Scandal Involving Enron Corporation

ENRON ‘S SCANDAL

Introduction: after 2002, Enron ‘s dirt was discovered, after that many surveies, studies, instances and others were issued to seek to cognize what are the factors taking to this fraud? . This study aims to place the related factors in this state of affairs, and to give some recommendations to forestall it from go oning once more.

How did the Scandal ( fraud ) occur?

ENRON was one of the largest energy corporation across the universe, it found a batch of Special Purpose Entities ( SPEs ) to function its awful mark. It had n’t owned any stock in these SPEs, merely control over by understandings and allow the BOD from its work forces, so, it forced the SPEs to do loans for itself. ENRON recorded these loans as Revenues. Here, the function of Arthur Anderson ( AA ) was considered. AA served Enron with Attestation services and Consulting services at the same clip, and that was a existent misdemeanor in the Independency Standard. So, AA was participated in this fraud. In 2001, they discover this dirt, and the investors lost their money. AA was liquidated ; the interested parties ( CEOs, attorneies, Banks ) were punished.

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Problem Statement:

The Fraud made by ENRON, what went incorrect? Who is accountable?

The intent of the study:

This study aims to place, detect, environment and put the finger on all parties that had a direct and indirect relationship with Enron, which helped to do this fraud. These factors are mentioned in the undermentioned inquiries:

  • What is Enron? Who is affected?
  • What is the function of the hearer “ Arthur Anderson ”?
  • How the Enron ‘s amalgamate companies ( Particular Purpose Entities ) exploited and employed to do this fraud.
  • What is the function of the Bankss?
  • How the accounting environment indirectly helped, allowed and permitted to make this state of affairs.
  • How the Securities and Exchange Commission “ SEC ” and the accounting environment developed and improved to forestall such instance once more.
  • How this instance helped to detect the existent facts and fortunes of other corporations.

The relevancy of the study:

The study puts a limelight on how the ordinary individual should moderately, safely put his nest eggs after analyzing all factors and hazards that might impact his life nest eggs. On the other manus, this study gives the comptrollers a vision to look at the corporation from all possible sides and faces, by the manner, it could back up a good standard for the hearers to cover with their clients.

LITERATURE REVIEW

There are many surveies published overall the universe to place, explicate, construe, analyze, discover facts and seting solutions for the quandary of Enron ( An American energy, trade goods, and services company based in Housten, Texas ) that made a large fraud in the universe of accounting at 2002. Three of these surveies discussed as follow:

[ 1 ] The rise and autumn of Enron, by William Thomas. April 2002, published in Journal of Accountancy.

This study was written to demo the narrative of Enron and the factors related to this state of affairs that helped Enron ‘s direction to accomplish their programs. Thomas begins with the rise of Enron and what helped Enron to make this offense so he showed the manner of the fraud that tricked the stockholders including the function of the hearer of Enron “ Arthur Anderson ” , after that he mentioned how the American Institute of Certified Public Accountants “ AICPA ” trades with this job and what the Securities and Exchange Commission “ SEC ” stated to forestall this instance once more. This article issued in the Journal of Accountancy that ‘s specialized in accounting and auditing, so it ‘s non written to public because it mentioned this job harmonizing to criterions of accounting and scrutinizing out of the head of non-accountants.

[ 2 ] Enron and Arthur Anderson: the instance of the crooked A and the fallen E, by Cunningham and Harries, March 2006, Book: Global Positions on Accounting Education.

This study shows the brother relationship between Enron and its hearer Arthur Anderson, that is so strong as you want to speak and describe the instance of Enron you must see the factor and the function of Arthur Anderson every bit, the authors discussed the narrative of Enron and how it attracted people to purchase its stocks from the all planetary universe, and how Arthur Anderson helped Enron to accomplish their fraud. They considered the function of the U.S authorities and other legal parties and how they treated with this instance. Then they discussed the job in U.S. position and how the Financial Accounting Standard Board “ FASB ” and Generally Accepted Accounting Principles “ GAAP ” improved and developed to forestall such job.

[ 3 ] Enron: Who ‘s Accountable? by Daniel Kadlec, January 2002.

This study aims to place and detect the responsible parties of the fraud events and how the accounting theories and criterions helped the direction of Enron to do this fraud, and the function of the hearer “ Arthur Anderson ” that played a game with Enron to state to the stockholders: “ Game Over ” . He mentioned the function of the attorneies and lawyers to accomplish what the direction wants and covered the illegal methods made by Enron and Arthur Anderson.

Theoretical Model:

1 ) Variables of the survey:

1- Enron ‘s Fraud: ( D.V )

Enron is an American corporation based in Houston and Texas that provides energy-trading and public-service corporations. Enron ‘s executives employed accounting patterns that falsely inflated the company ‘s grosss, which at the tallness of the dirt, made the house become the 7th largest corporation in the US.

