Enron Corporation Scandal - Essay Example

Enron Corporation Scandal Enron Inc. is a multinational company dealing with the production and supply of commoditiesand services across Houston, Texas. The company was founded in 1985 with the contribution of Kenneth Lay who led the company following the merging of Inter North Company and Natural gas. Just before it came down, the company had more than 20,000 staff running its operations throughout the city. By this time, the company was claiming annual revenues of more than $101 billion (Barbara, 12). After several years of operation, the company took in a highly trusted executive management who are later known to have disappeared with billions from their "bogus" projects committing the company to great debt. The Chief Financial Officer and other senior officers are known to have misled the audit committee when it came to issues of high-risk accounting practices. Following the confusion brought about by the Enron’s complex financial statements to both the shareholders and analysts, speculations were raised enquiring on the sustainability of the company. One partnership created by Enron had allowed it to keep $600 debt off the books it availed to the government and its shareholders. The problem in the company became evident in 2001. In August the same year, Jeffrey Skilling the CEO of the company tabled his departure. His position was resumed by Lay. On March, Bethany Mclean, a Fortune Magazine writer wrote an article inquiring Enron’s ways of making money. The reality of its collapse surfaced on October 16th when the company announced a loss of $638 million in connection with its internet investment failure (Barbara, 12). The shareholders of the company filed a $40 billion case after the stock price fell from us$ 90.75 per share in mid-2000 nose-dived to less than 1$ by the end of November 2001. The U.S Security and Exchange Commission launched (SEC) an investigation in October. The investigation later exposed the multifaceted web of partnership specifically engineered to hide the debt (Barbara, 14). In November, it was revealed that the company had overstated its earnings for the past four years by $586 million. It was also revealed that Enron owed over $6 billion in debt by the following year. This is what led to the drastic fall of its stock prices that saw investors lose billions of money. The company agreed to repay its investors immediately. It could not come up with the money to repay the debt therefore it filed for bankruptcy in accordance with chapter 11. In pursuant of justice, many senior executive officers were brought to trial which formed a point of reckon for the many citizens whose lives had been destroy. Fastow, the then Chief Financial Officer and his wife, Lea, pleaded guilty for the charges against them. He had been initially charged with 98 counts of money laundering, fraud and conspiracy among other crimes. He pleaded guilty to two counts of conspiracy and was sentenced to 10 years without parole in a plea bargain to testify against Lay, Skilling and Causey. His wife Lea was sentenced to year imprisonment for aiding her husband hide government income. Lay and Skilling were brought to trial in January 2006 (Barbara, 15). Skilling was convicted of 19 of 28 counts of murder. He pleaded not guilty and attributed the cause of the company’s downfall to Fastow. Lay was found guilty of 6 counts of security and wire fraud and was subjected to a total of 45 years in prison. Unfortunately, Lay passed away in July, 2006 before his sentence was scheduled. Rick Causey the then Chief Accounting Officer was charged with six wrongdoing charges for non-exposure of Enron’s financial condition during his term. He was sentenced to seven years in penitentiary after pleading guilty. Arthur Andersen was charged with impediment of justice because of destroying documents, erasing emails and files that were affiliated to his auditing firm dealings with Enron. He was found guilty and was sentenced and his company was made to surrender its CPA license in August 2002 (Pojman, 9). More than 85,000 employees lost their jobs. The ruling was reversed by the Supreme Court on the basis that the jury was not properly informed on the charges against Andersen. Enron’s shareholders lost $74 billion in the four years preceding the declaration of its bankruptcy. To pay the creditors, Enron held auctions to sell its assets that included photographs, logo, pipelines and signs. Due to its huge debt on its lenders, the company’s workforce and shareholders expected minute assistance. Over 20,000 former employees won a suit of $85 million that they had filed for reimbursement of $2 billion lost from their annuity scheme where each received $3,100. A $7.2 was advanced in September 2008 on behalf of the shareholders. To this effect, House Committee on Financial Services and Senate Committee on Banking, Housing and urban affairs held numerous hearings on Enron scandal. The hearings lead