expire or the executive leave would also secure a more long-term focus. Options do not currently show up o corporate income statements. While showing the true cost makes sense, the problem is that no one has come up with a very good way to figure out what the cost is. Moreover, depending on how companies gets the employees shares when they exercise, the cost may be a cash cost or a cost to shareholders in dilution or it may be no cost at all if the options expire before they have value. However, the author failed to highlight the misleading justification between the executive and non-executive. Articles should give more clear method on options for this both employees.

Raymond Kerr (July 2002) exposed that the invasive cancer of avarice and corruption is the probably an indelible feature of the US corporate world and government. The flotsam and jetsam of inveterate corporate fraud are now bobbing to the surface in rapid succession. The articles showing that the mind-boggling accounting swindle consisted of $3.8 billion of operating expenses being incorrectly reflected as capital expenditure, which hugely inflated profits to deceive investors and the markets. These expenses were deliberately distributed across a host account for capital expenses to escape detection in a concerted effort at profit manipulation.  The author merely investigates the parallels between Enron and WorldCom that both corporations fraudulently inflated profits. Enron shifting billions of dollars of debt off its balance sheets and into a plethora of offshore financial partnerships to hide its astronomical losses whereas WorldCom systematically sprinkled billions of dollars across a series of accounts for capital expenditure. The articles mentioned that the concealment of debt and inflation of profit was facilitated as both corporation embarked on phenomenal acquisition sprees. As a result of the frenetic pace of acquisitions it was difficult to achieve cohesion, standardisation and centralised executive control in the myriad subsidiaries. Author further illustrated that the highly fragmented structured of these organisations made them easy targets for the accounting malpractices like off-balance-sheet transactions and derivatives for concealing the rapidly escalating losses, which were largely responsible for their demise. Furthermore, the conflict of interest between the auditing and consultancy functions was swept under the carpet where it festers and eventually erupts. The author failed to address the similarities between the two corporations on issue of money for political influence which increasingly becoming the administration burden.

Bangkok Post (Oct 2002) describe that every business need auditors because they are required by regulators, and changes in today’s complex business world are placing new importance on their experience and activities. The articles mentioned that auditors playing a role to audit the companies’ financial statement for the purpose of reviewing by several important individuals, which is, stated as below:

a)        Owners

        -        Use financial statements because understanding them helps increase shareholder value;

b)        Lenders

        -        Need them to assess borrowers’ liquidity and solvency;

c)        Management

        -        Uses them to communicate strengths and weaknesses;

d)        Suppliers

        -        Want to see them to make sure customers can pay;

e)        Customers

        -        Check them to ensure vendors are reliable.

The articles further discussed that the auditor’s report helps to ensure that financial statement are reliable and that stakeholders are comfortable that reports are prepared in accordance with generally accepted by accounting principles. They also provide an important absolute check on financial statements prior to their release to the public. This article also point out that audit procedures need to be revolutionized after the incidents of Enron and WorldCom debacles. In the past, audit procedures only focused on examining documents that supported transactions, and were primarily collected and prepared by employees in finance and accounting departments. Now it has to be change to more aiming into increasing the corporate efficiency by concentrating on high financial and business risk areas and control-oriented audit approach on the risk based. The article suggested that all the auditors have to pursue performance audit rather than concentrating on documents audit program. In performance auditing, auditor first considers the market in which a client operates that he must informed about local, regional, global and industry trends, competitors’ strategies, etc. The articles also mentioned that the auditing process also have to focus on extending the outside finance function to management units where performance is achieved and value is created. However, the articles are abortive to provide more advantages on performance audit and the successfulness of this audit.

