Enron Affair Research Articles

AUDIT QUALITY AND REAL EARNINGS MANAGEMENT: EVIDENCE FROM TUNISIAN BANKS

The beginning of the 21st century was marked by a multitude of financial scandals, notably the Enron affair in 2001 and the fall of the auditing firm Arthur Andersen (2002). Such scandals have called into question of the financial reporting quality. The main cause of these scandals was the failure of the external audit quality which is considered crucial to ensure the reliability and relevance of accounting information. Moreover, following the promulgation of the SOX law (2002), managers tend rather towards the real activities manipulation to avoid the detection of the accounting earnings management. In fact, managers can resort to certain adjustments whose opportunistic or optimal nature is difficult to discern by auditors, in particular the reduction in selling prices, the granting of more lenient credit terms, overproduction and the reduction or postponement of research and development (R&D) and advertising expenditure. This study therefore aims to show the role that external audit quality can play in limiting real activities manipulation and therefore in the quality of accounting information. For this, we conducted an empirical study with a sample of the main. Tunisian commercial banks observed over a period from 2006 to 2019, using the panel data method. The results indicate that the presence of a reputable auditor limits real earnings management. However, the results show that the tenure of auditors increases these discretionary practices.

The Paradox at the Crossroads of US and OHADA Corporate Laws: A Comparative Study of Fiduciary Duties in Africa and the US.

From Africa to the United States of America (“US”), the people who invest money and other capital to create business ventures need protection against the people they entrust to manage and fructify their investments. The first category, known as shareholders for corporations, owns the business. The second category, known as management, has the expertise, and makes the day-to-day business decisions. As more US investors contemplate doing business in the continent of Africa, the legal protections they would be afforded there should be analyzed, and compared to the US corporate law with which they are, arguably, more familiar.In the US, the once beloved assumption that shareholders’ interests were ultimately aligned with management interests led to rather weak mechanisms designed to control management’s actions. High compensation of management combined with high profitability of companies were a testament, for proponents of that theory, that management and shareholders’ interests could only be aligned. However, repeated corporate management scandals including, recently, the Enron affair demonstrated that the ‘interest alignment’ principle is not sacred. Since then, US corporate law has refocused tremendously on protecting shareholders.In Africa, the multiplicity of laws, and, most importantly, their dissimilarities, made it very difficult to understand the legal environment as a whole and promote investments. To address this challenge, several African leaders, in the early 1990s, initiated an effort to coordinate business laws across the continent to achieve simplicity, predictability, and economic growth. This initiative, now known as the Organization for Harmonization of Business Law in Africa (“OHADA”), covers areas as diverse as corporate law, securities, bankruptcy, commercial law, and arbitration. OHADA is a multilateral treaty for business with an unprecedented pace of expansion across the continent. Both in the US and Africa, however, the main question remains how to protect investors, the people who risk money and property to create business ventures but do not necessarily possess the expertise or the time to oversee the day-to-day operations. The underlying issue is how to keep directors, or management in general, under control without harming the ability of the corporation to grow, expand, and give maximum returns. Both the US and OHADA corporate law systems rely heavily on the legal concept of fiduciary duties to achieve investor protection. However, neither the construct, nor the understanding, of fiduciary duties and the obligations thereunder are the same under US and OHADA laws. Despite the fact that both systems enunciate traditional duties such as loyalty and care, US and OHADA have fundamental differences, and their design of mechanisms to hold management accountable as fiduciaries are profoundly unalike.This paper will discuss similarities and specificities of the concept of fiduciary duties under the US and OHADA laws. The discussion of fiduciary duties under OHADA, alongside the more familiar construct of the concept under US law, will provide an easily understandable description of the legal framework. Additionally, this paper will equip all interested parties in general and investors specifically, with an added consideration in their investments decision-making process.

Learning from Enron

This paper argues that the Enron affair has been misunderstood as a failure of monitoring, with adverse consequences for the drafting of the Sarbanes-Oxley Act and the Higgs report. Where Enron's board failed was in misunderstanding the risks which were inherent in the company's business plan and failing to implement an effective system of internal control. Enron demonstrates the limits of the monitoring board and points the way to a stewardship model in which the board takes responsibility for ensuring the sustainability of the company's assets over time.

I. Recent Developments in UK Extradition Law

In July 2006, three bankers, all UK nationals, were extradited to the United States on charges of conspiracy to defraud their one-time employers, a British bank, a subsidiary of Natwest. The conduct took place under the shadow of the ‘Enron’ affair. The defendants were said to have conspired with senior officials of Enron. Enron was the subject of the largest corporate bankruptcy in US history. In comparison the sums involved in the Enron collapse, those at stake in what the papers called the ‘Natwest Three’ case were small, but the involvement of persons implicated in the Enron affair made the defendants of interest to US prosecutors. The cases enjoyed an unusual public profile, partly because the extraditions took place under the unique legal regime which governs US-UK extradition,1 partly because this case was simply one of several cases in which persons charged with what one might loosely call economic crimes were sought by US prosecutors2 and partly because the defendants argued that their offences (which they denied) were allegations of what were ‘really’ English crimes which should have been proceeded with here. Although the extradition aspects have loomed largest, this last matter, possible conflicts of criminal jurisdiction, is the most interesting.

