Accounting Scandals And The Enron Corporation

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

Arthur Andersen was one of the Big 5 accounting firms and the most respected. It was co-founded by Arthur Andersen in 1913. The change in culture and personalities at Arthur Andersen forced the company to involve in scandals. Over the time, profit pressure was increased due to which Arthur Andersen manipulated Enron’s false profits and cash flow statements. Arthur Andersen generated fake profit, hid the losses and kept financing off the Enron’s consolidated financial statements. It also failed to recognize the Generally Accepted Accounting Principles. Also many transactions between Enron and Special Purpose entities were not in the interest of Enron’s Shareholder. Their profits were manipulated by falsely boosting management bonus arrangements.

Effective leaders are good at getting followers to their common goals or objectives in the most effective and efficient way; unfortunately for Enron, in the end Ken Lay and Jeffery skilling were too focused on profits that nothing else mattered. In the beginnings of the company Ken and Jeff were very efficient in growing their company from a small oil and gas pipeline firm into one of the largest entities in its industry. As the company grew and so too did the demands of upper management.

sprees, wild corporate “gatherings” became the norm. Employees who could not afford the lavish lifestyle created at Enron began to take a toll on them. Trying to keep up with the crowd, lower level employees found themselves maxing out their credit cards and putting themselves in debt. This created an environment that seemed to worry less about earning actual profits. According to Li (2010), shareholders and employees were told by Enron’s CEO the stock would probably rise but did not disclose he was selling his stock while telling everyone else to buy. Shareholders were completely unaware of the irregularities going on at Enron and were constantly lied to about the company’s actual health. Actually, employees were never told by any of Enron’s top management team, the true status of the company. Li (2010) stated not only until the investigation surrounding Enron’s bankruptcy enabled shareholders to learn of the CEO stock sell-off before February 14, 2002 which is when the sell-off would otherwise have been disclosed. However, the most damaging act was committed by the accounting firm Arthur Andersen. According to Li (2010), their reputation was damaged by their admission on January 10, 2002 that employees of the firm had destroyed documents and correspondence related to the Enron engagement. The shredding of documents was a clear admission of guilt which eventually caused Arthur Anderson to also file for bankruptcy. Auditor’s reputation is based on being reliable, honest, and

Because Arthur Andersen was trusted and widely lauded as a great accounting firm, it had many clients and a significant profit margin. When it was discovered that the firm had "adjusted" documents for Enron, Arthur Andersen was forced to surrender its CPA licensing (Sachdev, 2003). It was heavily fined, but the damage to its reputation was the worst issue it faced. Once a

The accounting world has changed dramatically during the last two decades, yet at the same time its core responsibilities remain the same as it has in previous eras. Ethically speaking, company accountants and outside accounting firms have been at the crux of many of the disasters that have befallen major corporations both in America, and globally. The word 'Enron' is a prime example of a company becoming a hiss and a byword, and the lack of ethics evidenced in that case is quite blatant. One report states that "after some significant financial scandals around the world, such as those involving Enron, WorldCom, and Arthur Andersen, various United States bodies have appealed to the public for a greater emphasis on accounting ethics" (Ho, Lin, 2008, p. 883). With that demand for higher personal and company-wide ethical standards and behavior has come a shift of the public's perception concerning the role of accountants and/or accounting firms.

Another key factor to its early success was Enron 's change in accounting systems. The company had previously been using a straightforward system that would just list actual profits and the expenses for supplying and distributing the gas to consumers. Skilling spearheaded the transition to a new method called mark-to-market (Fox, 2004). This accounting system allows Enron

Ethical and moral issues have received substantial focus in the modern society because of the recent cases in which huge corporations with big profits and earnings have faced bankruptcy. Enron is an example of corporations that have faced bankruptcy in the recent past because of the numerous problems it had with federal and state governments for manipulation of financial statements. While these problems are not only attributed to organizational issues, accounting firms are also blamed for such incidents. Enron's bankruptcy is mainly attributed to ethical and moral issues experienced by the firm's management and leadership in relation to preparation of financial statements. Even though Enron's heydays have come to an ended, the ethical dilemma provides lessons that will last long in light of corporate values and ethical issues.

