...| The Enron Scandal | | Introduction Enron Corporation was an American energy, commodities and services company based in Houston, Texas. From the 1990's until December 2001, Enron was famous throughout the business world and was named by Fortune as "America's Most Innovative Company" for six consecutive years. It grew wealthy due largely to marketing, promoting power, and its high stock price. Before its bankruptcy, Enron employed about 21,000 staff in forty countries and was one of the world's major electricity, natural gas, communications, and pulp and paper companies, which claimed revenues of $100.8 billion in 2000. Enron gave the illusion that it was a steady company with good revenue which was not the case, as a large part of its profits were made on paper through a creatively planned accounting fraud. Deep debt and surfacing information about hiding losses gave the company big problems and in the late 2001 Enron declared bankruptcy under the United States Bankruptcy Code. The collapse was followed by a series of revelations on how the executives manipulated Enron's success. The Fraud Schemes The Enron scandal, revealed in October 2001 was a management fraud involving top executives of Enron who deliberately manipulated the accounting structures in order to conceal their losses and debts so that the corporation appeared to be performing favourably. They adopted mark-to-market accounting, an accounting system based on market value, which was then inflated; the...
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...“ENRON SCANDAL” The Enron Corporation was the biggest in a series of scandals that damaged the reputations of corporations in the United States. It represented one of the largest fraud scandals in history. As a result, the company was said to force to file for bankruptcy in 2001 of December. This is where Sarbanes-Oxley Act was imposed with stricter rules on auditors and made corporate executives criminally liable for lying about their accounts. Enron was known as a provider of products and services related to natural gas, electricity and communications to wholesale and even retail customers. As an accounting major student I recognized that there were several doubtful accounting schemes that Enron used just to manipulate the employees, investors, customers and everyone. While I found that there are a lot of issues to expound on, the main issue is how fraudulent their company was especially having misrepresented their public financial reports. The financials presented by Enron were restated. In 2000, the profitability was less than 1%, becoming clear that Enron’s profits were realizable only if the quality of their revenue is good but if not it is not realizable. Enron used SPEs or Special Purpose Entity this is used to keep Enron’s debts and losses away from its balance sheets, therefore allowing it have a good credit rating and look good in front of the investors. In this case it is purely seen as an investment scam. In the company were I worked on last year...
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...Draft - Corporate Governance Considerations This material was prepared by Eliot H. Sherman – July 2005 FOCUS Learning Objectives By the end of this chapter, you should be able to: Understand the issues related to agency and delegated responsibility. Describe the similarities and the differences in the corporate scandals that have been identified in the past few years Identify the responsibilities of managers to the shareholders and other stakeholders associated with their corporations. OVERVIEW Corporate governance is not a new topic. It has been around for many years, often described as the “agency issue.” However, in recent years it has taken on increased significance, demanding increased attention. Since 2001, in particular, the corporate marketplace has seen a significant number of headline grabbing scandals involving major corporations. These scandals have raised new questions about corporate governance and, as a direct consequence of some of these situations, the U.S. Congress passed a very broad piece of legislation called the Sarbanes-Oxley Act of 2002. This law has had a wide range of consequences directly affecting large public corporations and public accounting firms and, less specifically, smaller public firms, private corporations, not-forprofit organizations and regulatory entities in many different ways. This law mandates some specific actions for large public corporations, many of these actions being required shortly after the legislation passed and others in...
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...The Enron Scandal and Moral Hazard Prof. Leigh Tesfatsion Department of Economics Iowa State University Ames, IA 50011-1070 http://www.econ.iastate.edu/tesfatsi/ Last Revised: 3 April 2011 The Enron Scandal and Moral Hazard • Enron, the 7th largest U.S. company in 2001, filed for bankruptcy in December 2001. • Enron investors and retirees were left with worthless stock. • Enron was charged with securities fraud (fraudulent manipulation of publicly reported financial results, lying to SEC,…) • QUESTION: In what ways are security market moral hazard problems at the heart of the Enron bankruptcy scandal? Brief Time-Line of the Enron Scandal • Enron was a Houston-based natural gas pipeline company formed by merger in 1985. • By early 2001, Enron had morphed into the 7th largest U.S. company, and the largest U.S. buyer/seller of natural gas and electricity. • Enron was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc. Brief Time-Line of the Enron Scandal…Continued • On October 16, 2001, in the first major public sign of trouble, Enron announces a huge third-quarter loss of $618 million. • On October 22, 2001, the Securities and Exchange Commission (SEC) begins an inquiry into Enron’s accounting practices. • On December 2, 2001, Enron files for bankruptcy. : Oct – Dec 2001 Regulatory Oversight of Enron Auditors Arthur Anderson Audit Committee (Directors) SEC Company Report Shareholders Enron Board...