Enron: Widespread myopia

This article looks at the Enron affair in terms of what investors and experts fail to take into account to being able to predict Enron collapse. The authors show how analysts could have predicted Enron's difficulties in view of the incoherence observed in its strategic decisions, from the viewpoint of the theory of resource-based and competence-based approaches. Certainly, it was hard to suspect that numbers could lie on account of the financial manipulation doubled by the rhetorical discourses of executive managers who succeeded in imposing a flourish image of their company. The authors’ view takes on a political dimension by illustrating the contradictions of the system that sustain the widespread myopia, where everyone is purely alienating himself.

Global Corporations, Corporate Governance and Social Responsibility

Several intentional long-term research projects that reflect the gradual lost of trust in the ethical behaviour of businesses and institutions; the results show moments of particular disenchantment that coincide with specific events, such as Vietnam war, oil crisis, the Enron affair, the Cirio and Alitalia scandals. The great variety of the stakeholders with which a modern company interacts is such as to require an organic, structured vision of the many sensitive issues that must be addressed, resolved and then communicated, first and foremost within the company itself.

Liberalisation and capital market performance: lessons from the Enron affair

We discuss the consequences of liberalization on capital market performance. Greater autonomy is expected to bring efficiency, profit and augmented welfare. In some cases, this higher autonomy has also been connected to episodes of fraud. We discuss the role a regulatory activity can play into such a scenario. In order to do it, we focus on factors such as volatility and performance of capital markets, and we analyze the hypothesis that the capital markets' functioning is conditioned by the regulatory activity. We analyze firms' strategies by studying the specific case of Enron. This analysis allowed us to relate firms' behaviour, motivation and strategies with the necessity of a regulatory process on capital markets, in order to achieve an environment of confidence where the market can fulfil its objectives. Our results point out for the existence of a positive relationship between our proxy of the regulatory activity and the level of stock market index. Our results also pointed out for the existence of a negative relationship between the conditional volatility modelled by GARCH models and the growth rate of that regulatory index. The use of autoregressive process had the objective to include in the model the expectations formed in the capital market in previous periods.

Nothing like the Enron affair could happen in France (!)

This paper reviews the reactions of the French accounting profession and academia following the collapse of both Enron and Andersen. It considers policy statements and declarations on the part of the accounting profession, legislative changes, the general impact on university accounting education programmes and specific developments in accounting teaching at my own institution, HEC. It considers the value of using corporate scandals in the teaching process and claims that more accounting theory and ethical issues should be introduced in accounting educational programmes.

Accounting education and business ethics after Enron: the European illusion

Have the lessons of the Enron case actually led to a radical transformation of the educational practices and content of accounting education in Europe? Nothing could be more uncertain. This paper studies the consequences of the Enron affair on accounting education in Europe. The Enron affair is widely used by teachers to attract the interest of accounting students, but educational methods used to teach accounting in European business schools have not fundamentally changed. Implementation of business ethics teaching aims to prove that business schools appreciate the importance of values and integrity in management. However, the real impact of these courses on the behaviour of future professionals remains unknown.

Learning from Enron

This paper argues that the Enron affair has been misunderstood as a failure of monitoring, with adverse consequences for the drafting of the Sarbanes‐Oxley Act and the Higgs report. Where Enron's board failed was in misunderstanding the risks which were inherent in the company's business plan and failing to implement an effective system of internal control. Enron demonstrates the limits of the monitoring board and points the way to a stewardship model in which the board takes responsibility for ensuring the sustainability of the company's assets over time.

An Ethical Perspective on CEO Compensation

The controversial issue of whether Chief Executive Officer (CEO) compensation is excessive or appropriate is examined in terms of two competing claims: that CEOs are overpaid for the value they provide to an enterprise, and that CEO compensation is inherently equitable. Various arguments and perspectives on both sides of the issue are assessed. Little evidence supports the claim that CEO performance justifies very high compensation. Further, the complex interactive alliance between boards of directors and CEOs compromises rational decision-making about CEO compensation, with the Enron affair offered as an illustration of what can go wrong when dishonest CEO actions combine with lax board oversight. Recommendations for restoring trust in the system include continuing current regulatory actions, using different metrics for determining CEO compensation, making board member-CEO relationships transparent to all company stakeholders, and several more radical ideas for change. Stakeholders must resist being distracted by other social, economic, or political issues from pursuing serious, lasting reform.

