...Q:How Enron fraud? A:1.Stock Option Incentive motivation of fraud 2.Defective internal control mechanisms 3.Complex financial reporting. Answer 3: Enron in financial problems are mainly reflected in four aspects: First, to complex financial structures Enron conceal the problems. In support of Enron-like explosive growth, with Enron complex corporate networks and related transaction, Enron's management to create a very complex financial structure, not only retail investors can not understand, and even Wall Street analysts and accounting professor are difficult to interpret. Enron's use of complex financial structure, unbridled fictitious profits, hidden debt. Second, the accounting treatment Enron pioneered a number of technologies, enabling the company to record revenue generating profit and loss information has not been long-term contracts. For example, Enron uses a technique called "MTM (Mark-to-Market) "accounting system, the accounting system to allow Enron and other energy companies to increase their current net income from the book, and these contracts in 10 years or may not be realized in the longer. Meanwhile, the accounting system also requires that a company can not disclose how the details of the valuation of the order, it may not disclose how much revenue from such non-cash benefits. There are accounting experts believe that due to the energy product orders vary greatly, and therefore does not provide a method to its valuation, which gave Enron fraud...
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...Accounting fraud case Halliburton, one of the world's largest providers of products and services in the oil and gas industries, had several lawsuits brought against them and its former CEO, Vice President Dick Cheney. The allegations claim that Halliburton illegally overstated its revenues in order to hide losses the company had experienced because of under estimating costs for construction projects, and a downturn in the oil industry. The claim also states that the company violated U.S. securities laws and defrauded stockholders. Halliburton settled the lawsuits for $7.5 million although the SEC continues its investigation of the accounting allegations. (SEC Charges Halliburton and Two Former Officers for Failure to Disclose a 1998 Change in Accounting Practice) Halliburton accomplished the alleged fraud by making changes in the way it accounted for its costs from its numerous construction projects. Much of Halliburton's business comes from big construction projects, like natural gas processing plants, which sometimes run over budget. The company failed to account for any of the over budget costs. Instead of counting the excess costs as losses, Halliburton began accounting for them as revenues based on the belief that the funds would eventually be paid by the subcontracted firms. Over six reporting periods, spanning approximately 18 months covering 1998 and 1999, Halliburton failed to disclose its change of accounting practice. These lead investors into believing the...
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...FORENSIC ACCOUNTING ENRON: The Smartest Guys in the Room Movie Summary Gerald Prayogo ------------------------------------------------- 342858 Enron: The Smartest Guys in the room is a documentary movie based on the book of the same name. Essentially, it tells us about one of the biggest fraud ever performed in the US. It tells us of the downfall of Enron: its scandals, the prosecution of its perpetrators, as well as its role in California electricity crisis. The film describes the biggest names on the fraudulent corporation. First is Kenneth Lay, the founder of Enron. Kenneth, nicknamed ‘Kenny Boy’ by his spouse, got the company into scandal in just two years after its establishment, after Enron’s managers bet on oil markets. The second is Jeffrey Skilling, the man who utilized mark-to-market accounting, which allow Enron to appear as being a profitable company, even if the reality might not be so. He also applied the Darwinian philosophy on Enron by establishing a ‘rank and yank’ system, a system of which a group of review commitees grades employees and fires the bottom fifteen percent. Skilling was also described as having a soft spot for “guys with spikes”; which made him recruit J. Clifford Baxter, a manic-depressive; and Lou Pai, the CEO of Enron Energy Services which was known for using shareholder money to pay strippers. Enron managed to get a myriad of profits during the dot-com bubble by using the process known as “pump and dump”: pushing up their stock prices and...
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...CASE STUDY #1 | The Function of Accounting Information Systems in the Enron and Bernard Madoff Fraud Cases | | | | | | | What is the definition of accounting information system? The Core Concepts of Accounting Information Systems textbook defines accounting information system “as a collection of data and processing procedures that creates needed information for its users” (Bagranoff, 2010). A key factor in determining the success in an organization is its accounting information system. It is the combination of the organization’s resources, such as its people, procedures, and business records that it (the organization) maintains to provide financial data. The basis of this case study is to disagree with the question of whether or not accounting information systems played a role in the Enron and Bernard Madoff fraud cases. All organizations should have an adequate, effective, and efficient accounting information system in tack. In my opinion, the Enron and Bernard Madoff fraud cases had the classic signs of pure greed; the accounting information systems were perhaps manipulated, ignored, and compromised to financially suit the personal gains of the individuals involved and did not assist with the cases. An important part of the accounting information system is its internal control system. Internal controls are methods and procedures used by an organization to safeguard assets, authorize transactions, and ensure accuracy of the accounting records...
