...The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron The tale of Enron is a story of human weakness, of hubris and greed and rampant self-delusion; of ambition run amok; of a grand experiment in the deregulated world; of a business model that didn’t work; and of smart people who believed their next gamble would cover their last disaster—and who couldn’t admit they were wrong.1 Once one of the country’s foremost companies in regards to earnings, innovation, and reputation, Enron seemed to have it all. No one would have ever suspected that the company was billions of dollars in debt. Those at the top frequently assured everyone that all was well. No one thought to look any further. And therein lies the problem… While there is an endless list of things that could have altered the path Enron was on, I am only going to touch on a few of my recommendations. First of all, the corporate culture of Enron was a breeding ground for greed and immoral actions. Employees were rewarded for the money they brought in, no matter how it was made. They were encouraged to use unsavory ways to drive the price of their product up, no matter the cost to the consumer. They exploited their customers time and time again in the name of good business. This all stemmed from the “tone at the top.”2 “Tone at the top is a level of commitment to integrity, to doing the right thing at all costs despite the consequences such action may have on financial performance. Actions...
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...Summary: Enron and Arthur Andersen The article described the rise and fall of the Enron Company during the period of time that managed by several executives. The deregulation of public utility industries gives Enron chance to make profit by trading energy as commodity in the open market. Thus, Enron ranked the seventh largest of the Fortune 500 at the year of 2000. However, for the purpose of rise company shares and control current risk of company, Enron deals agreements with internal related companies, which is owned by Enron executives, in order to rise company value and increase stock price. These special purpose entities (SPEs) overvalued Enron’s share about 600million and finally drove company to bankruptcy. Three main aspects point out by author that indicates how Enron Company filed for bankruptcy. Firstly, rather than hedging its risk by entering into contract with independent third parties, Enron entering agreement with its own executives company to control risk level. Secondly, Enron’s Chief Financial Officer Andrew Fastow fully controls trading agreements between Enron and SPEs, which means he can make personal profits by cheat other investors. Thirdly, the accounting firm—Arthur Andersen, which have responsibility to providing allegedly unbiased and accurate financial reports to help investors decision making whether invest or not into a corporation. For the purpose of keep receiving huge amount of consulting and advising fees from Enron, Andersen auditors also...
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...Brady Heidrick Dr. Dan Deines ACCTG 641 15 October 2014 The Meteoric Rise and Fall of Enron Enron was created in 1985 after a merger between Houston Natural Gas and Internorth. By 2002 it was gone forever. Its stock price rose to $90/share in August of 2000 before bottoming out at $0.40/share when they filed for bankruptcy on Dec. 2nd 2001. It only took 16 years for one of the largest Fortune 500 companies to completely dissolve, taking employee jobs, pensions, Arthur Andersen, and the American public’s faith with it. Enron and its young McKinsey consultant created the energy derivative and used it to form the new natural gas division that dominated the market. However, the use of mark-to-market accounting and the creation of Special Purpose Entities (SPEs) led to overstated profits and inaccurate balance sheets. By the fall of 2001 nobody could find out how Enron was making its money. A disclosure on the October financial statements for a $1.2 billon dollar reversal caught the Security and Exchange Commission’s (SEC) attention. They launched an investigation and in less than two months Enron filed for bankruptcy protection. A large part of the scandal also focused around Arthur Andersen, at the time of the of the Big Five accounting firms, because of its qualified auditing opinions of Enron. It ultimately ceased to exist because of its involvement with the Enron fraud. The Enron scandal showed the public that changes in accounting and auditing standards...
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...1/25/13 The rise and fall of Arthur Andersen Arthur Andersen Arthur Andersen was born in Plano, Illinois in 1885. He graduated the University of Illinois in 1908 with a degree in accounting. At the age of 23, he was the youngest Certified Public Accountant in the state of Illinois. From 1907 to 1911 he served as the Senior Consultant for Price Waterhouse in Chicago. In 1913, Andersen decided to establish his own accounting firm. At the age of 28, he founded the public accounting firm of Andersen, DeLany & Company in Chicago. Licensed as accountants and auditors in many states across the country, the company grew rapidly during the 1920s. The firm opened six offices nationwide, the most important of which were located in New York (1921), Kansas City (1923), and Los Angeles (1926). During World War II Andersen himself reached the pinnacle of his success. After World War II, Andersen began training his associate, Leonard Spacek, for the company's leadership position. Spacek joined the company in 1928 and was named a partner in 1940, becoming one of Andersen's closest and most trusted confidants. Upon Andersen's death in January 1947, Spacek took over the company, remaining committed to the regimented management style of the founder. During Spacek's tenure, the firm grew from a regional operation located in Chicago with satellite offices across the United States into an international organization with one-stop, total service offices located around the world. Spacek...