William L. Anderson (October 2002) express that free markets are desirable and unnecessary government regulation may stifle business growth. Authors mentioned that today’s markets are in trouble, betrayed by the practitioners of capitalism and outside regulations imposed by the state can bring back investor confidence and permit free markets to flourish. Authors believed that the right demand standards of accountability should retain by the members of US congress and businessman. The corporations have fabricated revenues, disguised expenses and establish off-balance-sheet partnership to mask liabilities and inflate profits. The articles mentioned that this statement is breathtaking, because its describing current accounting practices of the US government. The “off-budget” practiced are created precisely to hide the trillion of dollars of financial obligations that ultimately fall upon US taxpayers. It can be considered the greatest set of financial frauds in world history, something that puts the collapse of Enron and WorldCom in better perspective. Authors highlighted that the current wave of scandals did not emanate from dishonest motives but rather from the business climate that brought by the reckless effort by Alan Greenspan’s Federal Reserve System to expand credit and create an unsustainable boom. The articles point out that the economic rules that apply during the boom are not the same rules that exist during the bust, when realities of invested resources come to the fore. The boom permits business owners to play much faster and looser with assets and equity; since it seems that whatever decisions they make are good ones. Furthermore the article urged that top executives should be required to certify personally that the company’s public financial reports are accurate and that all information material to the financial health of the company has been disclosed. If their certification is false, they should go to behind bar. However the limitation of this articles is impossible to know the over projections made by executives at Enron and WorldCom whether the result is from the deliberated fraud or simply came about because of boom induced calculations.

   

Emerald (July 2002) proposed a new transformation on the changes in management, internal communication and for further organizational development. The articles describe that the WorldCom’s false figure, “Enrongate” and now AOL’s dubious accounting became major corporate scandals such as these have served to reinforce the unpredictable nature of modern management. But as organizations resign themselves to the inevitability of yet more re-structures, re-budgeting and re-alignment on this lean times. Articles mentioned that transformation becoming yet another established part of the corporate vocabulary and is used with more and more regularity in a variety context. The articles also analyse the fundamental difference between change and transformation. Transformation is the only alternative to corporate oblivion where mere change and view as something of an incremental concept that has tendency to focus upon processes rather than culture, tangible as opposed to intangible. On the other hand, exploring what it implies or how it is perceived can help us to utilize this management technique effectively within the organization. The articles conducted a review on the most recent research three sets of issue are pertinent to understanding the various definitions of transformation in the current corporate arena which is stated as below: -

        (a)        Criteria for transformation: from behavior to paradigm

• This reinforces the assumption that transformation is about generating success where previously there was failure as well as changing beliefs and values regarding the organization future. To top management, transformation is not about incremental alterations but definite qualitative difference.

(b)        Transformation is bigger, wider and deeper

• When contrasted with Organizational Development (OD), Organizational Transformation (OT) is perceived bigger, wider and deeper. OT is a district form of planned and had a basis of inherent characteristics, whereas OD is less ambiguous in response on adaptation in market changed.  

(c)        The material and spiritual

• The top management must acknowledge that such upheaval could engender feelings of resistance and unease amongst employees.

The research only draws few samples from transformation and fails to find evidence of inherent transformation type that can be a tool for the management to shift their paradigm.

 

Research Methodology 

During this stage, this research held several sessions and method to identify the major problems models on Enron and WorldCom episode based on their research efforts to date.  Referencing articles, web site discoveries, and online experiences, the survey ultimately developed a list of five key models, which is stated in figure 2.  The survey then developed high-level diagrams for these models and identified the key methods of preventive steps and established a high quality of management and accounting system as well as other economic benefits for each model.

Figure 2 :        Research Methodology Framework

Discussion, Analysis and Finding

Implementation of quality management and accounting system

The Enron collapse has focused world attention on accounting standards and the role of auditors. Accounting bodies has been reviewing the issue because it concerns members in two ways.

As investors they need to consider the quality management on accounting standards, corporate governance implications and possible regulatory impact, especially with reference to the impending government review. As preparers of accounts, they need to reassure themselves that the practice is sufficiently robust and that any regulatory changes following Enron and WorldCom will lead to genuine improvements without adding unnecessary cost.

More generally the financial and business community has an important interest in ensuring that confidence in the audit process is maintained. Otherwise there is a risk for companies and their shareholders of unexpected and arbitrary withdrawal of capital from suspect businesses.

The issues are complex, and it is clear that knee-jerk reactions are not appropriate. Hasty conclusions will not necessarily strengthen the system. Indeed, they may open up the risk of further trouble in future.

