...| 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 Enron Scandal Background Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff 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.[1] 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. Financial Frauds Enron’s downfall is basically the accumulated effect of its unethical practices in financing and reporting. Enron's non-transparent financial statements did not clearly depict its operations and finances with shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to portray a favorable depiction of its performance. Enron's accounting and financial transactions is designed to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books. The combination of these issues later led to the bankruptcy of the company: Aggressive Revenue Recognition As an energy supplier, Enron can be considered as merchants or agents. As merchant...
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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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...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 $618 million. • On October 22, 2001, the Securities and Exchange Commission (SEC) begins an inquiry into Enron’s accounting practices. • On December 2, 2001, Enron files for bankruptcy. : Oct – Dec 2001 Regulatory Oversight of Enron Auditors Arthur Anderson Audit Committee (Directors) SEC Company Report Shareholders Enron Board...
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...Busicom2 – 05/02/10 Executive Summary In 2001 fell Enron after one of the biggest scandals in the modern economy. Creative accounting, oppressive management and deceptive communication are in the heart of that affair. The first ruse was a cheating accounting. The company used the mark to market system, but in an illegal way for they calculated the assumed profits for the next 20 years, ie long term assumed profits. Moreover, they did not declare all the expenses (only a third for the trade with the station in the North Sea) and manipulated subsidiaries, which are told independent when they belong at least 3% of their capital, to hide debts and boost earnings. Besides, the management in Enron used the staff performance review which conducts the staff to work hard in order to be in the group of the ‘winners’. There were actually rewards for good employees, pension and savings, so that they would be interested in the good form of the firm and would not complain against the scam. Enron also managed to corrupt some politicians, bankers, analysts by pressurizing them or by giving great advantages and funds. For instance, the Energy Regulation Board earned one million dollars. Their marketing strategy was a diversification of the production of the corruption of analysts who would promote those new products. When the frauds were discovered by an employee and exposed to the Securities and Exchange Commission, the free fall began for Enron. The shares dropped from 90$ to 1$, the company...
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...1. Enron was valued at $2.3 billion when it was formed in July 1985. On August 23, 2000, its stock was at $90 per share and it had a market capitalization of $65.9 billion. Explain the major business practices that created such dynamic growth in the price of the stock. Enron used many different tactics to inflate their stock prices. The one that sticks out to me is when they signed a 20-year contract with Blockbuster. Early in the contract Blockbuster and Enron parted ways with a null and void contract. However, Enron still kept the contract on the books as future earnings when they knew that money was never going to come in. They did this so their stocks prices would stay inflated. Another practice is that they switched from an agent model to a merchant model when recognizing revenue. Doing this gave them a 65% increase when typical industry standards only gain between 2-3%. Once they switched to this accounting method other companies started to follow their lead in order to stay competitive with Enron. In addition, Enron understated its liability and overstated its equity. They would do this by creating special purpose entities. These entities were created to show investors the downside of risk. I believe the main reason the stock increased so much is due to corruption of Arthur Andersen, an independent audit firm. On Wikipedia’s website there was a statement from Enron’s Power Committee and it appears they were placing blame on the Andersen firm. They were quoted...
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...Focus: The Enron Scandal This corporation was identified by Fortune Magazine as America’s Most Innovative Company 1996 to 2001 (Lindstrom par. 1). It was garnered as the 7th largest company on the Fortune 500 list in the US in 2000 and it placed sixth in the largest energy company in the world in 2000 (“Enron Corporation” par. 6). Who does not know the Enron Corporation, a giant in the commerce of energy? But among all these prestigious titles, there is another that the Enron Corporation is famous for, the Enron Scandal. Enron was the result of a merger between two gas pipe line companies in 1985. The Houston Natural Gas Co and a Nebraska based company called InterNorth. The fusion between the two became the Enron Corporation in 1986 (“Enron Corporation” par. 2). The firm experienced a rapid growth as it shifted from being a gas pipeline company into a “global energy trader (“Enron Corporation” par. 6).” Enron enjoyed profuse economic benefits and experienced revenues amounting up to 100 billion dollars by 2000 (“Enron Corporation” par. 6). The firm ventured to other facilities like Internet broadband called Enron Online (Lindstrom par. 9). For a company who reported to be harvesting so much profit and having so many investments would boggle your mind on why Enron still broke down. Where did Enron go wrong? What brought this billion dollar business down into bankruptcy? It was in the year 2001 that the company’s stability was put into question. Enron entered...
