Introduction I have described the ethical and governance issues of the Enron scandal that took place in 2001. In this paper, there is information about the way things went the way it did with the Enron scandal. They hide a lot of documents pertaining to how their profits increase so rapidly. It also includes the close link Kenneth Lay had with George Bush. The investigators had some help with what happened in the scandal of Enron. Enron scandal at a glance Enron had grew from nowhere to becoming Americas seventh largest company in just 15 years, employing 21,000 staff in more than 40 countries.
They lied about their profits and were accused of a range of shady dealings, including concealing debts so they didn’t show up in the company’s accounts. They had an insider by the name of Michael Kopper whom which spilled the beans about Enron’s murky finances and he also plead guilty. “ In 2006, a federal judge who heard Kopper testify sentenced him to 37 months, compared with the 15 year maximum term he agreed to in his plea”- Los Angeles Time. During the investigation, Enron salvaged its business by spinning off various assets. There were hundreds of U.
S firms who used so-called aggressive accounting methods in order to keep debts or one-off charges away from the headlines figures that were offended. President George W. Bush had passed a tough bill aiming at cracking down on corporate fraud, ordering a review of U. S pension regulations. Enron: The Real Scandal Kenneth Lay, Enron’s chairman/CEO, had a close link with George Bush and other Texas republicans. Lay and other Enron bosses made calls to administration officials begging for help. There is also talk going around about how the congressman was collecting campaign money from Enron.
As a matter of fact, three quarters of the Senate took cash from Enron. Enron’s auditor has admitted to an “error of judgment” in the treatment of the debt of one of Enron’s off-balance sheet vehicle. Because of Enron’s situation, the SEC believes there is a need for systemic reforms in three areas. First is the regulation of auditors. Second is the urgent need to eliminate conflicts of interest in accounting firms; lastly is Americas accounting standards, GAAP standards used to be thought the most rigorous in the world.
Second is Andersen, the company’s firms collected $25 million from Enron, but it earned even more for consulting and other work. The accounting firms is trying to limit or stop the undertaking of consulting work for audit clients because they claim that there is no real conflict of interest. Lastly, it is said to be that if Enron was going by the British standards then they would not have been able to overstate its paid by so much. Enron: The Rise and fall of Enron It is said to believe the motives and attitudes behind the Enron downfall is individual and collective greed born in an atmosphere of market euphoria and corporate arrogance.
They should have known something wasn’t right when Kenneth Lay announced his retirement in February 2001 and then he named Jeffrey Skilling president and CEO of Enron. In the same month that Skilling was named president and CEO, he also held the company’s annual conference with analysts, bragging that the stock (then valued at $80) should be traded at $126 per share. After that the stock kept on decreasing and decreasing. On August 14, just six months after being named CEO’ president, Skilling himself resigned, claiming that he resigned for “personal reasons”.
Enron: Who’s Accountable? Enron’s lawyers gave the workers who audited the company’s books an extraordinary instruction, which was to destroy all audit material, except for the most basic “work paper”. If Enron hadn’t destroyed all of their emails, and other electronic or paper files then the FBI investigators, congressional probers, and workers suing for the loss of their retirement savings would have won. Enron was putting them deeper and deeper into a hole because prior to the subpoena they were destroying documents which are illegal.
Then on top of that, they also were making big contribution to the Presidential campaign of George W. Bush. They gave U. S Attorney General John Ashcraft $57,499 in campaign cash for his failed 2000 Senate re-election bid in Missouri. Texas attorney general John Comyn also accepted $158,000 in campaign contributions from the company. Lessons from the Enron Debacle: Corporate Culture Matters! Enron’s collapse has sent shockwaves all over the financial world raising serious questions about corporate governance. Arthur Andersen turned a blind eye as the money disappeared.
As long as there where a set of off the books, unregulated private partnerships to take on debts, hide losses and kick off inflated revenues, the executives were able to keep bond rating agencies happy. Andrew Fastow took the most blame because he was working on both sides of every transaction manipulating Enron financial statements to enrich him and other service executives. Creative Accounting used at Enron Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules.
Enron took the idea of extending the market-to-market accounting over the short term of two or three years. By doing that their earnings were boosted and profits went up instead of going down in order for Enron to show ongoing growth to the public. Creative accounting made from Enron look really powerful on paper, but like the say “looks can be deceiving”. They used special purpose entities to hide risky investment activities and financial losses. “Enron followed GAAP, thus circumventing any need to be “creative”. When I hear Sherron Watkins say that “Accounting doesn’t get that creative”.
I have to wonder where she got her CPA. She should know that accounting DOES in fact get creative and it’s not because Enron or any other company is trying to fool anyone. They do it that way because it is required of them by the federal government (the SEC requires public companies to use GAAP). The same federal government that supposedly didn’t do enough to “protect” investors insisted that Enron use a certain kind of accounting. ”- (Elision, 2011) Enron created offshore entities, which is a common practice in accounting and tax planning.