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...one of the largest accounting firms in the United States. We will look and review the mandated requirements for legal compliance (from Chapter 4) and determine which requirements apply to the Arthur Anderson case. Then we will discuss how the issues with the Arthur Anderson case may have played out differently if the Sarbanes-Oxley Act had been enacted in 1999. Next we will determine and discuss which elements of the framework for ethical decision making in business (from Chapter 5) played the biggest role in the Anderson case. Explain your reasoning. Lastly, we will discuss how the situations at Arthur Anderson may have played out differently if their senior management had displayed the habits of strong ethical leaders. Provide specific examples to support your response. Introduction Known as one of the Big Five the Arthur Andersen firm was founded in 1913 by Arthur Andersen and his partner Clarence Delany. The company name was very synonymous for their integrity, ethics and trust, which is necessary for an accounting firm to have and stand by. Our textbook states, “Andersen set standards for the accounting profession and advanced new initiatives on the strength of its then undeniable integrity (pg. 348). Andersen once shown a strong character but with the rise of many high-profile companies filing for bankruptcy, that same character would come into question. Analyzing the Sarbanes-Oxley Act was enacted to by U.S. Congress in 2002 to protect investors...
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...Read the Arthur Andersen’s Troubles Ethics Case on pp. 107–113 (Ch. 2) of the text. Answer questions 1, 3, and 4 on p. 113 in 200 to 300 words. When responding to question 3, focus solely on the Enron case. 1. What did Arthur Andersen contribute to the Enron disaster? Arthur Andersen (AA) did not advise the Enron Audit Committee that Enron’s policies and internal control were not adequate to protect the shareholders’ interests even though AA had assumed Enron’s internal audit function (Brooks, 2007, 110). As their accountants they should have had and were supposed to have had reviewed the company's financial condition and truthfully report on that condition. This would have allowed the investors as well as the public to estimate and know about the risk of trusting Enron and investing in the company. They down played the risk which caused their actions to become illegal. Arthur Anderson helped Enron deceive investors and the public by helping the company keep substantial information private. Many people trusted Arthur Anderson, they were seen as being a respectfully and trustworthy accounting firm; they also believed that they were experts in their work which helped legitimized Enron and gave its financial reports and statement credibility that it may not otherwise have had. AA did not establish nor enforce internal controls for Enron, by doing some fraud would and could have been detected, charges and jail time would have been avoided, and the auditing of papers to cover...
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...Nobody Won Michelle L Brown Oklahoma Wesleyan University Abstract When the Arthur Andersen LLP/Enron scandal surfaced in 2001, there was much confusion as to whom committed what crime and how many employees were actually involved. After the facts and criminal charges were final, the sequence of events makes sense; the union of two companies, the rise of the participating executives, and finally the end of the money ride. The leaders of both companies used dishonesty to make an abundant amount of money and gain power status (Thomas 2002). Christopher Bergland said it best when he wrote, “Karma is a boomerang and the long-term shame and anxiety of cheating will ultimately negate the short-term gains of victory,” (Bergland, 2012). This definitely held true for the employees who were disgraced at the conclusion of the legal proceedings; they may have had more money than they needed, but they ultimately lost in the end. The Beginning The joining between Arthur Andersen LLP and Enron was a marriage too good to be true (Thomas, 2002). The relationship started in 1986 when Enron hired the accounting firm Arthur Andersen LLP to perform “creative accounting,” allowing the energy company to appear more powerful on paper than it really was (Investopedia, 2011). Enron Corporation started investing massive amounts of money in “Special Purpose Entities” to generate huge amounts of revenues. Special Purpose Entities are creative ways for companies to more efficiently raise debt, but...