Public accounting firms have long played a role in convincing the public the authenticity of the corporates’ financial statements. However, the public started to become skeptical about accountants’ reliability when the Enron scandal occurred. In October 2001, SEC started an investigation against Enron for improper accounting practice. According Sherron S. Watkins, the former vice president for corporate development, Enron failed to disclose complicated deals with its partnerships to inflate the stock price. In a report by Enron’s law firm, Arthur Andersen, the accounting firm that was in charge of auditing Enron, was involved and failed to report the partnership transactions, which resulted in the collapse of Enron.

This case study was about different accounting company's that were investigated and charged with making fraudulent documents and records with money. These different company's in this case study were Enron, WorldCam, and Adelphia Communications (Ferrell, 2009). Enron was founded by former CEO Kenneth Lay, former CEO Jeffrey Skilling and former CEO Andrew Fastow. Enron was one in several other major corporations (most famous) accused of dirty dealings (Ferrell, 2009). Enron had reported 111 billion in 2000. The Corporation collapsed in debt after it had been concealed through a complex scheme of off balanced sheet partnership called mark-to-market. Mark-to-market accounting is assets that are yet to be obtained based on the current market prices. Mark-to-market allowed Enron to record future profits on books as present and ignoring sources of debt boosting the company's revenue on paper (Ferrell, 2009). Enron Corporation was forced to file Chapter 7 bankruptcy and had to lay-off 4,000 employees and a thousand more lost their retirement savings that had been invested in Enron stock. Later former chief financial officer Andrew Fastow was sentenced to six years in prison in exchange for giving prosecutors important information (Ferrell, 2009). Jeffery Skilling was sentenced to 24 years in prison and was ordered to pay back 45 million in restitution for his part in the scandal. Kenneth Lay died before he could began serving his 20-30 year sentence in prison (Ferrell, 2009).

Following the multitude of fraud scandals in the early 2000’s, such as Enron and WorldCom, many accounting firms found themselves as part of a thorough investigation to determine what exactly caused the sudden outburst of accounting fraud. As investors and creditors pursued their lost money from the these business failures, accounting firms began to garner attention for not fulfilling their due process during the audit to detect the fraud before it grew to the extent in which it did. In the case of the Enron scandal, it ultimately turned into the indictment and conviction of Arthur Anderson, one of

Combine the cold-bloodedness of the company culture with Skilling’s relentless risk taking to drive growth; Enron was primed for an epic financial accounting deception. By 2000, trading operations accounted for 99 percent of income, 88 percent of income before tax and 80 percent of identifiable assets, while reported revenue increased from $11,904 million in 1996 to nearly $100,000 million in 2000 – a tenfold increase (Epstein and Lee, 2009). Skilling shifted Enron’s business model from a gas trading and pipeline company to become a Wall Street-like financial trading machine dealing with all sorts of commodities, derivatives, options and hedges. With the diversification, Enron was betting on too many horses and too many risky horses. To offset

Though the numbers looked good, the process behind them was questionable. Unbeknownst to many, Jeff Skilling, a top Enron executive, was able to persuade the SEC and their accounting firm, Arthur Anderson & Company, to approve the use of mark-to-market

Enron was founded in July of 1985. Enron was an electricity and natural gas company which was a fortune 500 company and it was ranked the sixth largest energy company in the world. Enron’s stock went from a peak of $90.75 to $0.67. This was very detrimental to stockholders. Enron’s top executives sold their stock a long time before the stock price fell. A lot of lower level employees could not sell their stock because of deals they made with the company. This later caused a lot of these employees to lose their life savings and everything they had worked for. Enron used a very complex accounting method to trick the stock market. This method was called “mark to market” accounting. Enron used this method of accounting to predict and project their earnings in a long term period. These earnings were projected based on the long term energy contracts Enron was going to make. This could have been money that was not made at that point. This made Enron’s stock price skyrocket at a very fast pace, making a lot of employees and general public invest in the stock. Enron stock seemed to be a very secure and profitable investment which would make people lots of money. The Fortune 500 company went down very quickly. In August of 2001, the CEO of Enron, Jeffrey Skilling resigned. He randomly resigned and a lot of suspicions arose. His resignation was described to be because of personal reasons.

In 2001, there was an event that had shaken the whole business world. The crash of Enron in US, followed by worldwide collapse of its auditor, Arthur Andersen. It was a greatest corporate failure uncovered in business history. Follow the Enron-Andersen scandal, massive organizations like WorldCom,