Abstract
M.Com. (International Accounting)
One would be hard-pressed to find an accountant who does not know about the
Enron collapse which took place over a decade ago. The scandal was the largest the
corporate world had seen at the time, and its impact was significant. Shareholders of
the company lost tens of billions of dollars (Jickling, 2002), 4,000 employees lost
their jobs (Bratton, 2002), the reputational damage suffered by their auditors Arthur
Andersen was severe enough to break up the firm (Fearnley, Brandt & Beattie, 2002)
and members of the public stood in awe that this was even possible. This incident
was succeeded in following years by more high-profile international corporate
scandals involving Tyco International, WorldCom and Parmalat, each one affecting a
variety of stakeholders and broader society.
The common thread that weaves these corporate collapses together appears to be
seized opportunities to misreport financial information. Corporate failures of
companies as big as Enron are inclined to give cause for future business regulation
(Bratton, 2002). As noted by FearnIey et al. (2002), the Enron collapse provided
regulators with an opportunity to reconsider fundamental issues associated with the
regulatory framework for corporate financial reporting. Bratton (2002) explains that
numerous regulatory-related concerns had been implicated prior to the completion of
the Enron investigation. As with the demise of the other companies, the cause
thereof involved questionable practices, particularly relating to the accounting
treatment of transactions and the reporting of the financial position and performance
to the users of financial statements. The result was that stakeholders of the entities
did not have access to accurate and complete information regarding the entity in
order to make sound economic decisions. This phenomenon is referred to as
information asymmetry (Gaffikin, 2008).