Accounting Scandals Of Enron Company

What did Enron buy and sell? Electricity? Natural gas? The corporation created a market in energy, gambled in it and manipulated it. It moved on into other futures markets, even seriously considering "trading weather." At one point, we learn, its gambling traders lost the entire company in bad trades, and covered their losses by hiding the news and producing phony profit reports that drove the share price even higher. Enron was a corporation devoted to maintaining a high share price at any cost. How Wall Street and the bankers wanted to investigate if they are the first to get profit from all that.

Jumping right into the summary then. Enron was one of the most successful corporations in America during its prime. Marketing electricity and other commodities, as well as, providing financial and risk management services to other companies were the main types of business that Enron conducted. However, Enron’s successful appearance was found out to be a façade, when it came out that the corporation was making a plethora of unethical business moves. Once the corporation’s actions became public, Enron’s fall from grace quickly followed. (Johnson, 2003)

In 2001, Enron, the largest energy company in the U.S., collapsed after a vast creative-accounting scandal. Enron practiced a type of accounting called mark-to-market practice which it used to hide losses. Mark-to-market accounting it not illegal on its own but it was used improperly by Enron. The CFO and CEO of Enron were able to write off any losses to an off-the-book balance sheet and made the company appear financially healthy (Seabury, 2008). Investors lost $74 billion while thousands of employees lost their jobs and

In October of 2001, Enron announced a third-quarter loss of $618 million. The SEC and the U.S. Department of Justice both launched investigations into the sudden fall of the company and found that Enron had overstated their earnings by an estimated $586 million since 1997. Top executives in the company sold their majority shares days before the company’s collapse leaving lower level employees with worthless stocks in their pensions causing them to lose the majority of their life savings (CNN). As of today, charges have been brought against at least sixteen employees and executives in connection with Enron on counts of wire fraud, securities fraud, insider trading and money laundering among others. Flashback to June 17, 1972, and the

Enron was founded by Ken Lay in 1985 as a result of a merger of two gas companies. Enron was in top fortune 500 at number 7 and could not produce accurate financial statements to their investors. Top executives sold over a billion dollars in personal stock two years prior to their demise. Thousands of employees lost their jobs and. Author Anderson shredded all the financial statements all in one day. Employees of Enron lost over a billion and retirement and pension. Many of the top executives got off with just a slap on the wrist. The Sarbanes-Oxley Act of 2002 was set into place to make sure financial organizations are honest with investors.

Enron Corporation was an American energy trading company who committed the largest audit fraud alongside Arthur Andersen and filed for one of the largest bankruptcies in history in 2001 after producing false numbers and committing fraud for years (“Enron’s Questionable Transactions” page 93). Enron failed to run an ethical business in multiple aspects. The executives of the company abused their powers by having board members not properly oversee its employees. Enron committed accounting malpractice by producing false financial reports to hide the debt from failed projects and deals. Using a mark-to-market accounting method, Enron would create assets and claim the projected profit for the books immediately even if the company had not made any profit yet. In order to hide its failures, rather than reporting their loss, they would transfer the loss to an off-the-books account, ultimately leading the loss to go unreported. Along with Enron hiding losses and creating false profit for the

The company Enron was formed in 1985 after two natural gas companies, Houston Natural Gas and InterNorth merged together. Kenneth Lay, former chief executive officer of Houston Natural Gas was named CEO of Enron and a year later, Lay was assigned to the chairman of Enron. A few years later, Enron launched a website to allow customers to buy stock for Enron, making it the largest business site in the world. The growth of Enron was rapid; it was even named seventh largest company on the Fortune 500 list; however things began to fall apart in 2001. (News, 2006). In the third quarter of that same year, Enron posted an enormous loss of over $600 million in four years. This is one of the reasons why one of the top executive resigned even though he had only after six months on the job. Their stock prices fell dramatically. Eventually, Enron filed for bankruptcy protection. This caused many investors to lose money they had invested in the company and employees to lose their jobs and their investments, including their retirement funds. The filing of bankruptcy and the resignation of one of the top executives, also led to an investigation by the U.S. Securities and Exchange Committee, which proved to be one of the biggest scandals in U.S. history. (News, 2006). All former senior executives stood trial for their illegal practices.