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...The Enron scandal Tobias Pavel 910422 Mylene Encontro 850224 Chalmers University of Technology Finacial Risk, MVE220 Examiner: Holger Rootzén 2012-12-02 Göteborg This report has been written and analyzed by both group members jointly. Abstract From the 1990's until the fall of 2001, Enron was famous throughout the business world and was known as an innovator, technology powerhouse, and a corporation with no fear. The sudden fall of Enron in the end of 2001 shattered not just the business world but also the lives of their employees and the people who believed that their soar to greatness was genuine. Their collapse was followed by a series of revelations on how they manipulated their success. Introduction Enron shocked the world from being “America’s most innovative company” to America's biggest corporate bankruptcy at its time. At its peak, Enron was America's seventh largest corporation. Enron gave the illusion that it was a steady company with good revenue but that was not the case, a large part of Enron’s profits were made of paper. This was made possible by masterfully designed accounting and morally questionable acts by traders and executives. Deep debt and surfacing information about hiding losses gave the company big problems and in the late 2001 Enron declared bankruptcy under Chapter 11 of the United States Bankruptcy Code. Many factors affected Enron's surge to the top and its sudden fall. In this report we will discuss and present what we think...
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...energy, commodities and services company, Enron Corporation, filed for bankruptcy. This was not just an ordinary corporate bankruptcy; this was the largest corporate bankruptcy in the history of the United States (Gutman, 2002). Understanding the reason behind the bankruptcy filed by Enron, which employed over 20,000 people, is instrumental in understanding why major changes in the accounting industry have to come to pass. To understand why Enron filed for bankruptcy, one must first understand who was handling their company finances. That who was Arthur Andersen, the accounting firm convicted of obstruction of justice by destroying documentation relating to Enron’s finances. Although Arthur Andersen was auditing the accounts of the Enron Corporation, it was Enron’s own executives that lead to its downfall. At the time, there were certain securities in place to help protect investors and the public such as Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and a few other things such as the business code of ethics. However, Enron executives found a way around this. Unfortunately for them, that way was illegal and led to the scam being known as the Enron Scandal. The top executives at Enron had been inflating their balance sheets by valuing assets at far greater values than their worth as well as hiding their liabilities. Not only did Enron build a mountain for their company in engaging...
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...Enron Corporation was an American energy, commodities, and service company based in Houston, Texas. It was founded in 1985 as a merger between Houston Natural Gas and InterNorth. Enron eventually became one of the world’s largest electric, gas, and communications company. In 2000, the company’s annual revenue reached $100 billion. Enron was ranked as the seventh-largest company. Shortly after, Enron’s stock price would drop from $90 in August 2000 to $0.26 in November 2001. Enron was caught committing accounting fraud, now known as the Enron Scandal. The beginning of Enron’s fraud began in 1992 when Jeff Skilling, the president of Enron’s trading operations, convinced Federal regulators to allow Enron to use the “mark to market” accounting method. Mark to market is an accounting practice that involves recording the value of an asset to reflect its current market levels. Enron used mark to market accounting for contracts that had predictable future cash flow. “Use of this accounting method allowed Enron to take up front most of the anticipated profits on such contracts, and the requirements to write them down if their value diminished” (Enron- A Case Study, 2008). Enron could show significant profits and overstate its financial position. Enron had also misled the public into...