2- Enron ‘s Board of Directors ( BOD ) : ( I.V )

One of the function of BOD is to choose and compensate the executives. 15 members with more than 15 old ages of experience in the board of Enron and many of them are members at board in other companies, failed to safeguard Enron ‘s stockholders by leting executive to do inappropriate minutess, extended unrevealed off-the books activities and inordinate executive compensations.

3- CEOs and other cardinal employees: ( I.V )

• Kenneth Lay was Enron ‘s Chief Executive Officer ( CEO ) since 1985. Lay gave up his place in early 2001 to Jeffrey Skilling, but was re-elected in August 2001 when

Skilling resigned. Under force per unit areas from creditors, Lay resigned in January 2002. Skilling reported that he left due to personal grounds after more than ten old ages with Enron. Lay and Skilling allegedly played major functions in the bankruptcy, but did non

hold a direct impact on the fiscal coverage and scrutinizing issues.

• Andrew Fastow was Enron’s Chief Financial Officer ( CFO ) until October 2001, when Lay fired him. Fastow had the repute of being a money ace who constructed the complex fiscal vehicles that drove Enron’s growing. Since 1993, Fastow created SPEs that permitted accounting misrepresentations. Fastow plead guilty in a plea-bargaining agreement with his married woman, who was besides implicated.

• David Delainey was the CEO of the retail and sweeping energy divisions. He plead

guilty to insider trading, for wittingly take parting in pull stringsing reported fiscal public presentation.

• Ben Gilsan, Jr. was financial officer of Enron until he was fired in October 2001, for profiting personally from one of Enron’s complex SPE investings. He was a former comptroller with Andersen and played a cardinal function in accounting-related misrepresentations. He plead guilty to one count of confederacy related to fiscal coverage misrepresentation.

• Michael Kopper was Fastow’s helper who was actively and sharply involved in making and pull offing SPEs, and in the accounting misrepresentation, along with Ben Gilsan. He plead guilty to a lesser charge and has been collaborating with the authorities to look into and prosecute others.

• Richard Causey was the main accountant working under Fastow. He plead guilty to

offenses related to unjust fiscal coverage in a plea-bargaining agreement in exchange for his information in the prosecution of Lay and Skilling.

• Sherron Watkins antecedently had a senior place at Enron that was eliminated in a

downsizing activity. She was subsequently re-hired and played a major function as the alleged

“whistle blower” who started the ruin. She had worked several old ages as an comptroller for Arthur Andersen and so moved to Enron where she worked for Andrew Fastow for eight old ages.

• David Duncan, a spouse in the Houston office of Andersen, headed the Enron audit

and allegedly orchestrated a papers tear uping run. Arthur Andersen terminated Duncan’s partnership shortly after events became known publically.

• Joseph Bernardino, managing spouse and CEO of Andersen, tried to support its audit of Enron instead than acknowledging failures and accepting the effects.

• Carl Bass, caput of the Professional Standards Group at the Houston office of Andersen. Bass advised against the auditors’ accepting certain deceptive accounting

patterns of Enron, but Joseph Bernardino overruled him because of ailments by

Duncan.

All of these employees made a direction collusion to do this dirt.

4- Special Purpose Entities ( SPEs ) : ( I.V )

An entity that is created by another company to prosecute in a limited specific type of concern activity, such as owing or renting existent estate. Enron created these entities and owned from 0-20 % of them, but Enron required that all of BOD of these entities selected by Enron.

4- Arthur Anderson ( AA ) : ( I.V )

Enron ‘s external hearer was Arthur Anderson, which besides provided the house with extended internal auditing and consulting services. The confer withing fees were $ 27m on accounted for more than 50 % of $ 52m earned by Arthur Anderson for work on Enron. All of that affected the independence of Arthur Anderson when scrutinizing Enron.

5- Enron ‘s Banks: ( I.V )

They were profoundly involved in the use of its reported and net incomes and the balance sheet. The function played by the Bankss is: the Bankss had existent cognition of the unlawful behavior in minutess, and the Bankss gave significant aid to certain of Enron ‘s officers by take parting in the structuring abd shutting of these inappropriate minutess.

6- Securities and Exchange Commission ( SEC ) : ( I.V )

The bureau of the US Government with the primary duty for ordinance of securities markets.The SEC is responsible for for reexamining houses ‘ fiscal statements and reappraisal companies ‘ one-year study at least one time every three old ages. However, the one-year return of less than 50 % of public companies had been reviewed in the old 3 old ages at the clip of Enron ‘s bankruptcy ( at 2002 ) and no reappraisal of Enron ‘s returns had taken topographic point after that of 1997, despite the warning marks.

7- Generally Accepted Accounting Principles ( GAAP ) : ( I.V )

Guidelines for the presentation of fiscal statements in the US. GAAP allowed and permitted corporations that invests in other companies by less than 50 % to non include Balance Sheet and Income Statement of these attached companies in the corporatin ‘s books straight. Corporation merely record a pro-rata sums, and that helped Enron to conceal the truth about money borrowed from these companies by the name of Enron or other attached companies.