Enron was named “America’s Most Innovative Company” by Fortune magazine. They were even successful enough to win it six times in a row. How does a company fall so far that they were the biggest bankruptcies at the time? Enron is known for its risky business tactics that would help keep them afloat in stock sales. Enron was headed by two main people that would go on to underhanded business schemes and charismatic acts that would betray the people who worked for the company. Kenneth Lay, the first CEO and the last as it collapsed, and Jeffery Skilling, the second CEO who was only CEO for about six months. These two people are very notorious white collar criminals. White collar crime is crime that is committed without violence but can have very

Based on the documentary, Enron: Smartest Guys in the Room, it is proven that the company's financial condition was nothing but a creatively planned accounting fraud. The approved legislation of deregulating the sale of natural gas has results in markets which made it possible for traders to sell it at higher prices, therefore significantly increasing revenue. After Jeffrey Skilling was hired, by using accounting loopholes and poor financial reporting, it was able to hide billions of dollars of debt from failed deals and projects. The deregulating of market and establishing numerous limited liabilities allowed Enron to hide its company's liabilities from appearing in accounts, thus allowing it to generally increase stock prices and keep its

Enron executives and accountants cooked the books and lied about the financial state of the company. They manipulated the earnings and booked revenue that never came in. This was encouraged by Ken Lay as long as the company was making money. Once word got out that they were disclosing this information, their stock plummeted from $90 to $0.26 causing the corporation to file for bankruptcy.

Enron was formed in July 1985 by the merger of InterNorth and Houston Natural Gas (Enron Fast Facts, 2015). Kenneth Lay became chief executive of Enron and he hired Jeffrey Skilling to look after the company’s energy trading operation (The rise and fall of Enron, 2006). Skilling’s plan was to be basically a gas bank where buys gas from suppliers for future years at previously agreed prices and sells the gas to its customers in advance to purchase at specified prices for future years. By doing that, Enron was able to make money just as a bank would (Thomas, 2002). After seeing the successful results, there was a new division managed by Skilling, Enron Finance created in 1990 to begin selling financial instruments. Enron next step was Enron Online divisions and again it was overnight success and handled $335 billion in online commodity trades in 2000 (Thomas, 2002). Enron used a practice known as “mark-to-market” to report for its book and mark-to-market accounting requires to revalue assets on the balance sheet that respond to the increased or decreased market value and reports the difference as profit or loss on the income statement (Thomas, 2002). Taking this as its advantage, Enron recognized profits on its futures that intended to be sold 20 to 30 years later with the price that is impossible to estimate and record the unreliable profits on its income statement.

All of the prior represents the business side of the downfall of Enron. That being said, businesses fail all of the time. The reason why Enron Corporation and its executives will always live in infamy is not because the company failed, but how and why the company failed. How, exactly, does a company worth about $70 million collapse in less than a month? It became clear that the company not only had financial problems, but ethical problems that started from the top of the company and trickled down. A key player in these problems was Jeffrey Skilling. He was a man brought to the company by Ken Lay himself. Skilling brought his own accounting concept to the company. It was called mark-to-market accounting. This concept allowed Enron to record potential profits the day a deal was signed. This meant that the company could report whatever they “thought” profits from the deal were going to be and count the number towards actual profits, even if no money actually came in. Mark-to-market accounting granted Enron the power to report major profits to the public, even if they were little or even negative. It became a major way

In this research paper I will be examining accounting scandals, specifically the Enron Accounting Scandal. First, I will be exploring the history of Enron. Then I will be going into further depth on what accounting issues Enron faced and then I will be explaining what a derivative is. Finally yet importantly, I will consider the different types of Accounting Fraud following a conclusion. Accounting Scandals are born due to collective greed and corporate arrogance. In the case of Enron there was a lot of euphoria before the downfall. Stock prices soared and Enron was seen as one of the most innovative companies in the world. However, things seemed too good to be true. Eventually the company was exposed for its wrongdoing which led to the collapse. Many more of such cases were exposed during the 2008/2009 recession such as the Lehmann Brothers scandal. As mentioned earlier, many financial scandals have happened in the past but none of those are nearly as bad as the scandals when it gets to trading in derivatives.

The story of Enron begins in 1985, with the merger of two pipeline companies, orchestrated by a man named Kenneth L. Lay (1). In its 15 years of existence, Enron expanded its operations to provide products and services in the areas of electricity, natural gas as well as communications (9). Through its diversification, Enron would become known as a corporate America darling (9) and Fortune Magazine’s most innovative company for 5 years in a row (10). They reported extraordinary profits in a short amount of time. For example, in 1998 Enron shares were valued at a little over $20, while in mid-2000, those same shares were valued at just over $90 (10), the all-time high during the company’s existence (9).

Enron's entire scandal was based on a foundation of lies characterized by the most brazen and most unethical accounting and business practices that will forever have a place in the hall of scandals that have shamed American history. To the outside, Enron looked like a well run, innovative company. This was largely a result of self-created businesses or ventures that were made "off the balance sheet." These side businesses would sell stock, reporting profits, but not reporting losses. "Treating these businesses "off the balance sheet" meant that Enron pretended that these businesses were autonomous, separate firms. But, if the new business made money, Enron would report it as income. If the new business lost money or borrowed money, the losses and debt were not reported by Enron" (mgmtguru.com). As the Management Guru website explains, these tactics were alls designed to make Enron look like a more profitable company and to give it a higher stock price.