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...Enron Corporation Overview: The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Issue: Enron, once the countries seventh-largest company according to the Fortune 500, is a good example of how greed and the desire for success can transform into unethical behavior. Good ethics in business would be to compete fairly and honestly, to communicate truthfully and to not cause harm to others. These are things that Enron did not seem to display, which led to Enron’s operations file for bankruptcy in 2001. Enron’s scandal has become one of the most talked about forms of unethical business behaviors. The company’s collapse resulted from the disclosure that it had reported false profits, used accounting methods that failed to follow generally accepted procedures. Both internal and external controls failed to detect the financial losses disguised as profits for a number of years. Enron’s managers and executives retired or sold their company stock before its price went down. Enron employees lost their jobs and most of their retirement savings invested in Enron stock. Enron’s dishonesty and misleading business ethics...
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...Enron’s Failure Abstract Enron was the world’s top electrical, communications, pulp and paper, and natural gas company. Unfortunately, due to poor leadership and unethical decisions Enron failed to remain a stable and productive company. Enron due to a misrepresentation of funds found itself on the brink of bankruptcy. The company stock was worthless and within a short period of time has gone down by 89.00 per share. A scandal was revealed that involved the companies own accounting firm, Arthur Anderson, and Enron. The unethical practices of Enron were discovered in 1990 resulting in an investigation, which included finding out why stock prices being manipulated. This paper will identify the failures of the management and leadership of this company, how correct and positive organizational behavior and leadership of the management team would have affected the configuration of the now disgraced company. (Cernusca, 2011). Organizational Behavior Theories Enron’s failure could easily be predicted if the company ensured that the accountants and leaders were following the code of ethics set forth by the company. They adopted unethical practices like using unconsolidated affiliate companies for financial purposes and omitted expenses that were in the amount of billions of dollars. Enron misused their motivation tactics by hiring and promoting individuals who were driven by monetary incentives and rewards. This provided Enron the opportunity to entice their employees...
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...1. Explain the concept and rationale behind mark to market accounting and it's significance to Enron. Kenneth Lay, the president of Enron hires a new CEO who is very energetic and a “dreamer” and joins Enron with one condition. That they utilized mark-to-market accounting, allowing the company to book potential profits on certain projects right after the deal are signed. Enron began a venture that could make $50 million in 10 years; it could claim the $50 million as current income. This gives Enron the ability to appear as a profitable company even if it isn’t. 2. Describe the Enron culture. Enron’s culture seems to be very competitive and all the employees had the same attitudes of their bosses. 3. What is Andy Fastow's significance to Enron? Andy Fastow’s was the Enron’s CFO. He helped the company by hiding the losses with a “Tom Ponzi’s scheme”. 4. What is Sherron Watkins significance to Enron? She was the Vice President at Enron. She is considered by many to be the whistleblower that helped to uncover the Enron scandal. She wrote a concerned internal email message to Enron CEO Kenneth Lay warning him that the in the financial reports didn’t make sense. 5. Why did Wall Street wait until the collapse of Enron to investigate the company? Was there a diffusion of responsibility whereby the executives at Enron told thmeselves that their behavior was okay because the bankers and the lawyers knew what they were doing? 6. In the Stanley Milgram experiment, why...
