The Failures Of Recognizing Enron S Problem Accounting Essay

Stock option award is one of the jobs that cause Enron failed. In Enron, direction parties were more emphasize on the manner to actuate themselves for doing determinations by utilizing stock option because they will acquire excess fiscal benefits straight besides their salary if the Enron ‘s stock rose. Besides that, direction parties can acquire the same benefits or involvement with stockholders. This will convey disadvantage toward stockholders and creditors who provide capitals or put in Enron if compared to direction parties who are non supplying any capitals into Enron but besides can bask the benefits with them. Harmonizing to Hall and Knox, 2002, Enron had experienced the addition in short-run stock public presentation with stock option awards as a incentive to directors but do non make any value in the medium or long term.

Role of audit commission

Enron ‘s audit commission members consist of a batch of expertness and qualified people such as professors or presidents from some universities, and besides adept parties from other states. They covered a immense figure of of import issues such as study on revelations associating to judicial proceeding hazards and eventualities and so on by utilizing 85 proceedingss. Somehow, Enron have those expert and experient professions as it audit commission members, none of them have second-guess and assurance to the hearers on some of the proficient inquiries which are related to the particular purpose entities and no uncertainty on the cogency of representations of top direction. Harmonizing to Powers, Troubh and Winokur, 2002, it was mentioned that Enron ‘s audit commission was no uncertainty about certain possible struggles which related to party minutess and no full revelation of those minutess are required.

Role of external hearers

Arthur Andersen, who is the Enron ‘s hearer, has been charged in using the lax criterions in their audits because of the involvement over the important consulting fees generated by Enron. It has been said that the audit fees of Enron is approximately 27 per centum higher than the audit fees of Arthur Andersen ‘s Houston office populace clients. Andersen besides tried to cover up any impropernesss in Enron ‘s audit by tear uping all the back uping paperss. Audited account houses are confronting the force per unit area for the two major alterations in the seventiess. First, audit houses are allowed to publicize and vie with each others when the Federal Trade Commission is concerned with the oligopoly by the big audit houses during the mid-1970s. Second, the company with questionable accounting information is no longer to be shown in order to do the investing as they can trust on the stock monetary value itself. These alterations have increased the judicial proceeding hazards of hearers. The cost of audits can be reduced by practising the mechanical accounting and auditing criterions and developed criterion operating processs to cut down the variableness in audits. Besides that, it will besides supply a defence in the instance of judicial proceeding. The impact of the failures of Enron ‘s hearer to show the pure audited study is the regulators and general public perceive that hearers are beholden to their clients.

Role of fund directors

In the late of 2000 and get downing of 2001, 60 per centum of Enron ‘s stock owned by big institutional investors such as Barclay ‘s Global investors, California Public Employees Retirement Fund, Morgan Stanley Investment Management and so on. Good state of affairs of Enron does non last thirster, in the terminal of 2000, Enron ‘s public presentation been questioned by “ The Energetic Messiah ” , 2000 and James Chanos who is a fund director of Enron besides realized that there are some jobs from revelations about party minutess. After that, Chanos sold out all the stock in November 2000. Three months subsequently, he revealed the jobs happened in Enron at Fortune. From October to December of 2001, the institutional ownership of Enron dropped from 60 per centum above until 10 per centum within one month because of the proclamation of Enron ‘s accounting jobs.

There are some grounds that can explicate on the factors which will take to fund directors non alarm to acknowledge the jobs at Enron. First, the fund directors were misdirected by the aggressive accounting or sell-side analysts of Enron, due to unrealistic outlooks of future public presentations. Another ground explained that the fund directors failed to acknowledge on Enron ‘s hazards because they are on demanded with the high-quality, long term company analysis. For illustration, Enron do non concentrate to cardinal analysis because index financess were of import proprietors of Enron stock. On the other manus, non-index fund directors rewarded based on their comparative public presentation. For illustration, if the director keeping less fund of Enron, the stock autumn in the following one-fourth, the fund show superior comparative portfolio public presentation and pull new capital. If the fund directors are continue to execute good on the following quarters, so he or she will underachieve the benchmark and new capital will flux to other financess. Some of those risk-averse directors, who keep avoiding others to fault his or her public presentation, they will merely follow the crowd because of the stock clangs go on, no 1 will fault them since other financess besides done a same error. In current stock downswings period of Enron, most of the fund directors will merely follow the crowds, and put more attending in placing when the crowd will purchase or sell, about disregard about their ain cardinal analysis.

