Enron Corporation was an American energy, commodities and services company. There are several actions that led to Enron’s bankruptcy. The issues were with the accounting method used as well as the negligence in the methodology of the company’s administration. Although once upon a time it was at its best, but gradually due to mismanagement, lack of sufficient business, improper business strategies and greed of the employees and the leadership all together became the reason for Enron’s bankruptcy. Under the section of Federal Bankruptcy Code, giant companies seek financial protection. Even it allows the company to protect itself from such threats, still all of the above were neglected by Enron Corporation.
Enron had the largest bankruptcy in America’s history and it happened in less than a year because of scandals and manipulation Enron displayed with California’s energy supply. A few years ago, Enron was the world’s 7th largest corporation, valued at 70 billion dollars. At that time, Enron’s business model was full of energy and power. Ken Lay and Jeff Skilling had raised Enron to stand on a culture of greed, lies, and fraud, coupled with an unregulated accounting system, which caused Enron to go down. Lies were being told by top management to the government, its employees and investors. There was a rise in Enron 's share price because of pyramid scheme; their strategy consisted of claiming so much money to easily get away with their tricky ways. They deceived their investors so they could keep investing their money in the company.
In October 2001, Enron announced it was reducing after-tax net income by approximately $500 million & shareholders’ equity by $1.2 billion. It also announced that it was restating net income for the years’ 1997-2001. In November 2001, Enron recognized in a federal filing that it overstated earnings by nearly $600 million since 1997. Within a month, they declared bankruptcy. It was discovered that many financial reporting issues were poorly disclosed or not disclosed at all. There were major
On December of 2001, the nation’s seventh largest corporation valued at almost $70 billion dollars filed for bankruptcy. Illegal and fraudulent accounting procedures would led to the demise of the company. Over 20,000 people lost their jobs, and about $2 billion in pensions and retirement funds disappeared. Despite all this, Kenneth Lay, Jeffrey Skilling and Anthony Fastow profited greatly from Enron. These events resulted in the implementation of new legislation on the accuracy of financial reporting for public companies. The fall of Enron became known as the largest corporate bankruptcy in the United States at the time.
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
The fall of the colossal entity called Enron has forever changed the level of trust that the American public holds for large corporations. The wake of devastation caused by this and other recent corporate financial scandals has brought about a web of new reforms and regulations such as the Sarbanes-Oxley Act, which was signed into law on July 30th, 2002. We are forced to ask ourselves if it will happen again. This essay will examine the collapse of Enron and detail the main causes behind this embarrassing stain of American history.
By August 2001, the financial statement fraud became obvious and by October Enron management announced that the company was worth $1.2 billion less than what was previously recorded. The difference was due to inflated estimates of income and failure to include all the debt in the financial reports that were sent out to investors. The Securities and Exchange Commission (SEC) started investigating Enron. By November 2001 Enron admitted to overstating its past four year earnings by $586 million and admitted to owing over $6 billion in debt. After this admission the price of Enron stock dropped incredibly. Investors and creditors requested immediate repayments from Enron. However, since Enron could not come up with any cash to repay its creditors, it filed for bankruptcy in December of 2001. Thousands of Enron employees and investors lost their savings, their children’s college funds and pension when Enron collapsed due to financial statement misrepresentation by its management. A lawsuit on behalf of a group of Enron’s shareholders was filed against Enron’s executives and directors whereby 29 of them were accused of insider trading and misleading the public.
In this case of Enron the corporate culture played a vital role of its collapse. It was culture of full of moneymaking strategies and greed, in the firm Greed was good and money was God. There was no or very little regards for ethics or the law, they operated as there was no law and ethics in the world (Enron Ethics, 2010). Such culture affected all the employees of the firm from top to down. Organizational culture supported unethical behaviour and practises, corruption, cheating and those were all widespread. Many executives and managers knew that the firm is following illegal and unethical practises, but the executives and the board of directors did not knew how to change this unethical culture, the firm used creative accounting and were making showing misleading profits every day. Reputation management enabled them carry on their illegal and unethical operations. Moreover if the company made huge Revenue in the unethical way then the new individual who joined the firm would also have to practise all those unethical practises to survive in the company. All of the management was filled by greed and ambition, their decisions became seriously imperfect, thus the firm fell back and managers had to pay in the price in the form imprisonment and fines. Greed is the main key factors that brought the Enron “the most innovative company” to downfall. Enron was looking into the ways of
Enron was formed in 1986 by Ken Lay (“Enron Case Study”, n.d). It was an energy and service company based in Houston. “The early years of Enron were modest, and despite suffering financial woes and tremendous debt for several years, Enron survived.” (Rafraf & Haug, 2013). Enron was the 7th largest company on the Fortune 500 in the year 2000 with assets of $65 billion and revenue of over $100 billion (“Enron: Quality Assurance”, 2016, p 17). Despite of revenues in 2000, Enron filed for bankruptcy in 2001 affecting billions of shareholders. The Enron collapsed despite of being audited by one of the “Big Five” accounting firms called Arthur Anderson. What caused the Enron failure? What was Arthur Anderson’s role in Enron’s failure? Enron had
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.
Fortune used to rank Enron as the most successful business in the United States. The collapse of Enron was shocked the whole world energy trading market. It caused significant losses to investors. In this paper shows analysis reason of factors that lead to Enron demise and also lessons can be learnt from Enron case study. The approach which have used in this paper to respond, the case study question are the background of the case organization and how business structure had been use by the case organization. Reviewing some lessons that can be learned from this case study to avoid any failure another Enron whether in the financial market, as well as in the auditing and accounting professions.
2001’s Enron’s Chapter 11 bankruptcy filing could be considered an alleged failure of the legal system. Enron’s directors and officers seem to have failed to adequately perform their duty of caring for the finances of Enron
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.
The auditors of Enron did fail in their task of providing a duty of care to all of the parties. The main reason for this is that they failed to correctly audit the assets and financial position of Enron resulting in all stakeholders having no clue about the forthcoming collapse of Enron. This resulted in the stakeholders facing a very critical condition or a phase where in they were not sure if they would be able to recover their investments and debts or not. The auditing process has revealed several issues and findings of problems within the accounting system and the same have been discussed as the primary areas of exposure, areas of possible mishandling of accounts
Endrew and his wife got benefits from Enron to buy Chewco where his wife is owner. He controlled subsidiary companies to buy stock and hid debt for Enron. Enron did not follow the accounting rules. Every mistake in accounting needs to note and describes for shareholders know, and writes on the financial statements. In 2001, Accountants cannot combine Chewco into the Enron’s financial statement. This lead to misunderstanding report which show the financial statement of Enron such as a decrease Enron income and an increase Enron’s reported debt. In addition, Enron tried to make maximize profits by break the law. Therefore, dishonesty in the financial statement, corruption and a lack of knowledge and skills of accountants are the causes of the Enron’s bankruptcy.
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.