The Enron and Worldcom Scandals

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

In my opinion the Enron scandal was one of the worst in American history. While we could argue many facets of the scandal the main talking point in my mind stems from the sheer level of corruption they managed to obtain. Which begs the question how far would the corruption have went had it not been for an insider blowing the whistle? It is estimated that Enron hid approximately 51.2 billion dollars worth of debt. They achieved this by utilizing several ingenious but unethical and illegal methods. However, the key to this scandal was the key involvement by the company which was supposed to be the watchdog. This is one of the major reasons SOX was created by the federal

In light of the recent scandals that rose around big multinationals such as Enron and WorldCom, it has become evident that reform in the traditional corporate operations and objectives was to be encompassed in the organisations corporate strategies. Indeed throughout the years, companies main objectives were defined primarily as being economic objectives, Multinationals developed with sight of profit maximisations regardless to the other incentives, Friedman considered that to be the foundation for a well-managed company, it was further considered that the financing of any other sort of social corporate activities rather unnecessary. The expenses were regarded as expenditures for the owners and investors; this was a time where shareholders rights were regarded as conflicting with other constituents namely the employees, creditors, customers or the community in general. However this interpretation is seen as rather inadequate due to the nature of the amalgamated relation between both constituents. Stakeholders in modern corporate doctrine are considered as a core apparatus for the well functioning of a business. It is however often argued that the only way for a corporation to achieve better results and maximise its profits is to include other people in the process, individuals or organisations with direct or indirect interest in the well performance of the company, that is the reason why modern regulations and codes include a number of stakeholders other than the

There were several situations that lead the executives and managers of WorldCom to "cook the books." Acquisition of other companies drove WorldCom to spend beyond their means; managers were told to spend whatever was necessary to increase revenue, even if it meant that long-term costs would outweigh the short-term gains. This fiscally unhealthy mentality led to a very bad decision to enter into long-term fixed rate leases for network capacity with extensive punitive termination provisions. Once the market for WorldCom 's services started to cool down, the expense to revenue ratio started to increase – as expenditures increased and revenue decreased, the percentage value would rise above the targeted 42% to a larger, more unfavorable

One of the biggest corporate financial frauds in history was Enron scandal, where the relationship between the company governance and their auditors - Arthur Andersen was one of the factors that helped the company hide its frauds, which eventually led Enron’s bankruptcy. The accounting firm was accused of not acting independently and misstating Enron 's accounts such as keeping huge debts off balance sheets. Some believe that the auditors had gone along with Enron’s questionable accounting practices in order to maintain their work. As a result, the shareholders lost $74 billion further (further depressing the stock market), thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. In addition,

When many people hear the word Enron, they immediately associate it with the most important accounting scandal of our lifetimes. Enron was an American gas company that began as the Northern Natural Gas Company in 1931. Internorth, a holding company in headquartered in Omaha, Nebraska, purchased the Northern Natural Gas Company and reorganized it is 1979. Enron arose from the 1985 merger of Houston Natural Gas and Internorth. After building a large, new corporate headquarters in Omaha, the new Enron named former Houston Natural Gas CEO Kenneth Lay as CEO of the newly merged company, and soon moved Enron 's headquarters to Houston, Texas. After becoming the newly created top executive, Lay later became chairman of the board

When the accruals started to run out, WorldCom came up with another method, capitalization of line costs. WorldCom started classifying line cost expenses as long-term capital investments in 2000 (J. Randel Kuhn & Sutton, 2006). These expenses are required to immediately recognize in the period incurred since the expenses are not for assets that can be capitalized and depreciated over their useful life in accordance with GAAP. By falsely recording these expenses, WorldCom reported an artificial increase in its net income and earnings before interest, taxes, depreciation and amortization (What Went Wrong at WorldCom?, 2002). Bernard Ebbers, CEO portrayed WorldCom as a high growth company. Even though, its market conditions had worsen, Ebbers told analysts that he “remain[ed] comfortable with . . . 13.5 to 15.5% revenue growth in 2000.” (Beresford, Katzenbach, & C.B. Rogers, 2003). In order to show the public that they were doing well, top management kept a separate report to come up with the difference that existed between the actual and expected number that they need to report to the account called corporate unallocated revenue from the actual book (Beresford, Katzenbach, & C.B. Rogers, 2003). By doing so, WorldCom improperly recorded a total of $958 million in revenue from 1999 to the first quarter of 2002 (Beresford, Katzenbach, & C.B. Rogers, 2003).During an internal audit in 2002, it was discovered that WorldCom had committed fraudulent financial reporting. WorldCom

The abrupt and unanticipated collapse of Enron Corporation was due to one of the largest accounting frauds in U.S. history. This scandal had significant impact on the financial markets by causing enormous financial losses for numerous investors. Before filing for Chapter 11 reorganization bankruptcy protection in December of 2001, Enron was named the "Most Innovative Company in America" by Fortune Magazine from 1996 to 2001, and also named first in 1999 on its list of the "100 Best Companies to Work For in America" (McLean & Elkind, 2006). For many years, this Houston-based energy company was widely regarded as a fast growing, well-managed, and prosperous organization. However, after years of manipulating accounting

In the case of Enron’s collapse, many would blame the external auditor’s collusion with the management, the aggressive accounting policy it had adopted to manipulate its earnings or the Special Purpose Entity (SPE) it had created as a sham to conceal its debts. However, everything began from an internal environment with weak controls.

