Corporate Fraud: the Enron Scandal - Essay Example

Corporate Fraud: The Enron Scandal. The Enron scandal is a good case in point of corporate fraud that has transpired inside the last two decades. Corporate fraud has turned out to be a routine in the global financial sector. Some of the schemes employed during the Enron scandal were also to blame for the recent economic crisis (Mackey and Kristine 349). The Enron scandal was first disclosed in October 2001. Subsequently, Enron Corporation plunged to bankruptcy on December 2, 2001 and filed for chapter 11 bankruptcy protections. More to the point, Arthur Andersen partnership was also dissolved at the time. Arthur Andersen was one of the five biggest audit and accountancy firms globally during the scandal (Li 37). Enron executives, particularly Jeff skilling as well as Andy Fastow, were key to Enron plunging into bankruptcy as well as ultimately dissolution. The acts include: market to market accounting as well as special purpose entities (SPE’s). None of these acts was illegal; however they were employed in illegal business plans (Mackey and Kristine 349). Enron Corporation was an American company based in Houston, Texas. What's more, Enron being one of the most prominent companies in the globe, it was also one of the companies that collapsed very quickly. Over and above, being the biggest liquidation reform at one time, Enron scandal was undeniably the largest audit letdown in American history (Li 37). This paper examines why the Enron scandal occurred? Whether the investigations into the scandal were fair? How the scandal was discovered? What went wrong? And what internal controls failed? Enron Corporation was established in 1985. Enron was as one of the globe's leading company dealing with natural gas, electricity, pulp and communications ahead of being declared bankrupt in October 2001. Enron was nearly universally regarded as one of the country's most innovative companies in the late 1990’s; a new-economy nonconformist that abandoned stuffy, aged industries with their bulky hard assets for the lax world of e-commerce. Enron persistently operated gas lines as well as built power plants, however it gained prominence for its distinctive trading businesses. In addition buying and selling gas plus electricity futures, it established whole new markets for such nonconformist merchandise as weather futures, Internet bandwidth as well as broadcast time for advertisers (Li 37).Very few people were acquainted with precisely what Enron's business was. Bethany McLean, a reporter for Fortune, inquired, “How exactly Enron made its money?” The question is hard to answer; the "particulars are difficult to get hold of as Enron keeps many of its details secret for what it terms 'competitive reasons.'" a different analyst remarked, "Enron is a big black box." Hence, even Wall Street had very little information about Enron's actual business practices. However, Enron is not unique in this regard. Enron akin to the majority corporations, operated relatively independently by opposing transparency and stakeholder participation (Brenan 35). Jeffrey Skilling proposed market to market accounting is a scheme to increase stock prices, hide Enron’s losses as well as attract new investment. The market to market scheme entailed that once a long-term contract was signed, the amount of which the asset supposedly would trade on the future market is reported as profit in the present financial statement. So as to soothe the investors to maintain a steady profiting condition at Enron, traders at Enron were forced to predict low discount rate on the long-term contract with Enron as well as high future cash flows. The variation amid the computed net current value and the initially paid value was viewed as the profit of Enron. However it is unfeasible to gain in a long-term operation manner, and so it is evidently illegal furthermore immoral. Additionally, it was reported that the US Security and Exchange Commission (SEC) at the time permitted Enron to employ mark to market accounting scheme. Unawareness by SEC of the shortcomings of this accounting system is also liable for the ultimate Enron scandal (Li 38). Jeff Skilling was later condemned to 24 years in prison for insider trading, conspiracy and securities fraud (Mackey and Kristine 349) Accounting laws permit a company to leave out a SPE (Special Purpose Entity) from its personal financial statements: (i) in case an autonomous party is in command of the SPE or (ii) in case the autonomous party possesses no less than three percent of the SPE. Enron was desperate to conceal its debt as elevated debt levels would worsen the investment grade as well as prompt banks to recollect money. Andy Fastow, Enron’s chief financial officer (CFO) spearheaded an SPE. Andy used Enron’s stock as guarantee, to loan hefty sums of money. The loans were used to balance Enron’s inflated contracts. Consequently, the SPE allowed Enron to change assets as well as loans laden with debt commitments into income. Additionally, the