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...The Enron Scandal Case Study FACTS OF THE CASE Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Enron's predecessor was the Northern Natural Gas Company, which was formed during 1932, in Omaha, Nebraska. It was reorganized during 1979 as the main subsidiary of a holding company, Inter-North which was a diversified energy and energy related products company. During 1985, it bought the smaller and less diversified Houston Natural Gas company > Employed approximately 20,000 staff > One of the world's major electricity, natural gas, communications, and pulp and paper companies. > Revenues of nearly $40.1 billion. Enron was almost universally considered one of the country's most innovative companies. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses. Enron’s Line of Business Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built, and operated power plants and pipelines while dealing with rules of law and other infrastructures worldwide. Enron owned a large network of natural gas pipelines, which stretched ocean to ocean and border to border. Enron Corporation represented one of the largest fraud scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. Enron was “a provider...
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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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...Enron as an ethical dilemma can only be described as a travesty. The violations of ethical code and moral obligation ceased to exist while the company was alive. A tremendous contributor to the scandal is Arthur Anderson, who was Enron’s outside auditor since 1985. Arthur Anderson was able to hide major losses from Enron. Many projects that had failed through Enron seemingly went unnoticed as they were covered up by Anderson. Not only was this illegal, but it was ethically wrong of Anderson and Enron to do. Most of what Enron did violated business legality. The decision to break these laws is surrounded by the unethical approach the company took in order to maintain company power. The categorical imperative of the energy giant is that in order to maintain power, we as a company must hide our losses. This is one of Immanuel Kant’s theories that focuses on imperatives and what human beings deem as necessity, and what actions must occur in order to reach ones goal. So in this case it is clear what Enron deemed as necessity. Next, I will talk about the utilitarian theory and how it relates to the ethical dilemma at Enron. Utilitarian is the theory in which we as people attempt to minimize the harm in our decision making process while also maximizing the good. In the case of Enron, executives, on the surface, may have acted in a utilitarian manner, but ultimately created more harm than good. The deeper levels of unethical behavior and illegal activity would show that Enron was...
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...ENRON SCANDAL Enron was formed in 1985 from merger of two companies; Houston Gas and InterNorth Inc. by Kenneth Lay. It grew to be among the highly innovative companies throughout 1990s. Its unique business strategy made it known. Initially, the company’s objective was to sell electricity and gas but by 1990s it had ventured into other businesses such as pulp and paper companies and communications . Its success was indicated by the rise in annual revenues; between 1995 and 2000 Enron recorded a revenue rise of $91 billion dollars. However in 2001 as notes accounting fraud was revealed in its financial reports. It was established that the company had indeed experienced a loss of more that $500 million dollars (Li, 2010) for the previous five years; contrary to its audit reports. The company fell bankrupt later in 2001. This essay examines the scandal, its effects and critically gives an ethical analysis of the situation. Enron scandal is the worst to have ever happened in the US business industry. Enron’s bankruptcy was a result of accounting fraud which was substantially institutionalized and creatively crafted within the management. The management focused on converting all the strategies into success to maintain their heavy compensations-through accounting manipulation; a greed financial officer with underground agreements to enrich himself; a collaborative law and auditing firms in Elkins and Arthur Andersen respectively; corrupt investment bankers- they structured...
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...Enron Corporation was established in 1985 by Ken Lay after merging Houston Natural Gas and Internorth, it has more than 20,000 employees and it's one of the seven largest electricity, natural gas company. Before it went to bankruptcy, Enron claimed revenues of almost $101 billion in 2000, placed Enron at sixth on the Fortune Global 500, it also named "America's most innovative company" for the past six years(1996-2001). In 10/22/2001, The "street.com website pronounced a message revealed the complex financial transaction between Enron and Osprey Co., through Osprey, Enron debited 340 billion dollars"○1 which never appeared in the financial statement. At the same time, SEC began to investigate Enron, thus, the Enron's accounting scandal finally above the water. The first person who became the whistleblower disclosure Enron's financial fraud was Watkins and Cooper, although the CFO asked cooper to postpone her investigation, Cooper still doing her audit to alert the board about the financial statement problems, at the meantime, Watkins outlined the problems in a memo to Ken Lay, "but by the time Watkins and Cooper blew the whistle, much damage had already been done and the shareholders and employees were the ultimate losers."○2 Whistleblower program is very important to minimum a corporation's hazardous activities, but the blower often face some awkward situations, such as fear of the manager's retaliation, fear to be treat as a betrayer by the workmates, unwilling to be...
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