Enron has clearly highlighted the fact that the American accounting standards have become too casual in nature. The treatment of items associated to off-balance sheet have also reflected the same. Nevertheless, in other scenarios, they are so arbitrary that wider principles have become immensely disregarded. In addition, previous endeavour on the FASB’s part to enhance the standards have also hampered through outspoken lobbying. Therefore, it is required that the SEC (Securities Exchange Commission) must develop effective standards and the same must be implemented through sound principles including paying less focus to single amounts for revenues apart from exaggeratedly explained rules. Furthermore, development of globally agreed standards can play a primary rule in advocating the profession of accounting in future (Livne, 2015). Nevertheless, another primary moral that can be attained from the Enron disintegration is that auditors and accountants must interrogate before progressing with their specific jobs. The primary aspect owing to such moral can be because the auditors (Arthur Anderson) have failed to ascertain the financial lists for complicated organization and thus, they continued the process even after the company had became a significant merchant of financial bonds and speculation in the industry. Another moral in Enron’s case would be to take commitment for the accounting profession from the private firms and then stock, offer, barrel, and lock the same to the statutory authorities. Moreover, such change may become mandatory accounting for the complexities in the current situation. Besides, it is also risky in association with the quality of auditors and hence, it is not compulsory that a government authority can assist in avoiding such complications to which the private accounting firms have witnessed major issues. Hence, as an intermediate step, the most crucial recommendation in the case of Enron will be to follow the path of choosing those auditors who are not involved in the senior department.
In the case of Lehman, the accounting world had faced a major issue as well. Hence, the moral lessons that is observable from such disintegration are that the policy-makers like IFRS and SEC must frame proper policies and measures so that such fall can be safeguarded. In relation to Lehman, the firm maximized its transactions of Repo few days before the reporting tenure. Thereafter, the company borrowed the same to buyback after such reporting tenure (Mock et. al, 2013). This concludes the fact that an effective audit of the quarterly financial statements of the firm can play a key role in portraying such unethical treatments of Repo 105 transactions in addition with the mortgage quality implemented by the firm (Lapsley, 2012). Nevertheless, the cause behind moral can be because such auditing profession had been ineffective to track or reflect such issue that can also highlight the inefficiency on the part of statutory authorities (Livne, 2015). Thus, in relation to the disintegration of Lehman Brothers, preparation and evaluation of financial statements in addition with the auditing measures can assist the statutory bodies in recognizing the wrongdoings that have been facilitated by the financial bodies (Kalpan & Williams, 2013). Moreover, one additional important lesson in relation to this case is that more concentration must be placed on the activities of huge organizations in terms of supervision and monitoring as the impact of their ineffectiveness can be very destructive to the overall financial system. Overall, in the presence of standards like ASA 701, the auditors could have easily recognized all the facts and details of the firm (Mock et. al, 2013). Therefore, if such standard was not present during the collapse of Lehman, the auditors became incapable of identifying such significant facts.
Enron
In relation to Enron, it can be visible that the American accounting standards are way to problematic and troublesome in nature. Further, off-balance sheet items such as dodges were properly treated but, in many cases, several statutory guidelines were discarded. The financial bodies like the FASB (financial accounting standards board) intended on enhancing the effectiveness of such standards that were widespread with the assistance of intense lobbying. This gives rise to various standards and approaches that the SEC must implement through the adoption of sound principles. These principles must concentrate on single values for earnings over exaggeratedly explained rules. Besides, there are standards that must be implemented globally and acknowledged by every organization. Nevertheless, owing to the collapse of Enron, accountants and auditors must learn to interrogate regarding the activities of the company (Geoffrey et. al, 2016). This is because the auditors of Enron failed to seek financial lists for the organization and continued the auditing job even though the financial bonds can be easily speculated. In addition, collecting the obligations for the accounting world through the private firms and thereafter, stocking, barrelling, and locking the same to regulatory bodies was another crucial lesson owing to Enron failure (Vause, 2009). Therefore, in relation to the lessons obtained from such failure, there are various alterations or changes that must be made within organizations.
In the case of Lehman, the auditing fees that was charged by the Big Four played a key role in generating major questions on the ethical standards of auditors. Furthermore, the reports that were submitted by the auditors were unqualified in nature. Nevertheless, massive amount of resources was attained by the accounting firms that were $1.4 million in the form of fees and thereafter, it became insolvent. Moreover, it is the prime duty of auditors to depict the actual financial performance of companies through their report. However, in this case, it can be witnessed that the independence and responsibility of auditors is a complicated issue and the same remains unascertained in nature (Wood, 2011). Besides, the audit fees to be attained by the auditor depends upon the unqualified opinion offered by the auditors.
In the case of Lehman, the auditors failed to exert proper attention towards the auditing standards. This is the reason why few items in the financials are not offered extra focus. Nevertheless, as a result, it forms part of the financials and investors attain a fraudulent view of the industry (Tadros, 2017). Therefore, loosing customers can assist in highlighting the company’s investors are withdrawing their investments from it, which is a negative indicator. Overall, the auditing measures must be enhanced through the provision of additional transparency so that the auditing firm can be altogether improved.
