Enron and WorldCom Case Study This report is based on the demise of Enron Corporation and WorldCom. Both the firms are demised due to the ethical lapses. These ethical lapses come into existence when managements of the firm, uses unethical practices to accomplish the goals of the firm. Maintaining financial and accounting standards in the business practices are necessary. The profession of accounting has become a mockery due to the accounting scandals that took place all over the world in the last decade (Smith & Smith, 2003).
The major companies involved in it are Enron, WorldCom, etc. By means of the following paper, the reader will be able to understand the various reasons that are associated with the ethical accounting practices, reasons behind dissolution of Enron and WorldCom, ethical violations done by Enron and WorldCom in accounting practices and the role of business ethics in financial strategic planning. Dissolution of Enron Corporation Established in 1985, Enron Corporation was formed with the acquisition of Houston Natural Gas by InterNorth.
The fraud case of Enron is highly complicated. It is also that that failure of Enron is due to the implementation of accounting method ‘mark to market’. The use of this method and other questionable practices made it complex to identify how the company was making profits. The profits were recorded in the books which influenced the stock price of the company. But Enron Corporation was not paying taxes according to the profits (Hinman, 2002). The accounting method used by Enron allowed it to make profits and maintain the growth without any taxable cash.
The company underwent complex deals which no one could understand whether they were legal or not. Finally the leading energy corporation started falling. As the stock came down, raptors also declined. In the year 2001, Chief Executive officer of Enron Jeff Skilling resigned due to his personal problems. The resignation of CEO shocked the industry and the management (Hinman, 2002). Dissolution of WorldCom The WorldCom Inc is a telecommunication company and Bernard Ebber was he former Chief Executive of WorldCom Inc, who was found guilty because of accounting scandal. The accounting Scandal of Bernard caused the bankruptcy of the WorldCom Inc. The accounting scandal includes the amount of $11 million, which also caused the loss for the investors. Bernard presented false financial statements to the investors to attract more investment in the company’s projects. The corporate image of the WorldCom Inc. also declined because of the Bernard Ebber case (Crawford, 2005).
The investor felt hesitation to invest the money in the stock of the company due to fear of the accounting irregularities in the financial statements. A huge amount of reduction was also seen in the earnings of the company. Ethical Violations in Accounting Practices at Enron Corporation and WorldCom The image and reputation of the accounting profession is built due to the members who are involved in this profession with the highest sense of honesty and truthfulness in the interest of the public. Both Enron and WorldCom have violated ethical and accounting principles of honesty and integrity.
These companies have failed in the industry; due to the accounting scandal has provoked the full-scale reconsideration of the corporate government practices, regulatory oversight mechanism, accounting/auditing and financial reporting industry and the interiority of security market of the United States (Hinman, 2002). Enron had not provided true information regarding their financial position and mailed their stakeholders such as employees, investors, public, etc. Arthur Anderson and Enron conducted them self in the mist biggest accounting scandals, they misrepresent their accounting data and inflated the profits (Hinman, 2002).
WorldCom is also involved in corporate fraud and violation of ethical business practices and accounting standards. The company became bankrupt as there were problems in its auditing. Financial disclosures of WorldCom were also not proper and the employees of the company were corrupted. They were followed loose business and they were not honest for their stakeholders and general public (Crawford, 2005). These companies did not follow the right ethical standards and deviates from the ethical path, which had destroyed their corporate image as well as, loss of clientele.
Telecommunication industry was also suffered by this fraud. In order to meet the revenue target, the service and equipment orders were also broken by the company even if they were not provided. Role of Business Ethics in Strategic Financial Planning Ethics and ethical values are very important in accounting, strategic financial planning and decision making process for every organization where accounting standard is followed. The base for getting success is that business and accounting ethics should be followed. Unethical behavior is not a key to achieve heights in business (Subramanyan, 2002).
James Brackner, one of the members of IMA (International Management Accounting) Committee in July 1992 said that ethical training for decision making is emphasized by the universities. Honesty, excellence, integrity, responsible citizenship, promise-keeping, respect for others, fidelity, caring, fairness and accountability are “Ten Universal Values” given by Michael Josephson (Subramanyan, 2002). The best ethical behavior in the field of accounting and decision making is that all the companies should follow the International Accounting Standards.
Standards have been developed for similar and regular working of different organizations (Smith ; Smith, 2003). The culture of organization has been converted from professional concern to business concern. Accounting and financial decision making are two major fields which need to behave in a best ethical manner; these two processes are important tools which play a huge role in the success of a company. Following the right ethical policies will lead to development of a good corporate image, as well as, will build up the trust and confidence of the customers.
It will keep the employees satisfied and will control the illegal activities taking place in the organization. If right moral conduct is followed, the company will be able to build up healthy and long term business relations and will have loyal customers (Corporation Basics, 2009). This will assist in increasing the profitability of the company and will add to its future growth and success. Thus, on the basis of above Discussion, it can be concluded that ethical standards can definitely help to keep a check on corporate fraud.
The right ethical code of conduct should be followed and corporations should focus on making the employees aware of the various ethical policies. This will be helpful in controlling the wrong activities of the company. The various ethical considerations ought to be a part of every organization and play an important role in shaping the ethical conduct of the employees and the management. Works Cited Corporation Basics (2009). Retrieved February 9, 2010 from http://www. nolo. com/article. cfm/objectId/78FC3C83-30C0-4E57-9F6C7E7F8B45E726/catID/B491956E-A152-424B-A2342A5861B5EACF/111/182/241/ART/ Crawford, C. (2005).
Ex-WorldCom CEO Ebbers Guilty. Retrieved February 9, 2010 from http://money. cnn. com/2005/03/15/news/newsmakers/ebbers/ Hinman, L. M. (2002, March). A Moral Challenge: Business Ethics after Enron. Retrieved February 9, 2010 from http://ethics. sandiego. edu/LMH/op-ed/Enron/index. asp Smith, K. T. ; Smith, L. M. (2003, June 21). Business and accounting ethics. Retrieved February 9, 2010 from http://acct. tamu. edu/smith/ethics/ethics. htm Subramanyan, S. (2002). Business ethics: Precept easier than practice. Retrieved February 9, 2010 from http://www. thehindubusinessline. com/2002/10/08/stories/2002100801900900. htm