It makes suggestions, which focus on the need to ward against conflicts of interest between auditors and their clients. These are not a complete and definitive list of proposals for change, but more an initial contribution to what needs to be a wide-ranging debate.

Evaluation of external and internal auditors on independency and diligence 

A number of separate groups have an interest in a company’s accounts: management, shareholders and lenders, and where relevant regulators. While all have a genuine interest in understanding the business and its prospects, the motivation may not be the same in every case. Management has an incentive to paint a positive picture to the other groups. Shareholders and creditors need an objective view.

Accounting rules need to be robust in order to ensure that the picture is objective. The audit process needs to be independent in order to prevent undue influence by management. Though a complete picture has yet to emerge, it looks as though Enron and WorldCom’s collapse revealed shortcomings on both counts of robustness and independence.

It is thus appropriate to review of accounting bodies practice from these standpoints. There may be a case for change in some areas, but these should not generally go in the direction of detailed prescription and additional rule making. US practice differs from other country that it is more flexible and less rule-bound. Because it values substance over form, it is likely to produce more reliable outcomes. This approach should also be preserved for the elaboration of international standards, which are due to enter force in the future accounting conference. It would be wrong to shift towards a more rule-based approach in the wake of Enron, not least because that would encourage companies and their auditors to seek loopholes.

It is commonly considered that, had Enron and WorldCom been incorporated in the other country, it would not have been able to move so much of its business off its balance sheet, or to book future profits prematurely, or to treat turnover in energy trading as revenue.

Nonetheless it is appropriate that investors and audit committees should tighten their scrutiny of the audit process. Beyond that, it is particularly important to examine ways in which the system can be strengthened to limit conflicts of interest. Auditors must be in a position to resist pressure from managements to present an overly positive view of the business. They must not make themselves vulnerable to such pressure by coming to rely heavily on fees for non-audit consultancy work from companies whose accounts they audit.

External and internal auditors continually strive for improvement and eliminating the conflict of Interest

Two main means of preventing conflicts of interest have featured in the debate over Enron and WorldCom. Some have suggested that auditors should be rotated on a regular basis. Others have suggested that there should be a formal separation of the roles of auditor and consultant. Both ideas have attractions. Both have flaws. Of the two, that of rotating auditors is the more problematic, because there would be regular periods of transition during which scrutiny would be weak. Critical issues might thus be overlooked.

A more practical approach might be to impose more frequent rotation of audit partners than the current seven-year norm. This would be part of a process that would also ensure a steady and continuous rotation of audit teams. Some members believe the audit partner should be rotated every three years. Another suggestion is that the audit partner be named in the annual report. This, it is argued, would instill a greater sense of personal responsibility and raise the quality of the audit.

Another idea, to which shareholders attach considerable importance, is that the audit partner should not move across to a senior position within the client company, particularly as finance director. While shareholders are not in favor of rotating auditors, they do believe that such an appointment should automatically trigger the appointment of new auditors. The idea of separating audit and consultancy work also finds some support. This is also the direction in which the market is moving, especially in the US.

However there are reservations on two counts about prescribing such change. First there are definitional problems. Some types of non-audit work fall naturally to auditors. An example is the preparation of regulatory returns for insurance companies. For this reason the accounting bodies has resisted the temptation to prescribe a formal separation of the audit/consultancy role or to prescribe any maximal for the ratio of non-audit to audit fees.

There is, however, scope for strengthening governance in this area, even as an interim measures pending the conclusion of broader debate. The U.S. accounting bodies already monitors the ratio of audit to non-audit fees. When the latter exceed the former and now plan to follow through with a letter to the chairman of the audit committee, asking for an explanation of the fees, confirmation that the committee is comfortable with the award of non-audit work to its auditor and to state whether non-audit work had been put out to tender.