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...you are not supposed to do”; however, OM is a wide topic of investigation and the understanding of this subject depends on different aspects, theories and perspectives (Richard, 2008). Other researchers saw misbehaviour as something more linked to relations within an organisation, stating that OM is mainly based on interactions between people and that is relied on ethical issues in employer-employee relationship (Deckop, 2006). This essay will mainly explain and analyse the different types of misbehaviour that can be found in a particular case: The Enron & Arthur Andersen scandal, the “Why’s” and “How’s” these two companies fell into corruption and thus, misbehaviour. Enron & Andersen Enron Corporation was an energy company founded in 1930 based in Houston, Texas. It never shined out until 1996, when the firm was considered as one of the most innovative organisation in the world (Debinski & Al). Enron started lying about its profits and liabilities, stating that their assets worth much more than it actually did and deleting all its debts with the help of Enron’s main auditor, Andersen. This eventually led to a significant increase on the company shares of 336% to a peak of $90 per share dropping to $0.67 (Cunningham, 2006), resulting in many investors and employees losing all their life savings valorised in $11 billion...
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...Review the mandated requirements for legal compliance (from chapter 4) and determine which requirements apply to the Arthur Anderson case. There are five categories that separate the mandated requirements for legal compliance. Two directly apply to the Arthur Anderson case. Those requirements include (1) protection of consumers, and (2) incentives to encourage organizational compliance programs. When I read the text, the examples which were given were all about making sure that people were not taken advantage of as a result of an entity’s business practices. The mandated requirement, incentives to encourage organizational compliance programs, speaks directly to the Arthur Anderson case. Our text states, “Gatekeepers such as lawyers, financial rating agencies and even financial reporting services must have high ethical standards.” High ethical standards don’t just happen they are enforced. Without compliance programs, loopholes are created for the dishonest. Discuss how the issues with the Arthur Anderson case may have played out differently if the Sarbanes-Oxley Act had been enacted in 1999. The provisions of Sarbanes-Oxley Act help minimize the likelihood of auditor failing to identify accounting irregularities by the following requirements: 1). Improving the internal control. Auditors comment on the internal control of the firm should be reported. 2). Reinforcing supervision for financial irregularities. This act boosts to establish an independent the Public Company...
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...THE NATION’S NEWSPAPER BS2003-01a Collegiate Case Study Enron law firm called accounting practices 'creative' By Greg Farrell www.usatodaycollege.com Accounting fraud Part I: The problems “Creative accounting” is not a new technique, but it can certainly be a costly one. Businesses feel the pressure to appear profitable in order to attract investors and resources, but deceptive or fraudulent accounting practices often lead to drastic consequences. Are these so-called creative practices always illegal or can they ever be justified? This case study will present examples of companies who have used inappropriate accounting practices, the results of their deceptions and the government's plan to avoid future incidents. Did banks play role in Enron scandal? By Edward Iwata Banks face accusations in Enron case By Edward Iwata Banks defend e-mail about Enron By Edward Iwata WorldCom finds accounting fraud By Andrew Backover, Thor Vladmanis, Matt Kranz and Michelle Kessler Former controller comes up more often By Andrew Backover and Chris Woodyard Cover story WorldCom’s bad math may date back to 1999 By Jayne O’Donnell and Andrew Backover CFOs join their bosses on the hot seat By Jim Hopkins Capitalizing on oldest trick in book How WorldCom, and others, fudged results By Matt Krantz USA TODAY WorldCom's accounting game is stunning investors who thought the loophole the telecom firm used was sewn shut years ago. Bros. "How was this overlooked...
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...Alexis Isbell 11/1/2012 Case Project The Enron Scandal Near the turn of the 21st century, a seemingly large Dallas-based gas company sent a shockwave around the world in what would become known as the Enron scandal. The Enron scandal would cause many people to not only lose their jobs and their ways of life, but it would also cause people to become weary of these incredibly large companies. The Early Years (1985-early 1990’s) Enron was the brainchild of Kenneth Lay, when he brought about the merger of Houston Natural Gas and Omaha-based InterNorth. Enron Corporation created the first nationwide gas pipeline network in America, and would continue to grow throughout the 1990’s. In the early 90’s, after the United States government deregulated natural gas, Enron started growing into an extremely large company, whom employed over 21,000 workers. Enron would continue to grow into the nation’s seventh largest company. Enron’s profits skyrocketed through the roof once they were able to freely sell and buy natural gas in the United States. Enron would continue to grow into one America’s most profitable companies in the late 1990’s, but the argument could be made that is what possibly led to their drastic, and frankly embarrassing downfall. The Later Years (mid-late 1990’s – 2001) As previously stated, Enron would become one the nation’s most profitable companies in the late 1990’s. “Enron’s reported annual revenues grew from under $10 billion in the early 1990s...
