Running Head: SCANDALS AND EFFECTS ON CORPORATE ACCOUNTING 1
Accounting Scandals and the Effects on Corporate Accounting Standards
Tamara Dasgupta
SCANDALS AND EFFECTS ON CORPORATE ACCOUNTING 2
Accounting Scandals and the Effects on Corporate Accounting Standards
The commitment of publicly traded companies is to ensure that a company’s financial
statements are produced with ultimate transparency, so that capital investors and shareholders
can make informed decisions related to their investments. The foundation of a business is
founded on the trust between customers, capital investors, and shareholders. Each element is
accountable to another. Integrity and responsibility are essential building blocks to the
foundation of ethical decisions. Despite the framework of accountability, there are flaws in the
method in which financial statements have been created. The study of past accounting failures is
essential to understanding corporate behaviors. The prevention of future scandals begins with
accountants, auditors, and corporate officers from not making ethical decisions. The following
paper will describe components of past accounting failures, along with the ethical responsibilities
that executive officers have, as well as a brief explanation of the effects that the Sarbanes-Oxley
(SOX) Act has had on the accounting and auditing professions.
In 2001, Sherron Watkins, a former accountant from the Arthur Andersen accounting and
auditing firm, was placed under Andy Fastow’s direction. Her main assignment was to review
Enron assets, as well as give an estimate on how the sale of certain assets would financially
affect the company. In the course of the evaluation, she investigated an entity named Raptor. The
investigation later proved that Raptor was, “part of a scheme of income statement manipulation”
[CITATION MimiSwartz \p 271 \l 1033 ]. In early 2001, the Arthur Andersen accountants, who
worked alongside the Enron employees, realized there had been an entry of “$1.2 billion”
recorded in error as an asset, in place of an entry against equity [CITATION MimiSwartz \p
295 \l 1033 ]. Any adjustment to prior year earnings requires a press release, which is dictated by
the Securities and Exchange Commission (SEC). However, prior to Enron releasing a press
SCANDALS AND EFFECTS ON CORPORATE ACCOUNTING 3
release, an Arthur Andersen attorney suggested “deleting language that Andersen knew that the
press release was misleading and was a violation of SEC rules,” [CITATION MimiSwartz \p
298 \l 1033 ]. Some executives would do anything to ensure a positive outcome for the company,
even if it meant bending the truth.
Ethical Responsibility
Greed begins as a selfish craving that motivates a person to constantly and continually
want more. Ken Lay’s greed was clearly apparent in his resignation letter, which stated,
“according to his contract, he would receive $20 million annually, and when the company was
sold to Dynegy he would get millions,” [CITATION MimiSwartz \p 333 \l 1033 ]. Lay was
guaranteed millions, while hundreds of employees lost their retirement savings. After the Enron