to the passage of Sarbanes-Oxley Act, in July, 2002. The main chuck of the Act included the establishment of the Public Company Accounting Oversight Board aimed at developing principles for the preparation of auditing services when auditing. It also sorts to limit public accounting companies from giving any non-auditing services when auditing (Pojman 13). Other provisions included; independence of auditing committee members, appending signatures on financial reports by the executive and intensifying of monetary disclosures of companies’ relationships with unconsolidated business corporations. Changes of the stock exchange set of laws following many instances of corporate bookkeeping rules breach was suggested in February 2002 by SEC. A fresh governance plan suggested by New York Stock Exchange was later approved by SEC. The main chuck of the proposal was; that all companies must have the greater part of autonomous directors, the directors must comply with an elaborate definition of autonomous directors, the reimbursement committee, nominating committee, and inspection committee shall consist of independent directors, and that all committee members must be financially learned in addition of the committee having at least one member with accounting expertise and finally. Apart from its ordinary sessions, the board should hold extra sessions in absence of the administration. From own perspective, it seems that the cases involving one of the biggest oil companies in the world ended up being simpler than most people had thought of. Mr. Skilling and Mr. Lay were found guilty of lying to the investors, employees and government regulators in their intentions of hiding the crumble of the giant company. According to 12 jurors and 3 alternatives who spoke to reporters at a news conference after the ruling, the two company leaders i.e. Skilling and Lay had perpetuated a comprehensive fraud for the refusal of publicizing the feat of the company to its stakeholders. This is attributed to insistence of the chief executives that no fraud took place apart from that committed by the minority underlings who stole millions in covert side deals (Pojman, 16). This defense could not sufficiently explain the tremendous downfall of such a gigantic oil company. The failure of the company can purely be accredited to the misconduct of its higher-ranking leadership. From the beginning, the trial of these leaders was not what most people expected more so after the revelation of secret dealings. The deals were used to support the company’s profits but the prosecutor never tried to verify whether Mr. Skilling and Mr. Lay were accountable for them. Up to date, little has been done to compensate the victims of Enron scandal in spite of the formation of commission on Supervision and Government Modification to look into the matter and gave an outline of how the victims should be compensated. Recently attempts to abbreviate the sentence of Mr., Skilling were met with a lot of resentment by the former workers of the great Enron. He made an agreement to relinquish his constitutional rights to any further petition as part of the accord with the Justice Department. He also settled to permit the property which were previously confiscated worth millions be disseminated to the victims of the company down fall. Although the sum is negligible as compared to the lump sum lost, the act is commendable though was met with a lot of condemnation on the basis that it was just an attempt to keep him out of prison. The executive members who had prior access to the information pertaining to the collapse of the company ought to have stepped forward in time to save the loss of enormous stakeholders’ funds (Barbara, 17). On the other hand, Arthur Andersen should have brought to light the information pertaining to the side way deals of the company long ago. If timely information had been provided, timely precautionary measures would have been taken. Enron formed the most recent example of a financial fraud case which occurred as a consequence of accounting irregularities. Andersen’s failure to query the suitability of sideway deals of the company run by its officers in the name of boosting their stock prices is vivid in the Justice Department’s and Securities and Exchange Commission’s investigations. Stringent measures that impose harsh penalties such as fines and imprisonment of up to 20 years for changing, mutilating, with holding, falsifying records, documents or physical items with the intent to impede, hamper or manipulate a legal investigation as outlined in the Sarbanes-Oxley Act section 809 should be upheld. Works Cited A Guide to the Sarbanes-Oxley Act. Retrieved December 6, 2013 from http://www.soxlaw.com/index.htm, 2006. Print. Pojman, L. P. Ethics: discovering right and wrong. Belmont, CA: Thomson Wadsworth, 2006. Print. Toffler, Barbara Ley; Jennifer Reingold (April 13, 2004). Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, 2004. Print. Read More