The Enron Corporation was founded in 1985 by Kenneth Lay and based in Houston, Texas. Enron was known as one of the world’s leading electricity, natural gas, communications and pulp and paper companies. By the late 1990s Enron was considered one of the country’s most groundbreaking companies constructing power plants, gas lines, buying and selling electricity and gas, and partaking in a unique trading business; creating whole new markets for oddball commodities. In 1995 annual revenues were around $9 billion and rose to over $100 billion in 2000. (Yahao, 2010) “White-collar crime is planned or organized illegal acts of deception or fraud, usually accomplished during the course of legitimate occupational activity, committed by an individual or corporate entity” (Benson, 2009 pg. 11).

As long-distance rates and revenue declined, the debt and expenses piled up and put pressure on WorldCom’s ability to meet key-performance indicators and earnings forecasts (J. Randel Kuhn & Sutton, 2006). The line cost was the biggest expense for WorldCom and half of its total expenses. Management committed to achieve a low line cost to revenue ratio because lower ratio meant better performance and higher ratio meant poorer performance. Management focused on lowering the line cost level expense (J. Randel Kuhn & Sutton, 2006). It carried out two improper accounting methods to reduce the amount of line costs (Beresford, Katzenbach, & C.B. Rogers, 2003). First, it released the accruals, the amounts kept aside on WorldCom’s financial statements to pay expected bills which is also called “cookie jar reserve” from 1999-2000 (Beresford, Katzenbach, & C.B. Rogers, 2003). These accruals were supposed to reflect the estimate line costs and other expenses that WorldCom had not yet paid (Beresford, Katzenbach, & C.B. Rogers, 2003). Releasing the accrual is appropriate when it turns out that less is needed to pay the bills than has been expected to pay. Instead, WorldCom provided offset against reported line costs when the accrual was released which reduced reported expenses and increased pre-tax income (Beresford, Katzenbach, & C.B. Rogers, 2003).

Accounting scandals have happened in numerous companies. In one major case, the firm filed for bankruptcy, and many of its workers lost their jobs, savings, and investments from stocks. This major epidemic happen at Enron, an energy firm stationed in Houston, Texas founded by Kenneth Lay in 1986 (Frontain). On December 2, 2001, the Enron Corporation, an apparently strong and booming business, fell to an all-time low by shocking the world when it filed for bankruptcy protection. Many people were left unemployed and without their savings. Because of this scandal, numerous effects were left on the accounting profession since the scandal was traced to the company’s financial reports, accountants, and auditors (Buckstein Part 2, p.1).

Ethics in the business world can often times become a second priority behind the gaining of profits and success as a company. This is the controversial issue that led to the Enron scandal and ultimately the fall of this company. Enron Corporation was an energy company, and in the peaks of their success, they were the top supplier of natural gas and electricity throughout America. Enron Corporation came about from a merger between Houston Natural Gas and InterNorth. Houston Natural Gas was a gas providing company formed in Houston during the 1920’s. InterNorth was a company formed in Nebraska during the 1930’s and owned one of America’s largest pipeline networks. In 1985, Sam Segnar, the CEO of InterNorth bought out Houston Natural Gas for $2.4 billion. A year later in 1986, Segnar retired and was replaced by Kenneth Lay, who renamed the company and created Enron. Enron was the owner of the second largest pipeline in America that measured over 36,000 miles. The company was also the creator of the “Gas Bank”, which was a new way to trade and market natural gas and served as an intermediary between buyers and sellers. As the company continued to develop, it became more of a trader rather than a producer of gas. This trading extended into coal, steel, water and many other areas. One of Enron’s largest successes was their creation of a website called, “Enron Online” in 1999, which quickly became one of the top trading cites in the world. By the year 2000 Enron as a company was

This disguised the firm’s actual net losses for the five quarters because capital expenditures can be deducted over a longer period of time, whereas expenses must be subtracted from revenue immediately. WorldCom also spread out expenses by reducing the book value of assets from acquired companies and simultaneously increasing the value of goodwill. The company also ignored or undervalued accounts receivable owed to the acquired

Most of the world has heard of Enron, the American, mega-energy company that “cooked their books” ( ) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?