What Companies Can Learn From The Enron Case and The Impact of the Enron Case - Essay Example

?Auditing Assignment Table of Contents Introduction 3 Definition of Fraud 4 Fraud Conducted in Enron 4 Comparison of Enron With Another Company 11 What Companies Can Learn From The Enron Case and The Impact of the Enron Case 12 Auditors Learning 12 Learning of Global Market 13 Conclusion 14 References 15 Introduction Enron Corporation was a reputed American energy, services and merchandise based organisation establised in the year 1985 by Kenneth Lay. It was situated in Houstan, Texas of the United States (US). The corporation was formed with the merger between two natural gas pipeline corporations, namely Houstan Natural Gas and Internorth Inc. After the merger, the position and corporate image of Enron Corporation improved by a large extent thereby enhancing its productivity and profitability among others in the market of the US. In the year 1989, Enron Corporation became one of the largest gas suppliers of the United States and United Kingdom (UK) with approximately sixty thousand kilometers of gas pipelines (American-Business, 2011). The prime objective of Enron Corporation was to position itself as an inventive as well as a prominent leader in the sector of natural gas of the US. Apart from these, Enron also extended its services in other sectors namely water, fiber optics, newsprint and telecommunications among others. Enron Corporation was quite succesful in its business operations, as its revenue enhanced approximately from US$ 9 billion in the year of 1995 to about US$ 101 billion in 2000 (Dharan & Bufkins, n.d.). It was as a result of enormous international and domestic expansions but the entire amount was cloaked from the shareholders through affiliations with other concerns (Drennan, 2008). Unfortunately, the brand image of Enron Corporation declined due to planned book-keeping fraud known as ‘Enron scandal’and illegal loans. It was one of the most significant indignities of the US which occured due to the misconduct of the management and members of corporate governance (Healy & Palepu, 2003). The assignment paper is a concise summary of Enron Corporation and its reason for downfall in the market of the US. Definition of Fraud The term ‘fraud’ refers to a criminal offence which is an intended deception resulting in personal gain or harm to other individuals. It may include prevarication or alterations of accounting records in order to attain an illegal financial benefit. Thus, it can be clearly revealed that it is an example of corporate internal fraud as the board members and management of the organisation were entirely involved in this case of conspiracy (Chartered Institute of Management Accountants, 2009). This type of fraud not only hampers organisational distinctiveness but also its culture, employees, ‘corporate social responsibilities’ and ethics. Hence, it can be affirmed that if the pillars of the busuiness are affected then it can not sustain in the long run among others in the market. Thus, it proved rather detrimental for Enron Corporation thereby fading its name from the market of the US. Fraud Conducted in Enron Enron Corporation was regarded as one of the fastest emerging and best controlled business organisations in the market of the US, but it could not retain its corporate image for the long run. The prime reason was due to the accounting scandal which resulted at the end of the year 2001. It was finally revealed that the fraud resulted in deterioration of its financial situations bringing about downfall of position and reliability among others in the market of the US. As a result, customer loyalty as well as market share was also affected to a large extent (IWS, 2002). Due to varied financial discrepancies, Enron Corporation finally filed a bankruptcy case on 2nd December in the year 2001. The prime suspects of Enron’s internal fraud were namely Kenneth Lay, Andrew Faston, Michael Kopper, Jeffrey Skilling, J. Clifford Baxter and Arthur Andersen, among which most of them were the directors of the organisation (Drennan, 2008). The fraud resulted due to the mutual cooperation of the board of directors along with auditors. Thus, the auditing firm of Arthur Andersen was forced to stop its operation of auditing in public concerns. In additon, most of the employees of Enron Corporation were replaced from their job positions thereby resulting in a catastrophic situation. All the directors of Enron Corporation utilised the assets of organisation as their personal resources therby transferring funds for private dealings which was one of the significant reasons for the downfall of organisation. Apart from these, the other imperative reason responsible for decline of Enron Corporation was modifications of company documents according to the wishes and demands of individual directors of the board. It was rather illegal on part of the directors of Enron Corporation (Santa Clara University, 2004). Furthermore, the fraud incident also includes high extent of political influences as well. This was due to the fact that Enron was one of the considerable corporate subsidiaries of ‘governor George Bush’ in areas of Texas. Moreover, Enron Corporation was always involves during the campaings of George Bush in one way or the other which resulted in high impact (Myers, n.d.). In additon to the above mentioned points, the other crucial point responsible for the cause of fraud was the failure of corporate governance. Corporate governance is defined as the method by which organisations are directed and managed. It includes a set of relationship among the management and board members of the organisation and with the stakeholders and shareholders in order to maintain a excellent relationship among them. It would help an organisation to prosper and sustain in the long run among others in the market. Besides, in case of Enron Corporation, it was just the opposite scenario. The management and board members or directors cheated with the revenues or