Offshore entities have an enhanced level of privacy, that’s why Enron’s auditors, investors and potential whistle blowers didn’t know what was going on (“Creative Accounting,” 2011). Most business creates offshore entities to reduce the amount of taxes they have. It can be done legally (tax avoidance) and it can be illegal (tax evasion). Red flags of possible fraud at Enron There were several red flags of possible fraud at Enron such as forensic warning signals that appeared in Enron’s financial statements in the years 1996-2001. Enron’s revenues increased over 1000%, from $13. 3 to $138. billion in 4 years and 9 months. With an increase like that it ranked them 6th on the Fortune Global 500 (Dharan, 2008). Employees were urged to buy stock and “talk up the stock” to their family and friends. Senator Levin issued a list of the red flags that should have altered the Board to trouble Enron jumped at 60 percent in cash sales during the manipulating years, but cash margins and earnings declined. They also had a change in receivable which was also twice that of the average firm. Enron showed an abnormal decline in employee count that was six times as large as that of the average firm.
Variable Interest Entities used by Enron able in “In 2001, Enron highlighted the limitations of consolidation standards that focused on equity ownership. They sponsored a lot of legally separate “shadow entities”, but did not consolidate”. Identifying variable interest equity is important because the company should consolidate such entities if it is the primary beneficiary of the variable. Because Enron did not consolidate their entities, and by doing that they understand their debt and over stated their income by recognizing transaction with the special purpose entity.
In the wake on Enron, a new accounting guideline provides special purpose entities wake on Enron, a new accounting guideline provides special purpose entities with guidance on consolidation principles. – Stephen Spector. A special purpose entity is an entity created by an asset sponsor to carry out a specific purpose, activity or series of transactions. Companies use SPE’s to access capital and manage risk. Examples of transactions that involve SPE’s include the following: 1. Lease arrangement 2. Financing arrangements with third party financial institutions to fund acquisitions of assets or businesses or 3. Project development activities.
While Enron debacle was going on, in order for an independent third party investor to represent a legal equity ownership interest in a SPE, the U. S GAAP requires a minimum three per cent investment from them. Corporate Governance and other compromises apparent at Enron Corporate governance is the process by which a corporation management is held accountable to its residual owners. Even though the implosion of Enron was unquestionably the decisive event that shaped the content and timing of the new corporate governance paradigm, their signifance in this regard couldn’t fully be appreciated except in the context of the changes in expectation.
After looking at the responses to Enron of the principal spokesmen on issues of corporate governance, it is easier to understand why Sarbanes-Oxley became inevitability. Both organizations convened tasked forces or special committees to reassess and further refine their position on best practices for corporate governance within weeks of Enron bankruptcy filing. BRT was the first to do it. In May 2002, the BRT issued its restatement of the “guiding principles of corporate governance”. There are three things that are striking about the BRT position in its “Principles of Corporate Governance”.
The BRT continued to insist that the United States has the best corporate governance and financial reporting systems in the world (Alton B. Harris, 2003). Earning Management at Enron Earning management, just like create accounting, is also a euphemism referring to accounting practice that may follow the letter of the rules of standard accounting practices. It is strategy the management of a company uses to make the actual earnings figures match post projection and goals. Earning management is under the same category as creative accounting. Misrepresenting financial statements with excessive earning management is enforced by U.
S Securities and Exchange Commission. It is important to understand why earning management is so crucial in today’s society. If earnings management continues to grow, it might ruin American capital markets by ruining that’s transparency and reliability of financial statements that investors’ confidence relies on (Rowland 2002). Some managers believe it is necessary to use earnings management. They mentioned the capital markets unwillingness to forgive companies that miss their earnings estimates. In order for them to keep the stockholders happy, they have to do everything they can to make their numbers look good (Lo 2008).
Conclusion I believe that Enron whole scheme was stupid because they knew that eventually they would get caught. It’s not every day that a big Fortune Global 500 profit/ revenues would increase by a large amount in one year. They started lay people off for no apparently reason. Even though they destroyed the paperwork, the public still knew what was going on. They were finally brought to justice. Some were doing jail time and some were released from jail recently. References Alton B. Harris, A. S. K. (2003, June). Corporate governance: Pre-Enron, post-Enron. http://www. uhlaw. om/files/Publication/0478ac3b-512d-4a9b-84fc-00c31e8424c9/Presentation/PublicationAttachment/b5aaa301-8fa0-4d47-b251-0131bfad77a9/Corporate Governance Article. pdf Creative accounting. (2011, November 03). http://www. slideshare. net/Rockstarranbhir/creative-accounting-10013199 Dharan, B. (2008, July 23). Red flags in Enron are reporting of revenues & key financial measures. http://papers. ssrn. com/sol3/papers. cfm? abstract_id=1172222 Elision, C. (2011). Creative accounting at Enron. In The Enron Blog (Ed. ), Kadlec , D. (2002, January 13). Enron: Who’s accountable?
TIME Magazine, http://www. time. com/time/magazine/article/0,9171,1001636,00. html The Institute of Internal Auditors. (2002). Enron-isms: Looking for the red flags. CAE Bulletin, http://www. theiia. org/CAE-bulletin/index. cfm? iid=195 Thomas, C. W. (2002). The Rise and Fall of Enron . Journal of Accountancy. http://www. journalofaccountancy. com/Issues/2002/Apr/TheRiseAndFallOfEnron. htm Unknown. (2002, January 17). Enron: The real scandal. The Economist. http://www. economist. com/node/940091 Unknown. (2002, August 22). Enron scandal at a glance. BBC News-Business.