Risk Management and Corporate Governance

We take up the question of potential conflicts between the objectives of risk management policies and those connected with maximization of the firm’s value. This question is a timely one, since many firms have a special committee devoted to risk management—banks and insurance companies in particular. In the wake of the Enron affair, various proposals have been formulated regarding the composition of the different committees set up by boards of directors. In the financial literature, it is now a widely accepted fact that risk management issues can give rise to conflicts of interest between heads of firms and shareholders, notably when executives are remunerated in stock options. In our opinion, the board’s risk management committee must be composed of competent and independent directors who hold no options to purchase the firm’s shares.

The Enron-Andersen Debacle: Do Equity Markets React to Auditor Reputation?

The Enron-Andersen debacle provides a unique opportunity to investigate whether equity prices impound auditor reputation. We address this issue by comparing the daily stock returns of a sample of Andersen audit clients with those of a control sample of big five non-Andersen audit clients during the months of October 2001 through January 2002. These four months are characterized by events that negatively impacted upon Andersen's reputation such as Enron's bankruptcy and the shredding of Enron documents by Anderson employees. The empirical results are not clear cut. Univariate and regression results indicate that event day abnormal returns and twoday cumulative abnormal returns are generally not significantly different from zero for both Andersen and non-Andersen audit clients. On the other hand, cumulative abnormal returns over all event days are marginally significantly negative for the Andersen sample and insignificantly negative for the non-Andersen control sample. There is some evidence that events directly related to Andersen had a larger negative impact on stock returns than events directly related to Enron. The data also suggests that the Enron affair had a negative spillover effect on non-Andersen big five audit clients. In terms of economic significance, the Andersen sample lost about 4% more than the non-Andersen sample in risk-adjusted returns over the events in the four month period.

The Quality of Financial Statements: Perspectives from the Recent Stock Market Bubble

SYNOPSIS: During the recent stock market bubble, the traditional financial model was assailed as a system, out of date in the Information Age. With the bursting of the bubble, the quality of financial is again under scrutiny, but now for not adhering to traditional principles of sound measurement and asset and liability recognition. This paper is a retrospective on the quality of financial during the 1990s. Did under U.S. GAAP perform well during the bubble, or was its quality suspect? My premise is that financial should serve as an anchor during bubbles, to check speculative beliefs. With a focus on the shareholder as customer, the paper asks whether shareholders were well served or whether financial helped to pyramid and stock prices. The scorecard is mixed. A number of quality features of accounting are identified. Inevitable imperfections due to measurement difficulties are recognized, as a quality warning to an alysts and investors. A number of failures of GAAP and financial disclosures are identified that, if not recognized, can promote momentum investing and stock market bubbles. INTRODUCTION Concerns about the quality of accounting intensify as economies turn down, companies founder, and investors lose. With the bursting of the recent stock market bubble, the quality of accounting is again under scrutiny. This essay questions the quality of financial against the backdrop of the stock market bubble. Bubbles work like a pyramiding chain letter. Speculative beliefs feed rising stock prices that beget even higher prices, spurred on by further speculation. Momentum investing displaces fundamental investing. One role of accounting is to interrupt the chain letter, to challenge speculative beliefs, and so anchor investors on fundamentals. Poor accounting feeds speculative beliefs. Warren Buffett recognized the dot-corn boom of the late 1990s as a chain letter, with investment bankers the eager postmen. (1) He might well have added their assistants, the analysts, many of whom shamelessly disregarded fundamentals. (2) But was accounting also to blame? GAAP accounting certainly came in for criticism during the bubble. Commentators argued that the traditional financial model, developed during the Industrial Age, is no longer relevant in the Information Age. Is this bubble froth or something to be taken seriously? In their statement responding to the Enron-Andersen debacle, the Big 5 accounting firms blamed backward-looking financial (3) Is this an insight or a self-serving defense? Consider the view, common among new-technology analysts during the bubble, that earnings no longer matter. Untested metrics like clicks and page views became the substance of value reporting for the Information Age. Price-earnings ratios over 50 were viewed as acceptable, with the implicit criticism that are deficient. These views are less compelling in retrospect. We now understand that the losses reported by dot-corns were a good predictor of outcomes. The statement that do not matter was bubble froth. The high P/E ratios of the 1990s are now seen as more to do with the quality of prices rather than the quality of earnings. Joe Berardino, chief executive of auditor, Arthur Andersen, claimed (in a wake-up call) that Enron's collapse, like the dot-corn meltdown, is a reminder that our financial model is out of date. (4) Others might argue that accounting served us well during the dot-corn meltdown. But accounting was an issue in the Enron affair. What is a balanced view? My commentary provides a way of thinking about accounting quality, and then applies that thinking to prepare a list of good and bad features of financial statements. I identify not only poor features of GAAP, but also, in response to the criticisms during the bubble, point out quality features of the traditional model. …