Role of sell-side analysts

The falling of Enron is besides because of the failure of sell-side analysts to supply an earlier warning of the jobs faced by Enron. Lehman Brothers, UBS Warnburg and Merill Lynch which were known as the reputable establishment have issued “ strong bargain ” or “ purchase ” recommendations for Enron. The account for why the analyst failed to supply an earlier warning of the jobs of Enron is many analysts had fiscal inducements to urge Enron to their clients in order to back up their houses ‘ investing banking trades with Enron. Many fiscal analysts will have fillips if they support investing banking as investing banking had reported an earning of more than $ 125 million in subventioning fees from Enron from the period of 1998 to 2000. The analyst ‘s one-year-ahead prognosiss of Enron ‘s stock monetary value are deflated by its existent monetary value on the prognosis day of the month. This is because of the possible struggle of involvement from investing banking ; monetary value grasp expected by analysts of investing banking with no banking ties is different from the analyst of investing banking with banking ; analysts with no investing banking concern were capable to optimistic prejudice. Some academic research has been carried out and it shows that sell-side analysts are influenced by their propinquity to investing banking. Lin and McNichols ( 1998a, B ) , Michaely and Womack ( 1999 ) and Dechow, Hutton and Sloan ( 2000 ) show that analysts who work for lead underwriter Bankss are more optimistic on the long-run net incomes prognosiss and investing recommendations. The diminution in sell recommendations by analyst over clip and the hapless record of analysts that covered dot-com stocks is chiefly because of the struggle between research and underwriting. Furthermore, sell-side analyst besides faced many potentially serious struggles. First, analysts are excessively relied on entree to direction for inside information to do the feedback on their analysis and research. The job is that the direction is less likely to let the analyst to entree to the company ‘s chance which is on critical and negative. Sell-side analysts do non do their projection on their ain. They make it in a web which relates the relationship of the investing bankers in their houses, the direction of their companies and besides their clients who read their studies.

Responses

The investor fundamentally wants a fiscal transparence which means that they need equal information on how faithfully a company is being run and besides its chances and hazards. But the audit commission ‘s function is limited to guaranting that the house is following the general accepted accounting rules as certified by the outside hearers. Therefore, many have proposed that the audit commission be renamed to transparency commission where the hearers realize on their duty lies with the board but non with delighting the top direction. Besides that, there is a struggle between scrutinizing and confer withing patterns. But the most of import thing is that hearers have to recognize that their being is to assist investors place stocks that are in a good investing. Furthermore, the hearer independency can be merely achieved when hearers treat audit commission as their existent clients but non the top direction. There are besides proposals which subject hearers to increased judicial proceeding hazard. This is due to all concern activities which are designed to make value must dwell of its ain hazards. Besides that, houses should be able to walk off from the clients that are prosecuting non-value making concern schemes although they are no accounting dissensions. Then, we besides need to manage our concern failure decently. The concern failures non merely can be responded through judicial proceeding but it is besides can be responded with the proper analysis from an independent organic structure of experts.

Finally, we can reason that the failures in supply of information which is needed by the hearers and the audit commission are really of import. Besides that, the failures in the demand of information besides lead to the really high degrees of Enron ‘s stock monetary value which are based on unrealistic public presentation outlooks. In the nutshell, we still need to hold a deeper consideration of the ends, inducements and interactions of these capital market mediators although there is a speedy holes such as dividing hearers from advisers or sell-side analysts from investing bankers may be worthwhile.