A second concern that is sometimes voiced in this debate is that auditing will cease to attract talented individuals if it becomes a dead-end activity. This is all the more questionable in that audit firms sometimes put it forward in order to justify their activity as consultants. The notion that audit work is simply a means of acquiring the contacts and knowledge that lead on to consultancy work debases the importance of the audit process. It suggests that there may be an element of cross-subsidy in which the audit is effectively a loss leader designed to attract lucrative consultancy work.

If institutional shareholders want to ensure that company accounts are properly audited, they must be prepared to sanction appropriate fees. It may well be that audit fees should raise as standards are tightened in the wake of Enron and WorldCom. Shareholders should support this if it leads to higher quality audits and reduces the temptation for audit firms to raise additional revenue through consultancy. There are two provisos. First it would be wrong to concede higher fees simply because a contraction in the number of large audit firms had reduced competitive pressure. Companies need a diversity of choice when looking for an auditor. Second, higher fees would also require higher standards of supervision.

There is a strong case for revisiting the role of the audit committee and for requiring it to make regular disclosure in the annual report about its activity in supervising the audit process. Such disclosure would increase the accountability of the audit committee. It would include confirmation that the committee had assured it that the audit process was suitably independent and that any non-audit work had been awarded on an appropriate basis. Shareholders should satisfy themselves that the audit committee was qualified to make such assurances.  

Corrective and preventive actions to eliminate recurrence of financial debacle

The Board and U.S. government have been examining the impact of the collapse of Enron and WorldCom. The preliminary conclusions as to how the preventive and corrective actions against the audit process in the wake of that event.

It is written on the basis that knee-jerk reactions would be dangerous and there should be widespread and careful debate about any changes to make sure that they are genuine improvements. It makes the following main points:

• Forcible rotation of auditors is not desirable because scrutiny would be weaker during the transition from one audit firm to another. Instead, it would be more sensible to rotate audit partners more frequently than the current norm of seven years.

• New auditors should, however, be engaged if the audit partner is appointed to a senior position in the client, for example as finance director.

• It is not practicable to force a separation of audit and non-audit work because there are too many definitional problems. For example auditors are best qualified for the task of preparing regulatory returns for insurance companies.

• However, audit committees should be made more accountable for ensuring that the audit process is independent, and that non-audit work has been awarded on an appropriate basis. They should reassure shareholders on this point by disclosure in the annual report. U.S. Government plans to step up its governance effort work in this area by seeking explanation of how work has been awarded in cases where audit fees exceed non-audit fees.

• Audit work should not be a loss leader. High quality audit may require higher fees. These would be worth paying if the result was improved protection against Enron-WorldCom style collapse, but higher fees should not simply reflect diminishing competition as a result of a contraction in the number of large firms offering the service.

  Limitations of the Project

 

The major thrust of the efforts of this mini project has been externally focused.  In other words, this project focused primarily on the preventive steps of the accounting scandals/fraud rather than on the inner debacles of the Enron and WorldCom.  This external focus was largely due to the objectives of the project, which was tasked with focusing on all organization, not simply on Enron and WorldCom itself.  Nonetheless, some internal study of this both organizations was essential to successful completion of the project, and to that end it’s made every effort to work closely with the Enron and WorldCom project.  However, the paper was limited in that respect because the issues are not privy every day to Enron and WorldCom by internal information and the actual problems and difficulties are not rising by this organization. For this reason, it is possible that some of the team’s assertions and recommendations might not be compatible with Enron and WorldCom growth strategy.

Conclusions

There are two main ways in which the present system could be strengthened. First audit partners should be rotated more frequently and actively discouraged from moving to senior jobs within client companies. This would prevent them from becoming too close to the companies with which they are involved.

Second, short of a formal ban on consultancy work, there is a need to encourage a greater awareness of the importance of ensuring that consultancy work is awarded on an appropriate basis. Putting non-audit consultancy work out to tender would help but is not the entire answer. There must be a strong onus on audit committees to ensure that auditors are producing objective work and that non-audit work is awarded on an appropriate basis. The diminishing opportunity to cross subsidise audit work from consultancy fees may mean that audit fees would have to rise. However, this would be a price worth paying to prevent a repetition of a collapse as damaging and expensive to so many people as that of Enron and WorldCom.

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