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...Enron: Case Study 1 The purpose of this paper is to formally address the Enron scandal that came out in late 2001. It will discuss a brief introduction to how Enron came to be such a large and powerful corporation and the decisions made which resulted in its ultimate downfall. While discussing these time periods, accounting issues such as the agency and horizon problems as well as agency costs and the manner in which they affected Enron will be dissected additionally. Lastly, an analysis of these issues and recommendations given in favor of preventing types of corruption like this will be listed out in detail. The company all starts with Kenneth Lay. Lay received a PhD in economics and was interested well ahead of the industry, in energy deregulation. He was promoted by George Bush Sr. to be named as Deregulations Ambassador at Large (Gibney, 2005). In 1990, Jeff Skilling joined Enron and turned the pipeline company essentially into an “energy bank”. This helped immensely for Enron in terms of establishing themselves as a very powerful corporation. “Enron was quickly transformed from a sleepy cash cow to a darling of Wall Street with a bounty of promising opportunities.” (Stewart, 2006). Enron’s misuse of mark to market accounting became step one of a few crucial mistakes that the company had made. “With a wave of accountants’ magic wands, Enron was authorized to record in a single year all the profit that would normally be booked over 10 to 20-year...
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...difficulties due to a large amount of debt and declining revenue. Its $40 billion merger with MCI was the largest in history. They tried to merge with Sprint in mid-2000 but the U.S. Justice Department did not approve. How was the fraud perpetrated? The fraud was not perpetrated in lower levels of the organization. Upper management improperly booked $3.8 billion as capital expenditures, boosting cash flow and profit over 5 quarters, disguising an actual net loss for 2001 and the first quarter of 2002. WorldCom’s management did not account for expenses when it incurred them, instead hiding expenses by pushing them into the future. This made it seem as if they were spending less and making more money. This caused investor confidence to rise, and the stock price to increase at a time when other telecommunications companies were struggling. By reclassifying operating expenses as capital expenditures, WorldCom was secretly hiding a large amount of expenses. Operational expenses are decreases in the company’s assets from its profit-directed activities, and result in negative cash flows (Williams). Examples of operational expenses are office...
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...Enterprise Risk Management at Hydro One (A) An early adopter of Enterprise Risk Management, energy giant Hydro One anticipated new threats and opportunities in an industry that faced climate change and carbon legislation, the deregulation of electricity markets, and the greater adoption of renewable technologies. CEO Laura Formusa felt Hydro One's risk profile had shifted, to the extent that she had to ask herself -- was the strategy tenable? The case provides a rich description of Enterprise Risk Management in action, and shows how Hydro One executives arrive at a shared understanding of the risk profile of the company. In the narrative a diverse group of managers (the chief executive, the chief financial officer, the head of the public relations and the chief regulatory officer) voice their views on the risks, collectively bringing a multiple stakeholder perspective to the risk profile. The case challenges students to define the problems and risks that the company faces, given its strategic objectives, its evolving risk profile, and the changing environment. The case also offers a discussion ground for defining the role of the chief risk officer, and the relationship between risk management, strategic planning and capital budgeting. Procomp Informatic: Stepping on Ethical Landmines in Asia The collapse of Procomp Informatics Ltd, a major Taiwanese chipmaker, has been regarded by Taiwan's market watchdogs as similar to the scandal of the U.S. energy giant Enron in 2001....
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...Management Vol. 5, No. 10; October 2010 The Case Analysis of the Scandal of Enron Yuhao Li Huntsman School of Business, Utah State University, Logan city, U.S.A E-mail: wyl_2001_ren@126.com, carolee1989@gmail.com Abstract 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 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 undoubtedly is the biggest audit failure. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. In this paper, it analysis the reason for this event in detail including the management, conflict of interest and accounting fraud. Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and Corporation’s Angle. Keywords: Enron scandal, Accounting fraud, Moral responsibility, Analysis 1. Review of Enron’s Rise and Fall Throughout the late 1990s, Enron was almost universally considered one of the country's most innovative companies -- a new-economy maverick that forsook musty, old industries with their cumbersome hard assets in favor of the freewheeling world of e-commerce. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses. Besides buying and...
