Enron

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Case 1.4 AMRE, Inc.

1.Generally, ethics refer to moral principles and values. Random House Webster’s College Dictionary notes that ethics are “the rules of conduct recognized in respect to a particular class of human actions or governing a particular group, culture, etc.” An individual's ethics generally define what that individual believes to be right and wrong. Professional ethics are typically expressed by a code of conduct adopted by an organization that represents a profession. Professions adopt such codes to encourage moral conduct among their members.

Following is a list of the individuals involved in the AMRE case:

Robert Levin, Chief Operating Officer
Dennie Brown, Chief Accounting Officer
Walter Richardson, Vice President of Data Processing
Steven Bedowitz, Chief Executive Officer
Mac Martirossian, Chief Financial Officer
Edward Smith, audit engagement partner
Joel Reed, senior audit manager

My experience has been that students differ markedly in their assessments of the ethics of these individuals. In particular, students generally have difficulty arriving at a consensus assessment of Martirossian’s conduct in this case. I believe that the lively debate typically produced by this exercise is healthy for students since such debates allow them to begin developing or "fleshing out" their attitudes regarding important ethical issues and concepts.

2.The executives involved in the AMRE fraud agreed in a consent order to refrain from violating federal securities laws in the future. In addition, Robert Levin and Dennie Brown forfeited funds they realized from sales of AMRE stock during the fraud. Levin also paid $1.8 million to the federal government, including a $500,000 fine for insider trading. Finally, Levin and Steven Bedowitz contributed approximately $9 million to a settlement pool to resolve a large class-action lawsuit. Most students conclude that the AMRE executives who participated in the fraud were appropriately punished. Their actions were motivated by greed and self-interest and they paid a heavy price for their indiscretions. The two auditors involved in this case, Edward Smith and Joel Reed, were prohibited from being assigned to audits of SEC registrants for nine months. Again, students typically find that this punishment was appropriate given the apparent mistakes made during the AMRE audits. These mistakes included failing to adequately test the computerized lead bank, allowing AMRE personnel to observe certain inventory sites, accepting client explanations without applying sufficient audit procedures, and failing to require the client to disclose large and suspicious period-ending accounting adjustments in the financial statements. The SEC issued a separate enforcement release criticizing Martirossian for his failure to take appropriate measures upon learning about the fraud. Students frequently disagree with the SEC’s criticism of Martirossian. Many of them view him as an ethical person who just happened to be in the wrong place at the wrong time. It is important to point out to students that it is not unusual for accountants to find themselves in these types of ethical dilemmas. Martirossian’s experience provides an excellent example of the potential consequences an accountant may face if he or she violates the Code of Professional Conduct.

3.Among the alternative courses of action available to Martirossian were the following:

a.Aid in the cover up of the fraud.
b.Demand that the executives involved disclose the fraud to the auditors. If they refused to comply, report the fraud to the SEC. c.Report the fraud to the auditors and to the Board of Directors immediately. d. Secretly report the fraud to the auditors.

e. Resign his position with AMRE, Inc.

Probably the best course of action for Martirossian would have been to demand that the executives disclose the fraud to the auditors. If they refused, Martirossian should...
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