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...Business Failure: Enron Chris Shealy LDR/531 August 22, 2011 Ericka Hilliard The Enron scandal was a corporate scandal involving the American energy company Enron Corporation based in Houston, Texas and the accounting, auditing and consultancy firm Arthur Andersen that was revealed in October 2001 (Wikipedia Enron Scandal 2001). All of this started when there was a loophole discovered in the accounting department when they were allowed to book large sums of money from energy-derivative contracts at their gross value and not their net value. This tactic although legal many analysts and investors saw what Enron was doing. This was called the distorting technique which allowed Enron to become one of the largest companies in the world. All of the hiding came from within Enron’s balance sheet. To let you in on Enron’s hidden success, Enron was allocating all of there money to independent private partnerships. This strategy showed that Enron’s market share was sky-rocketing to levels never seen before. The thing that was kept hidden was Enron’s asset and liability portfolio. Between 1996 and 2001, Enron reported an increase in sales from 13.3 billion to 100.8 billion (Forbes, 2001). In 2002, there were reports starting to come out about Enron’s wrongdoing. Everyone believed at the time that the Bush administration was telling the truth about what was going on at Enron. Now that Enron is bankrupt, many still believe that there was ever any wrongdoing at Enron. Even though...
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...ENRON CASE STUDY Title of the Article: * The first article of critique, talks about the ethical cultures and values of Enron and how this values and credence contributed to the collapse of this once corporate giants (Li, 2010). * Enron failures, the who, the how, and the why, that contributed to malpractices of its business practices (Gudikunst, 2006). Purpose of Research: The purpose of the first article of research is to depict the ethical views and practices of Enron’s Executives. During the Enron scandal several executives were charged with criminal acts from money laundering to insider trading and fraud (Li, 2010). This article of research shows how morals and ethical values differ in the eyes of different individuals. Second article of research explicate, how each stakeholders in the Enron scandal played a huge role in the collapse of the once was energy giant company (Gudikunst, 2006). Dr. Gudikunst explains how each executive and external stakeholder mislead employees and vested stakeholders in believing the organization was financially buoyant in their day to day business practices, and the reasons for the misappropriation of investors capital. Final this article touches the legal aspect of accounting practices. Research Questions Understanding an organization’s ethical values or business core practices is the baseline in understanding any defects which took place during the Enron’s scandal. Some of the purpose research questions for the first...
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... The accounting profession as we know went through many changes as a result of scams such as the Enron and WorldCom. It came stated as a clear fact that since these scandals had unfortunately happened, it would create a new demand for forensic accountants. The Association of Certified Examiners said that occupational fraud losses cost organizations on the average of about a trillion dollars yearly. I feel with this being a known fact brings along the push for the services of these forensic accountants. Forensic accounting is a profession in which combines investigative skills with accounting, auditing, and consulting to conduct investigations. Investigations which involve forensic accountants range from embezzlement at small retail business to a widespread of government corruption. When companies are yearly losing about a trillion dollars to fraud losses I feel that is a main reason as to why there was an explosion in this field. With this explosion taking place of forensic accountants, the American Institute of Certified Public Accountants (AICPA) formed a committee called the Certified Financial Forensics (CFF) in which was planned to award 900 credentials by the end of 2008. In was said that by the end of 2009 the AICPA rewarded 3,500 CFF certifications. Through research and the readings, I think it is simple to say that no one ever wanted to see a repeat such as the Enron and WorldCom scams. I came to find that through the readings that the marketplace in which...
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...Summary of facts of the scandals at Enron ................................................................................. 1 3. Summary of facts of the scandals at WorldCom ........................................................................ 2 4. Enron and WorldCom executives prosecution ........................................................................... 5 5. Effects of the scandal, legislative perspective ............................................................................ 5 6. Comment and lesson to Rwandan business sector ...................................................................... 7 6.1. Corporate governance .......................................................................................................... 7 6.2. Committed crimes during the scandals .............................................................................. 10 6.2.1. Insider trading .............................................................................................................. 10 6.2.2. Wire fraud .................................................................................................................... 11 7. Conclusion ................................................................................................................................ 12 8. Authorities................................................................................................................................. 13 1 Lessons from Enron and WorldCom cases ...
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