The audit reports must reflect a true and fair view of the financial performance of organizations and must not be biased in nature. Further, the performance area of an auditor in conducting his roles must be experienced and professional in nature. Moreover, an auditor must carry out his roles with integrity and dignity and must not be affected by things that can pave paths for discrepancies (Gay & Simnet, 2015). Nevertheless, threats or factors that can influence an auditor in undertaking his roles are biasness, acceptance of gifts in kind, threatened suits, etc. Hence, it is crucial for the auditors to be free from such issues that can assist in the facilitation of fabrication or manipulation in the audit report, thereby providing a true and fair view of the company’s performance. There are two basic incentives that can be offered to an auditor for undertaking his roles (Tadros, 2017). The first incentive is direct incentive whereas the other is indirect in nature. Moreover, potential or actual incentives are in the way of direct incentives that can be offered to the auditors wherein their interests admix with that of the management in a way that can result in manipulation of information, thereby playing a role in misleading the investors and spoiling their interests on a whole. Further, the personal auditors’ interests collaborate with that of the preferences of the management because of the fees offered to them by the client so that information can be fabricated. Thus, to allow the auditors become less burdened through the management, financial reliance measures can be adopted that consists of various scheme so that the duties are undertaken in a proper way (Fazal, 2013).
Due to the collapse of Enron, a crucial rule was framed that was called as the Sarbanes-Oxley Act of the year 2002. This rule possessed a major power on the auditing processes and the most significant feature was the implementation of PCAOB (public company accounting oversight board). This organization assisted in monitoring the auditors of public companies so that the company’s interests can be safeguarded and some rules can be framed that can assist in overall effectiveness in the long-run (Sikka, 2009). Besides, this is crucial in the adoption of fresh standards associated with areas like ethics, quality check, etc that are relevant in protecting public interests on a whole.
Owing to the collapse of Enron, the audit committee came out as a significant response. This introduction was a prime matter of corporate governance that was a boon to the auditors because the same focuses on compliance. Moreover, the same was made compulsory that assisted in increasing the transparency and effectiveness. Nevertheless, in the year 2003, auditors were made subjected to few rules that did not permit them to perform non-auditing services (Elder et. al, 2010). However, with the introduction of Sarbanes-Oxley Act of the year 2002, the same was allowed apart from services like book-keeping, assessment of financial statements of same audit’s client, adoption of financial policies and measures, etc.
In relation to the collapse of Enron, it can be seen that its aftermath resulted in the establishment of fresh or new finance standards from the regulatory bodies that assisted in making the entire economy transparent and reliable in nature. Furthermore, in the year 2003, it is observable that the FASB was framed and that played a key role in addressing all the prevalent issues in the auditing profession. This included recommendation on the part of the board to accommodate liabilities, assets of the Special Purpose Vehicle into its financial statements so that the investors can easily ascertain the truthfulness behind the financial performance of the company (Niemi & Sundgren, 2012). Nevertheless, this measure was primarily framed and directed towards disclosures that assisted in making the entire system more pronounced in nature. Moreover, the International Accounting Standards Board also assisted in framing a standard that assisted in enabling stock options to become expensed.
From the disintegration processes faced by firms like Enron and Lehman, the ineffectiveness on the part of accounting and auditing system can be taken into account. Moreover, it has resulted in the establishment of moral lessons that can considered for future effectiveness so that such scenario can be prevented. Further, the issues encountered by the Lehman Bros firm is a negative once and to mitigate such scenario, it is required that the companies must adopt such moral lessons and must learn from the causes of accounting failure. Furthermore, policy makers like the IFRS and SEC must pave a path for adoption of strict rules and regulations for companies so that they are not able to conduct illegal or unethical means. Moreover, the usage of Repo 105 transactions was immensely accommodated in the financials of Lehman and the company borrowed such transactions after the reporting tenure to buyback the same. Therefore, accounting profession must adopt and create new measures that can enhance the auditing standards in the upcoming tenure. Further, the management and auditor are the ones that can enhance the quality of audit and therefore, the auditors must be familiar with the clients of the company so that the auditing job is undertaken effectively. Besides, the audit reports must be prepared based on requisite standards so that all necessary norms have been duly adhered to. Overall, all such issues in the cases of Enron and Lehman have played a key role in shedding light on the fact that there is an urgent requirement for a periodic re-evaluation of the standards of auditing. The reason behind this can be attributed to the fact that this step can play a key role in allowing the firms to work effectively and deliver reports that are free from flaws or errors, thereby assisting in the decision-making process of users of accounting.
Conclusion
In light of the scandals like Enron and Lehman, the ineffectiveness on the part of auditing and accounting profession has been adequately highlighted. In both the cases, the firms adopted illegal measures to enhance their reputation in the market but the auditors failed to report the same and offered an unqualified opinion that reflects their ineffectiveness. Therefore, to prevent such scandals in the future, it is highly required that the regulatory bodies like IFRS must frame strict rules so that companies cannot go beyond the same in adopting an illegal way to enhance their image. Besides, this is the need of the hour because material risks in the businesses of companies can make them vulnerable to disintegration and the same happened in the cases of these firms
References
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