profits of stakeholders and shareholders, which affected negatively on Enron’s profitability margin thereby hindering the corporate entity as well (Healy & Palepu, 2003). Hence, it can be evidently depicted from the above mentioned facts that the board members or directors utilised and enjoyed the benefits of the organisation in order to fulfill their needs and wants instead of considering about the welfare of stakeholders. Director’s Contibution Towards The Fraud The President of Enron Corporation, Louis Borget and the Treasurer, Tom Mastroeni were the authorised signatories of the Apple Bank account. Besides, huge amount of revenue (US$2 million) of Enron Oil Trading was transmitted from Apple Bank account to a personal account opened with the name of Tom Mastroeni (Cannaverde, 2009). Both the accounts were present in the same bank i.e. Apple Bank of New York. Unfortunately, the name of Apple Bank was not present in the books of Enron Corporation, which acted as a fundamental component of the scandal (Scrivener Publishing, 2009). Apart from these, Louis Borget also transferred US$ 106,500 to another suspecious account named ‘M. Yass’ from Apple Bank account, which was also not present in the books of Enron Corporation (Cannaverde, 2009). Moreover, other board members including Michael Kopper and William Dodson also gained approximately US$ 10 million along with Andrew Fastow with about US$ 30 million for personal utilisations (Government Printing Office, n.d.). Hence, it can be avowed from the above described facts, that Louis Borget and Tom Mastroeni were entitled to severe punishments. Accounting Statement Alterations Apart from personal usage, the board of directors were also responsible for the modifications of the accounting documents of Enron Corporation. The directors also disclosed many vital facts to the outside individuals thereby misutilising the rules and the regulations of the organisation. Along with this, the code of conduct of Enron Corporation was also misutilised by the directors. Moreover, the special purpose entities (SPEs) of Enron Corporation were abused by the directors. Special purpose entities may be a trust or an organisation and were used for an array of legitimate reasons namely risk management solutions and purchase of assets among others. SPEs act as structured financial tools for an organisation and were utilised for the development of new assests. In order to handle the situation of bankruptcy, the SPEs were utilised both for legitimate and illegitimate causes leading to misutilisation (Tavakoli Structured Finance, Inc, 2003). Apart from these, the directors of the board also modified the entire accounting books according to their own demands and needs which was an illegal conduct which resulted in the downfall of Enron Corporation. Moreover, the board members also took numerous loans from the company account in order to satisfy personal demands. In additon, 10 percent of personal prepaid tax was also submitted from the revenue of Enron Corporation (Howard Rice Nemerovski Canady Falk & Rabkin PC, 2005). Apart from these, Kenneth Lay (CEO) of Enron Coporation also offered jobs and business contracts to many relatives and family associates thereby misapplying the powers given to him. Hence, it can be affrimed that the above discussed facts were the prime causes for the downfall of Enron Corporation from the market of the US. Auditor’s Contibution towards the Fraud In the scandal of Enron Corporation, along with the directors of the board, the auditor was also involved. Arthur Andersen, who was responsible for carrying out the auditing activities of Enron Corporation failed to discover the modifications of the accounting books. As the auditing firm was incapable to analyse the defects, and in order to settle the disputes, the managemnent of Enron Corporation provided huge amounts to the auditing firm. Moreover, the auditor of Enron Corporation, Arthur Andersen, was indicted for applying lenient values or standards in the audits due to the inconsistency in interest resulting in extra consultation fees from Enron Corporation. Along with these, as the auditing agency utilised by Enron Corporation was an external firm so it charged large amount of fees as compared to others. For example, in the year 2000, Arthur Andersen received US$25 million as audit fees along with US$27 million as consulting fees (Healy & Palepu, 2003). In additon, Arthur Andersen also developed a partnership with Enron Corporation in order to earn high revenues and to sustain in the market of the US. Thus, large amount of audit fees created a serious impact on the financial position thereby resulting in negotiations with the local partners and shareholders of Enron Corporation. As a result, the acitivities of the auditing firm was cancelled forcefully due to its suspicious performances towards the finacial activities of Enron Corporation (Healy & Palepu, 2003). Political Involvement Apart from the above described causes, the other important reason which resulted in the fraud of Enron Corporation was political involvements. As Kenneth Lay was one of the golf partners of George Bush, so he favoured the group at a high extent. Kenneth Lay supported the governor Bush with huge amounts of money as well in the year 2001. The political group of George Bush received approximately US$ 880,00 which was utilised for the development of Republican funds. Moreover, at times of political campaigns, all the members of Enron Corporation were present which clearly shows the level of intimacy with George Bush, but it offered negative influences (Clayton & et. al.,2002). Failure of Corporate Governance Corporate governance of an organisation also plays an important part in controlling the activities of an organisation. It is a system which helps to develop a good relationship with the management, stakeholders and shareholders along with the customers. It includes a set of rules and norms responsible to control the organisation in order to achieve the goals or the