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...Management Vol. 5, No. 10; October 2010 The Case Analysis of the Scandal of Enron Yuhao Li Huntsman School of Business, Utah State University, Logan city, U.S.A E-mail: wyl_2001_ren@126.com, carolee1989@gmail.com Abstract 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 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 undoubtedly is the biggest audit failure. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. In this paper, it analysis the reason for this event in detail including the management, conflict of interest and accounting fraud. Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and Corporation’s Angle. Keywords: Enron scandal, Accounting fraud, Moral responsibility, Analysis 1. Review of Enron’s Rise and Fall Throughout the late 1990s, Enron was almost universally considered one of the country's most innovative companies -- a new-economy maverick that forsook musty, old industries with their cumbersome hard assets in favor of the freewheeling world of e-commerce. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses. Besides buying and...
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...The Fall of Enron 1. Introduction Although Enron went bankrupt and disappeared ten years ago, the impacts it has made on the ethical standards never faded. It took Enron 16 years to go from about ten billion dollar assets to more than sixty-five billion dollar assets, and took twenty-four days to go bankrupt. (McLean & Elkind, 2004) Enron, which once ranked as the seventh-largest company on the Fortune 500 and ranked as the sixth-largest energy company in the world, on December 2, 2001, filed for bankruptcy protection in the biggest case of bankruptcy in the United States up to that point (Jennings, 2009, p. 285). By November 2001, the company’s stock, which once peaked at $90 US, was down to less than $1 US. It was a disaster for the thousands of employees and investors (Skilling v. United States, 2010). Employees lost their jobs and pensions, and investors lost billions of dollars. The Enron scandal is one that left a deep and ugly scar on the face of modern business. In this article, the facts of Enron’s case were reviewed and the major ethical issues involved in Enron’s scandal were analyzed. The rest of the paper is organized as follows. The second part is a brief summary of what has happened in Enron. The third part described the role of Arthur Andersen (AA) in the Enron scandal. In the following parts the culture of Enron, the important people involved in this case, and also the major ethical issues about this scandal were analyzed. At last, the conclusion...
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...EXECUTIVE SUMMARY This paper investigates about the Enron Corporation and Arthur Anderson. This assignment is to identify the background of Enron and Arthur Anderson and Enron fail. Other than that, identify the business risks that faced by Enron. Moreover, determine the responsibilities of board of directors and steps to improve corporate governance. Besides that, differentiated between rules-based accounting and principle-based accounting and the uses. In addition, there are discussion about auditor should allowed to provide non-audit services. There are also critical discussion on the reason audit partners struggle with making tough accounting decisions and a good recommendation of changes to be made. 1.0 Background of Enron Corporation and Arthur Anderson and fall Of Enron. 1.1 Background of Enron Corporation Enron was established in the middle of a recession in 1985, when Kenneth Lay CEO of Houston Natural Gas Company (HNG), persuaded a joining among Inter North Incorporate (Peterson). There was a young consultant named Jeffrey Skilling who had a background in banking organization (Peterson). He planned an innovative solution for Enron profit in the natural gas business (Sridharan, Dickes, & Caines). For instance, Enron buy natural gas from suppliers and sell to customers with the higher price (Sridharan, Dickes, & Caines). It is because the demand of natural gas increased (Peterson). Kenneth Lay was very impressed with Skilling’s new solution in 1990 and...
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...WHY THE SARBANES-OXLEY ACT CAME ABOUT OR HOW TO COOK THE BOOKS The Sarbanes-Oxley Act of 2002 (Sarbox, or SOX) was enacted on July 30, 2002, to protect the general public and shareholders from accounting errors, unethical behavior, and corporate scandal. There are 11 titles that include the requirements for reporting, retention period for records storage, management of electronic records, and standards for external auditors. The act is supervised by the Public Company Accounting Oversight Board, and administered by the Securities and Exchange Commission (SEC). Sarbox requires the CEO and CFO to certify and be liable for the annual and quarterly reports that are filed. If the financial reports are discovered to be untrue, such acts of noncompliance are fines, imprisonment, or both, depending on the severity. The Act was designed for publicly traded companies only, in reaction to scandals such as Enron, WorldCom, and Tyco. These scandals cost investors billions of dollars when the companies collapsed, or the stocks plummeted. These companies altered or destroyed records, defrauded shareholders, or “cooked the books”. When a company cooks the books, it means that incorrect information has been used to create their financial statements. They manipulate earnings and expenses to improve the bottom line, or earnings per share (EPS). This manipulation of information is used to bring in new investors, keep the shareholders happy, attain a bonus, and reach their...
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