Accounting Ethics: Enron Corporation and Johnson&Johnson

Ethics
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Ethics
Accounting ethics is a component of business ethics. It denotes the laws and regulations instituted by regulating bodies to govern professional conduct, especially prevent the possible misuse of financial information or accounting position. Accountants deal with intimate financial information of individuals and organizations. Consequently, accounting ethics is necessary to prevent any potential for data abuse or manipulation of figures to either improve company perception or increase earnings management. The American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) have set ethics codes. Every accountant is expected to comply with the Code of Professional Conduct rules or face disciplinary action by the AICPA (Marshall et al., 2020). IMA’s Statement of Ethical Professional Practice also requires management accountants to adhere to the highest standards of ethical conduct during their professional obligations.
The Code of Professional Conduct and the Statement of Ethical Professional Practice categorize integrity and objectivity as the primary constituents of ethical behavior in accounting. Integrity refers to the tendency, to be honest and straightforward in all dealings and interactions with others. At the same time, objectivity denotes the ability to remain impartial and unaffected by any conflict of interest. These two values are insisted upon because they are critical to producing accurate and complete financial information in accounting, over and above, making informed and independent decisions (Marshall et al., 2020). Other essential elements of ethical behavior in accounting include competence, confidentiality, and acceptance of professional obligations to protect the welfare of the client, the employer, and the public. These elements are critical to improving the accounting profession, sustaining public trust, and establishing fairness and trust in all financial dealings.
This essay will compare the business ethics in the accounting of two companies (Enron Corporation and Johnson &Johnson) concerning accounting ethics. The Enron scandal is widely considered one of the biggest accounting scandals in the history of America, primarily because of the pervasiveness of unethical accounting practices both inside and outside the company. Enron Corp had reached dramatic heights during the 90s when minimal regulatory policies allowed the dot-com bubble to flourish: the value of revolutionary internet stocks was often exaggerated, and both investors and regulators came to accept the rising share prices as the norm. Enron successfully marketed its electronic trading website to participants and trading partners due to its established reputation, experience, and credit in the energy sector. The company was even regarded as one of the most innovative companies in America. However, its unethical accounting practices, which mainly were unknown, would result in one of the largest corporate bankruptcies in the U.S.
By mid-2000, when the dot-com trend started waning, Enron's famed EOL became unsustainable, and the company faced considerable exposure to market volatility. Towards the end of 2000, the company was beginning to crumble under its weight. CEO Jeffrey Skilling, resorted to using market-to-market accounting (a strategy that works in securities but not in actual businesses) to conceal financial losses. Market-to-accounting involves evaluating the value of security concerning its present market value rather than its book value. Enron’s sophisticated corporate governance allowed it to continue attracting huge investments on the dubious business model, mask its actual financial performance using a series of unethical accounting strategies, and advertise its stock at excessive levels (Cuong, 2011). The company would invest in an asset and then claim the estimated profit from the asset even when no profits had been made. Most of these investments were failures, but rather than reporting the losses, the company would shift these liabilities to an off-the-books corporation to prevent hurting its bottom line. Enron continued to appear more profitable than the case, even as many of its subsidiaries recorded massive losses.
The company's chief financial officer developed a deliberate plan to cope with the mounting liabilities and toxic assets from creditors using off-balance-sheet particular purposes entities (SPEs). Enron would allocate a portion of its rapidly rising stock to the SPEs in exchange for capital. The SPEs would use the stock to hedge against an asset recorded on the company's balance sheet, while Enron would guarantee the value of the SPEs, thereby decreasing counterparty risk. These SPEs were not illegal, but they posed significant financial risk since they were capitalized wholly using Enron stock. Therefore, it was impossible to hedge if Enron's share prices plummeted (Rashid & Mustafa, 2020). Even though the company disclosed the existence of SPEs to investors, it failed to sufficiently reveal that the association between Enron and the SPEs was aimed at hiding accounting realities. However, the most considerable blame lay with Enron's accounting firm, Arthur Andersen, which oversaw the company’s accounts and continued to condone the unethical accounting practices.
Despite its reputation for quality risk management and ethical standards, the com...