succession by the SPE made Enron transfer additional stocks to SPE. Nevertheless, the loans plus assets acquired by the SPE were in reality laden with huge debts that were not reported in Enron’s financial reports. The shareholders were then misled that debt was not increasing and the revenue was even increasing (Li38). Andy Fastow later condemned to 6 years in prison for pleading guilty to securities and wire fraud (Mackey and Kristine 349). . Enron’s yearly returns increased from approximately $9 billion in 1995 to over $100 billion in 2000. Towards the end of 2001 it was revealed that Enron’s reported financial situation was maintained largely by methodical, institutionalized as well as artistically designed accounting fraud. Enron executives sought to make Enron look more profitable than it actually was, thereby driving up its stock prices and subsequently their own wealth (Mackey and Kristine 349). Enron's stock prices unexpectedly plummeted from $90 per share in mid-2000 to less than $1 per share towards the end of 2001, as a result, shareholders to lost almost $11 billion. Enron later reworked its financial statements for the preceding five years and found that there was $586million in losses (Li 37). The Enron scandal was incomparable for numerous grounds. It was the biggest insolvency in U.S. history at the time. Enron employees experienced astounding losses, as roughly 63 percent of their 401(k) assets were held in Enron stock. Corporate officers, including Kenneth Lay, Jeffery Skilling, as well as Andrew Fastow, gained large sums of money from both salaries and stock options, which implies that their financial gains may have come at workers' and investors' expense (Brenan 35). There is no proof that when Enron’s CEO told the employees that the stock price would possibly rise that he also divulged that he was selling stock. Furthermore, the employees would only discover of the stock sale inside days, as is usually the case. It is the investigation adjoining Enron’s bankruptcy that allowed shareholders to discover the stock auction by its executive officer ahead of February 14, 2002 when the stock auction would else be divulged (Li 37). Not many people expected the collapse; numerous stock analysts rated Enron as a buy up to a week preceding the collapse (Brenan 35). Enron Corporation had political relations with the Bush administration. Consequently the Enron bankruptcy, the previously revered accounting profession had come under criticism for ill-advised, if not immoral, practices, which had dented investor confidence in all firms and threatened to significantly depress the whole equity market in the United States (Brenan 35). The collapse of Enron became a story of national interest only after the political links between the corporation as well as Bush administration were disclosed. Enron's political donations to federal candidates plus parties from 1989 to 2001 summed $5,951,570, with 74 percent directed to Republicans plus the outstanding 26 percent bound for Democrats (Brenan 36). I would adopt the concept of internal controls to prevent the Enron scandal from ever happening in the first place. The best way of preventing corporate fraud is ensuring a culture of conformity through aptly designed internal control as well as antifraud programs. The internal controls concept basically refers to a scheme of checks and balances used to prevent financial loss while ensuring precise financial reporting. Simply put, internal controls are the foundation of finance function. The American Institute of Certified Public Accountants management antifraud program and controls is an incomparable fourteen step plan; that any organization can employ to alleviate corporate fraud. Some of the steps incorporate establishing a culture of high ethics as well as honesty, assessing anti-fraud procedures plus controls as well as mounting a suitable oversight process. The major part of any antifraud program is an appropriate code of conduct or ethics policy that helps instill honesty and integrity in an organization. The code of conduct must be well known by all employees. Prior to fraud risks being alleviated the risks must be identified as well as properly quantified as to their possible financial impacts as well as possibility. These two factors aid in establishing the method of risk mitigation in order to alleviate corporate fraud (Biegelman and Joel 108). . Works Cited. Biegelman, Martin T, and Joel T. Bartow. Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance. Hoboken, N.J: Wiley, 2006. Internet resource. Brennan, David M. "Enron and failed futures: Policy and corporate governance in the wake of Enron's collapse." Social Text 21.4 (2003): 35-50. Mackey, David A, and Kristine Levan. Crime Prevention. Burlington, Mass: Jones & Bartlett Learning, 2013. Print. Li Yuhao. “The Case Analysis of the Scandal of Enron.” International Journal of Business Management. Canadian Center of Science and Education Vol.5, No.10; 37-41 October 2010. www.ccsenet.org/ijbm. Read More