Accounting for Enron need now
1. Donald Duncan had responsibilities to all of the parties mentioned and he failed in the areas of due diligence, was guilty of acting negligently, and showed a complete lack of ethics throughout his involvement with Enron. As the head auditor, Duncan had the responsibility to maintain the highest professional accounting and auditing ethics, and to lead the auditing team in a responsible, unbiased manner. Due to several factors taking place at Enron, most of which surrounded Duncan and his firm collecting in excess of $100 million per year in Enron consulting fees, a healthy, skeptical auditor/client relationship was never maintained.
All auditors, including Duncan, are to maintain an unbiased attitude and they are also required to maintain a healthy level of skepticism - knowing fraud and misstatements could be present, but not judging without the supporting evidence that would arise from a proper audit, which is another element that was never actually provided by Duncan. Duncan was responsible for providing the best professional service that he was capable of, to his employer, Arthur Andersen. Duncan also had a responsibility to Enron's management, which was to perform a thorough, clean audit. Auditors don't audit companies for the benefit of the company; they audit companies for the benefit of the shareholders.
Duncan had a duty to shareholders to produce a clean audit, which would have showed the stockholders were losing money. When Enron collapsed, it actually was big enough to impact the market and the economy. This could have been mitigated earlier if Duncan had acted as he should have. Duncan's actions, including the ordering of Enron documents to be shredded, were and still remain a disgrace to the accounting profession and to business ethics.
2. There is nothing inherently wrong with aggressive tactics, including aggressive accounting practices, as long as the practices remain legal. The problem in this case is that the accounting and legal practices were not legal. Nancy Temple is an attorney and knows what documents will and will not produce the most reliable forms of evidence. This was the sole reason why she ordered Duncan to start shredding Enron's audit documents. The only point at which she ordered the Andersen staff to stop shredding documents was when the SEC gave official notice to Andersen stating that they were seizing Enron documents. An SEC investigation was foreseen, yet Temple still ordered the shredding of potential evidence, which was then instructed to staff by Duncan, as well.
As a corporate attorney of a public company, Nancy Temple acted in sole interest of her client. When investors are involved, corporate attorneys cannot act solely in their client's best interest. Professional legal ethics would dictate that they also act in the interest of the investors. Temple failed in her duties to act as a responsible, ethical attorney.
3. Sherron Watkins owed loyalty to herself and the investors, which is exactly why she blew the whistle at Enron. When we look at her email messages, we can see that she was concerned as to what would happen with investors when all came crashing down. Sherron knew that the SPEs were going to be discovered due to how they were structured, and she knew that two of the SPEs were at the end of their lives and had to be discovered. When Watkins stated in her email messages that it would be discovered the company had been hiding their losses in the SPEs, she was thinking of her duty to the investors of such a large company.
While it holds true that employees owe loyalty to their employers, when fraud or wrongdoing are present, they owe their loyalty to protecting the investors and the public, and they do so by being a whistle blower. Sherron Watkins was subsequently named People Magazine's "Person of the Year" that year due to the proactive role she played in blowing the whistle at Enron, which is ultimately what uncovered the Enron fraud.
4. The board owes their primary responsibilities to the investors when we're dealing with a public company. The board of directors should have been regulated to begin with, but there was no actual law prohibiting the structure of the board to include the former CEO. The board of directors wouldn't have possibly been able to remain unbiased and in-line with protecting shareholders and stakeholders due to their sheer makeup, which included the former CEO.
Unfortunately, there was a complete lack of regulation in place at the time of Enron. We have only seen tighter regulations that were actually developed because of Enron, including the creation of the Public Company Accounting Oversight Board (PCAOB), the creation of the Sarbanes-Oxley Act (SOX), and tighter regulation and monitoring imposed by the SEC. In addition, when Enron's board of directors was in operation, the board wouldn't have followed any regulations or laws due to the fact that they were aware their creation was biased, and because they knew of the frauds that were taking place at Enron. Regulations would have had zero impact on the board, even if there had been regulations in place overseeing the makeup or activities of the board of directors. All codes of conduct and internal policies that the board of directors was bound to at Enron were also violated.
5. Government regulators owe their responsibilities to the investors, just as the board of directors does. The companies are nothing without their investors, particularly a company the size of Enron, which needs investors for capital, to operate. This means that the regulators, the auditors, and the board of directors must be looking out for the investors, as their primary responsibility. The investors aren't inside running the company, so they don't have the ability to actually see what is transpiring inside of the company. This is where regulation comes in - investors count on regulators, laws, and management to ensure that the company is being run effectively and in the best interest of the investors.
We see the responsibility that government regulators owe the market, which is why SOX was created. When Enron crashed, it actually took a toll on the market. Just as legislation was created to protect the market after the Great Depression, we see regulation created after Enron to again protect the market. Unfortunately, if there had been greater regulation and governmental control in place before this happened, it could have mitigated a lot of the destruction and damages that resulted from Enron.
The government regulators owe the same duties to the general public - to protect the public. There is no reason at all why companies this size shouldn't be monitored. The accounting practices that were taking place inside of Enron were blatant, and they were paying their auditing firm in excess of $100 million per year in non-audit related fees, which were consulting fees. There is no excuse for a complete lack of governmental control over the practices that were taking place at Enron. While there are regulations in place now which protect the investors and the public, in the case of Enron, it came much too late.
6. Accounting and law are professions. Enron and Arthur Andersen are businesses. In a profession, we see certain elements that are required. Most professions require a professional license, whether it's a CPA license, a license to practice law, or some other type of license. In a profession, ongoing training and development, mainly in the form of continuing education, is required. A business runs as its own entity. The purpose of a business is to generate revenue in order to provide a return on investment for shareholders.