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...Fraud is a serious problem for most businesses today and often technology compounds the problem. In addition, the role of the independent auditor in the detection of fraud is often questioned. (http://www.swlearning.com/accounting/hall/ais_4e/study_notes/ch03.pdf) Fraud is dishonest activity causing actual or potential financial loss to any person or entity including theft of money or other property by employees or persons and where deception is used at the time, immediately before or immediately following the activity. (http://about.curtin.edu.au/definitions-impact.cfm) * Types of Fraud (http://www.auditsol.com.au/media/Fraudw.pdf) 1. Employee fraud Is internal or employee frauds are when fraud is committed against the company or organization a person is working for. Internal frauds can include: * payment fraud Payment fraud is any fraud that involves falsely creating or diverting payments. Payment fraud can include: * creating bogus customer records and bank accounts so that false payments can be generated * intercepting and altering payee details and amounts on cheques and Payable Orders, then attempting to cash them * creating false payment and financial information to support fraudulent claims for benefits * processing false claims by accomplices for benefits, grants or repayments self authorizing payments to oneself. * procurement fraud Procurement fraud is any fraud relating to a company purchasing goods,...
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...Professor Young March 5, 2011 Enron was an old line energy company, owning electric power production facilities and natural gas pipelines. It engaged in several acquisitions during the late 1980s and the 1990s that dramatically increased its size. Its acquisitions included power companies in the U.S. and abroad, as well as investments in various energy and technology companies. In the 1990s, Enron reorganized itself as an energy trading company, whose primary form of business was to trade in various energy vehicles, including contracts to provide electric power in the future at pre-determined prices and similar contracts to deliver natural gas, water rights, wind power systems, broad band transmission systems, insurance, and other products. 1. Describe how Enron could have been structured differently to avoid such action. Enron, like most public companies was required by law to describe its party transaction to shareholders and the members of the investing public in several different disclosure documents. Overall, Enron failed to disclose facts that were important for understanding the substance of the transaction. Although they did disclose that there were large transactions that the CFA had interest. Enron did not give the CFO’s actual or expected benefits from these transactions or provide complete financial statements. The organizational structure could have been different by not changing the original structure. When Enron decided to change its structure by...
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...Effect of unethical article ACC 291 June 27, 2013 Julio Medina The unethical behavior of Enron Corporation The unethical habits and behavior's in accounting would be deceptive under financial analysis such as gainings, misuses of fundings, overstating the value of corporate assets or underreporting the existence of liabilities, overdoing revenue as well as understanding expenses. Another unethical systems would be securities fraud, manipulation of the financial markets and bribery. Enron is one of the greatest example that impact the unethical behavior. Enron corporation was an American energy company was formed from the merger of Houston Natural Gas including the inter north a Nebraska pipeline company. Enron employed around 21,000 people and was one of the worlds leading natural gas, pulp, electricity, and communications companies. Enron reported financial situations of were the company constant of institutionalized systematic planning accounting fraud having rumors of corruption to secure contracts in central America. Enron's ethics of coding was created on respect, integrity, communication, and excellence. These values were described as follows. Respect. We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don’t belong here. Integrity. We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we...
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...The Enron scandal • 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…) • 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. • 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. The Background Enron was founded as a pipeline company in Houston in 1985. Enron was a company that was able to profit by providing the delivery of gas to utility companies and businesses at the fair value market price. As the deregulation of electrical power markets arose, Enron with the help of former chairman Kenneth Lay decided to diversify their business portfolio and enter into becoming an energy broker who traded electricity and other commodities. Enron took what would prove be a fatal turn that would ultimately meet their demise...
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...ENRON: The Idiocy and the Irony Introduction Red flags were blinding as Enron learned about possible corruption with Enron Oil Trading in Valhalla, New York. After the merger between HNG and InterNorth, the Valhalla office, originally established by InterNorth seemed all but forgotten until quarterly and annual reports were due. Supervisors Tom Harding and Steve Sulentic were rarely on-site, preferring the comfort of offices in Houston. Louis Borget who established and operated the trading business was an autocratic manager, receiving excessive incentive payment for profitable performance. Between 1984 - 1986, Valhalla continued to report profits in the emerging oil trading industry. A call to Enron in Houston by Apple Bank would shatter the false sense of security regarding Valhalla. An ensuing investigation by Arthur Andersen, an accounting firm employed by Enron, failed to produce concrete evidence of misappropriation within Valhalla. Questionable practices were identified, but Enron failed to react appropriately to this information. CEO Lay was able to persuade key executives within Enron and the board of directors to keep running Valhalla offices, with minor changes in personnel. Mick Seidl, unhappy with Lay’s influence over the board, called Mike Muckelroy to investigate Valhalla. Muckelroy’s investigation would become the tipping point regarding Valhalla. With a secret set of books discovered, fraudulent trading entities identified and $1 billion...
