Enron : The Financial Statement

On October 16, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders’ equity by $1.2 billion. Enron announced November 8, that it had overstated earnings over the past four years by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships. A $23 billion merger from rival Dynegy was dropped November 28 after lenders downgraded Enron’s debt to junk bond status.

The Sarbanes-Oxley Act of 2002 was the result of a number of large financial scandals in the United States in the late 1990s and early 2000s. One of the most well-known corporate accounting scandals was the Enron scandal, which was exposed in 2001. Enron, an energy company that was considered one of the most financially sound corporations in the United States before the scandal, produced false earnings reports to shareholders and kept large debts off the accounting books (Peavler, 2016). Enron executives also committed fraud by embezzling corporate funds and manipulating the stock market. Enron shareholders lost around $74 billion dollars, Enron employees lost their retirement accounts, and some Enron employees even lost their jobs (The 10 Worst Corporate Accounting Scandals of All Time, n.d.).

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

Not only was Enron a huge scandal at the time but also now WorldCom was coming into the picture, with this the public questioned as to how corporations were being governed (Welch. M. (2006)). In the wake of these scandals something major needed to happen to prevent any more corruption to occur. Both the Senate and the House in the summer of 2002 passed Sarbanes-Oxley Act with popular vote (Bumgardner.L. (2003)). After the Act was passed it called for changes in how companies run. Companies really had to look at how the roles of the companies’ top associates were going to change. Now when a company sends out financial statements, the managers of the company have to take ownership that the information being presented to the public and shareholders is correct. This can put an enormous amount of pressure on the company to report accurate numbers as to how the company is preforming, without Sarbanes-Oxley this would of never happened. Companies would not have to take ownership of what is being shared with the public and shareholder. Also now a clear picture is show as to how a company is truly preforming. It can be said that this is a

This would serve to guarantee the SPE's value [2]. The SPE, in exchange, would use the stock to hedge the value of various investments on Enron's balance reports [2]. Enron stock prices had been consistently on the rise and, counting on this trend to continue, the false assumption was made that they would never have to pay on any of the guarantees [2]. These complicated financial maneuvers generated huge sums of money for Enron. Several people were getting rich from these dealings, especially Mr. Fastow. They were given enormous amounts of compensation to continue promoting the use of the SPEs [2].

Besides hiding results, they also created affiliated companies (SPEs - special purpose entities) to transfer liabilities and expenses camouflage. On balance, not consolidated Enron statements together with the related companies SPE`s. They used improperly accounting technique mark-to-market. The main reasons for the financial and accounting transactions Enron seemed to increase revenue and cash flow reported at a high level, the amount of inflated assets and liabilities off the company's accounts. The combination of all these factors eventually lead to giant bankrupt.

Imagine over $60 billion of shareholder value, almost $2.1 billion in pension plans, and initially 5,600 jobs - disappeared (Associated Press, 2006). One would have to wonder how that is possible. These are the consequences the investors and employees of Enron Corporation endured after the Enron scandal started to unravel. This paper will focus on the infamous accounting scandal of Enron Corporation. It will also discuss how the company was able to fool investors by producing misleading financial statements, why they were not caught sooner, and new regulations enacted in response to the scandal.

Corporate malfeasance has earned a place among the defining themes of the last decade and a half, helping to give birth to the global recession and the Occupy Wall Street movement. Enron, a Houston based commodities, energy, and service corporation, created arguably one of the worst scandals of the past two decades. Due to reporting tactics implemented by Chief Executive Officer Ken Law and Chief Executive Officer Jeff Skilling, which hid huge debts from the company’s balance sheet, the company filed for bankruptcy, shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. Before the accounting scandal became public in 2001 due to whistleblower and Vice President

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 was one of the largest electricity and natural gas companies in the world located in Houston, Texas. On December 2nd 2001, Enron filed for chapter 11 bankruptcy when it was found by the SEC that they were misstating their income and their equity value fell below what their balance sheet had stated. The stock of the company was once selling around $90 per share and had a net worth of $70 billion dollars. At one point, the company stood as the 6th largest energy company in their world known for their innovativeness and is now known as one of the largest accounting scandals in history.

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.

Moreover, we know that ENRON has been buying a big number of ventures that looked promising. We know that ENRON has also been creating off balance sheet entities in order to remove the risk of their financial statements.  Because of market-based accounting explained above, ENRON recorded all time high revenues. The company thus wanted to be involved in other areas. For instance, ENRON was buying or developing an asset – such as a pipeline – and then was expanding through a vertical integration (buying a retail business around that pipeline). This strategy required huge amounts of initial investments and was not going to generate earning or cash flow in the short term. If ENRON elected to present this strategy on its financial statements, it would have placed a big burden on the company’s ratios and credit ratings, and credit ratings investment grade was crucial for ENRON energy trading business. In order to find a solution to this issue, ENRON decided to look for outside investors who would like to make those deals with

The Enron scandal was a financial scandal that was revealed in late 2001. After a series of discoveries involving irregular accounting procedures which could be turned in as fraud, went on throughout the 1990s, involving Enron and its accounting firm Arthur Andersen. Enron stood at the verge of falling into the largest bankruptcy in history by mid-November 2001. An attempt by a smaller energy company, Dynegy, was not feasible. Enron filed for bankruptcy on December 2, 2001. As the scandal was shown, Enron shares dropped from over $90.00 to just pennies. As Enron had been considered a blue chip stock, this was event came as a surprise to all and was an overall disaster in the financial world. Enron's downfall happened soon after

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'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.