2 ) Theoretical Framework Model:

3 ) Theoretical Explanation for relationships between variables:

1-

The BOD selects and remunerates CEOs and other executives and officers. These employees create the SPEs that played a big function in concealing the truth of grosss of Enron which is that, grosss, in fact, are adoptions and debts from these SPEs.

2-

As antecedently said, AA was Enron ‘s internal and external hearer at the same clip, and its adviser. All of that affect and act upon the independence of this hearer harmonizing to Enron. This interpret the brother relationship between Enron and AA while doing the fraud.

3-

The Bankss of Enron helped and gave it the aid to do the inappropriate minutess.

4-

SEC should reexamine the one-year studies and the fiscal statements of public companies at least one time every 3 old ages, However, the one-year return of less than 50 % of public companies had been reviewed in the old 3 old ages at the clip of Enron ‘s bankruptcy ( at 2002 ) and no reappraisal of Enron ‘s returns had taken topographic point after that of 1997, despite the warning marks. All of that helped Enron to do bogus fiscal statements, and that tricked the investors of Enron.

5-

GAAP allowed and permitted corporations that invests in other companies by less than 50 % to non include Balance Sheet and Income Statement of these attached companies in the corporation ‘s books straight. Corporation merely record a pro-rata sums, and that helped Enron to conceal the truth about money borrowed from these companies by the name of Enron or other attached companies.

Datas:

This is more a instance survey. So, I ca n’t use the practical side ( primary informations, questionnaires, population of survey, and the sample ) upon this survey. However, I will use the theoretical side to cover with this instance, by analyzing and analysing the old surveies written about this dirt.

After reexamining, analyzing, and analysing plentifulness of surveies ( secondary informations ) talked about ENRON and how they made the fraud, I concluded that:

The BOD selects and remunerates CEOs and other executives and officers. These employees create the SPEs that played a big function in concealing the truth of grosss of Enron which is that, grosss, in fact, are adoptions and debts from these SPEs.

As antecedently said, AA was Enron ‘s internal and external hearer at the same clip, and its adviser. All of that affect and act upon the independence of this hearer harmonizing to Enron. This interpret the brother relationship between Enron and AA while doing the fraud.

The Bankss of Enron helped and gave it the aid to do the inappropriate minutess.

GAAP allowed and permitted corporations that invests in other companies by less than 50 % to non include Balance Sheet and Income Statement of these attached companies in the corporation ‘s books straight. Corporation merely record a pro-rata sums, and that helped Enron to conceal the truth about money borrowed from these companies by the name of Enron or other attached companies.

SEC should reexamine the one-year studies and the fiscal statements of public companies at least one time every 3 old ages, However, the one-year return of less than 50 % of public companies had been reviewed in the old 3 old ages at the clip of Enron ‘s bankruptcy ( at 2002 ) and no reappraisal of Enron ‘s returns had taken topographic point after that of 1997, despite the warning marks. All of that helped Enron to do bogus fiscal statements, and that tricked the investors of Enron.

Recommendations

So, if we want to forestall this dirt from go oning once more such as Worldcom and other corporations, we should cognize how to put our nest eggs off from these multi hazards, by analysing corporations ‘ fiscal statements and traveling beyond the Numberss to maintain ourselves cognizant by everything happens in the corporation and around it.

In add-on, the authorities and the responsible parties should set, better, and put new Torahs, ordinances and limitations on how can the corporation invest and construct other companies, and they should do more control on the hearer of the corporation.

Decision:

After this dirt, many regulations and readings were issued to forestall this from go oning once more, in conformity of authorities and the accounting criterions all over the universe. These criterions centralized about that, a company can command over another house without having any stock, and doing penalty on the audit houses if they violated the criterions.

Mentions:

  • – Bethany Mclean, September 2004. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron.
  • – Brian Cruver, 2002. Anatomy of Greed: The Unshredded Truth from an Enron Insider.
  • – Cunningham and Harris, March 2006. Enron and Arthur Anderson: the instance of the crooked Tocopherol and the fallen A, [ article ] , from book: Global Position on Accounting Education.
  • – Daniel Kadlec, January 2002. Enron: Who ‘s Accountable, [ article ] .
  • – Kurt Eichenwald, March 2005. Conspiracy of Fools: A True Story.
  • – Mimi Swartz, March 2003. Power Failure: The Inside Story of the Collapse of Enron.
  • – Richard Munson, 2005. From Edison to Enron: The Business of Power and What It Means for the Future of Electricity.
  • – William Thomas, April 2002. The Rise and Fall of Enron, [ article ] published in Journal of Accountancy.

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Scandal Involving Enron Corporation. (2016, Nov 18). Retrieved from https://graduateway.com/scandal-involving-enron-corporation/