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...| 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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...The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a federal agency that provides protection for investors and regulates the bulk of the securities industry including: U.S. stock exchanges, options markets, and other electronic exchanges and securities markets. The Securities Exchange Act of 1934 created the laws that regulated it. The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the U.S. The commission's division of enforcement investigates possible violations of federal securities related laws and can take civil action with other law enforcement agencies when it comes to criminal cases. The market crash of 1929 and subsequent Great Depression took a toll on the public's trust in capital markets. Investors looking to go from rags to riches turned to the stock market during the roaring 20s. According to the SEC, an estimated $50 billion in new securities were offered, and half became worthless. Congress passed the Securities Act of 1933 and The Securities Exchange Act of 1934 (which created the SEC) in an effort to restore confidence in the markets. Publicly traded companies were now obligated to disclose investment risks and provide full information about the state of their business. Brokers, dealers and exchanges were now legally required to put the interests of the investors first and treat them in a fair and honest manner. Congress established the SEC to enforce these laws for the sake...
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...Case Study: Enron Background Once the seventh largest company in America, Enron was formed in 1985 when InterNorth acquired Houston Natural Gas. The company branched into many non-energy-related fields over the next several years, including such areas as Internet bandwidth, risk management, and weather derivatives (a type of weather insurance for seasonal businesses). Although their core business remained in the transmission and distribution of power, their phenomenal growth was occurring through their other interests. Fortune Magazine selected Enron as "America's most innovative company" for six straight years from 1996 to 2001. Then came the investigations into their complex network of off-shore partnerships and accounting practices. How the Fraud Happened The Enron fraud case is extremely complex. Some say Enron's demise is rooted in the fact that in 1992, Jeff Skilling, then president of Enron's trading operations, convinced federal regulators to permit Enron to use an accounting method known as "mark to market." This was a technique that was previously only used by brokerage and trading companies. With mark to market accounting, the price or value of a security is recorded on a daily basis to calculate profits and losses. Using this method allowed Enron to count projected earnings from long-term energy contracts as current income. This was money that might not be collected for many years. It is thought that this technique was used to inflate revenue numbers by...
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...Enron Corporation (Former NYSE ticker symbol ENE) was an American energy company based in Houston, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000staff and was one of the world's leading electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and corruption. The scandal also brought into question the accounting practices of many corporations throughout the United States and was a factor in the creation of the Sarbanes-Oxley Act of 2002. Enron filed for bankruptcy protection in the Southern District of New York in late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. It emerged from bankruptcy in November 2004 after one of the biggest and most complex bankruptcy cases in U.S. history. On September 7, 2006, Enron sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. Following the scandal, lawsuits against Enron's directors were notable because the directors settled the suits by paying very significant sums of money personally. The scandal also caused the dissolution...
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...controls in place and fraudulent activities were unlimited. Andrew Fastow created LJM1 to handle investments with Rhythms NetConnections, high-speed Internet service provider. The stock that they bought at $10 million was worth $300 million after a year. Enron tried to sell the stocks to an investor, in case the stock price dropped. They could not find an investor to purchase the stock at the put option because of the risks that was involved. 2) How might Enron’s harsh Performance Review Committee (PRC) have aided company executives in committing the fraud? Enron’s harsh Performance Review Committee (PRC) has aided company executives in committing the fraud because the high turnover may have caused them to seek revenge. All of the Enron employees were rated on a scale of 1-5. The employees that are at bottom of the scale were terminated and replaced. The employee may have known that they did not do so well and would be rated as the lowest score on the scale. They may have stopped putting as much effort into the work because they knew beforehand that they were going to be released. They may have felt as though they needed to get the rewards that were well... 3) The fraud at Enron is one of many major financial statement fraud that have occurred in recent years ( Quest, Global Crossing, WorldCom ).What are some factors that could...
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...American Business Ethics: Enron Born from the merger of InterNorth Inc. and Houston Natural Gas Company in 1985, Enron began an energy trading corporation. At the time of its creation, the natural gas market was extremely volatile. As such, a considerable amount of uncertainty existed about the future price of natural gas. Consumers could not obtain reliable prices for natural gas because suppliers and sellers of natural gas could agree to long-term prices due to this volatility. From these circumstances, Enron emerged as an innovator and market leader because it understood that it could help calm volatility in the natural gas market by acting as an intermediary between producers and sellers of natural gas. They did this by purchasing large amounts of short-term natural gas contracts from suppliers and subsequently contracting long-term agreements with sellers. This, in effect, eased volatility and allowed consumers to obtain constant or steady prices for natural gas. Though it began as a trading company, Enron diversified by buying many different types of assets, both energy and other consumer goods. At its peak, Enron was worth $60 billion dollars and had a stock price of $90 per share. In fact, Fortune Magazine named Enron “The Most Innovative Company” for six straight years. Enron’s downfall began with poor and misleading financial reporting which led to the discovery of fraudulent activity by Enron’s officers. The fraud Enron perpetrated center around...
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