objectives in the long run. This helps to enhance the corporate image and the position of the organisation among others in the market. It also improves the profitability and productivity of an organisation as compared to others. Thus, with the help of corporate governance, all the activities can be shared with the customers and shareholders in order to maintain reliability and consistency, thereby facilitating sustainability in the market. Hence, corporate governance acts as one of the significant techniques utilised for the improvement of corporate image of an organisation. Thus, corporate governance of an organisation should be maintained in an appropriate way in order to enhance shareholders returns (Kantakji, n.d.). Prosecution Made By Senate Committee of the USA The term ‘Prosecution’ is referred to a legal action in which a person is indicted for an illegal offense resolved in a court of a particular state by the government authorities. In additon, in order to deal the case of prosecution, a public prosecutor or district attorney is selected (Cornell University Law School, 2010). Arthur Andersen was prosecuted due to varied unlawful actions. Inspite of providing good suggestions to the directors of Enron Corporation, Arthur Andersen became involved with the management in order to perform the financial scandal. Thus, Arthur Andersen was ceased by the government of the US for breaching the laws and acts of ‘Generally Accepted Accounting Principles (GAAP)’ along with ‘Generally Accepted Auditing Standards (GAAS)’. These includes the guidelines and principles required for auditing the financial accounts of organisations. These guidelines as well as procedures were primarily utilised by the certified public account auditors. The auditing firm of Arthur Andersen, ignored and misled the auditing principles which resulted in a criminal offence (Cunningham & Harris, 2006). Apart from Arthur Andersen, many other members of the management namely Jeff Kelling and Kenneth Lay were also accused for the case of assertion. Along with this, the financial institutions of the US also offered high amount of investments in order to reconcile the allegations of the fake research reports. Hence, it can be avowed that Enron Corporation’s scandal ultimately escorted to the bankruptcy of Enron conglomerate which resulted in its downfall. Comparison of Enron With Another Company American International Group (AIG) has been one of the leading multinational insurance organisations in the United States and all across the world, which also had been accussed for accounting scandal just like Enron Corporation. AIG was also bailed out by the administration of the US. The scandal of AIG occurred in the year 2005, after a sequence of investigations by ‘Securities and Exchange Commission (SEC)’ of the US, ‘Justice department’ of the US in the headquarters of ‘New York Attorney General’. In the scandal case of AIG, just like Enron Corporation, the CEO named Hank Greenburg, Ron Ferguson along with certain other members such as Christopher Garand, Elizabeth Monrad, Robert Graham, Richard Napier, Eliot Spitzer and Christian Milton were also involved. Similarly, in case of Enron Corporation, the management along with the auditing firm were involved in the scandal case. The prime reason for the scandal of AIG was due to the wrong sanction of deal with Pittisburgh National Corporation. For which AIG had to pay US$126 million to the SEC. This declined its financial image and created a turmoil among the management and the customers. Due to this false deal, a penalty was charged to AIG of US$80 million for settlement. On the other hand, the directors of Enron Corporation attempted to cheat the stakeholders and the shareholders by transmitting the profit amount to their own accounts for own purposes, which was illegal. The members of AIG was also accussed for the prevarication of the records of accounts along with this, disagreement of the rules and the policies of ‘code of federal regulations’. As a reult of this conspiracy, the board members of AIG were also convicted just as Enron Corporation (Wells Publishing, Inc, 2004). What Companies Can Learn From The Enron Case and The Impact of the Enron Case Sarbanes-Oxley (SOX) Act In relation to the learning that a company can derive from the scandal that ocurd in Enron, it can be said that the Sarbanes-Oxley (SOX) Act has been one of the crucial aspects to be followed by a company. The ‘SOX Act’ often referred as Sarbanes-Oxley Act, was implemented in July 2002 in the USA. It was commonly known as ‘public company accounting reform’ and ‘investor prosecution act and corporate auditing accountability and responsibility act’. It is a centralised law of the United States which provides innovative and improved standards for all public company boards, management and public accounting firms in order to reduce the issue of financial scandals. The law also included certain major headings or sections involving varied corporate board members tasks as well as criminal punishments for the individuals or organisations attempting for any financial offence (SEC, n.d.). Auditors Learning According to this Act, the auditors are forbidden from performing non-audit services namely ‘book keeping’, ‘financial audits’, ‘internal audits’, ‘cash flow forecasting’, ‘chart of accounts’, ‘credit terms determination’, and ‘cash and accrual basis’ among others in order to enhance the system of accounting in a better way. Along with these, alternation of the main audit partner and the re-evaluating audit partner from of auditing after every five years might improve the operations of inspections of an organization. Moreover, according to SOX Act, it is unlawful to hoodwink an auditor or a director for personal interest. In additon, it is also illicit to amend or alter the financial statements of an organisation as per the SOX Act. Furthermore, personal job allotment or sanction of loans to relatives is also strictly prohibited (BoardSource and Independent Sector, 2003). Learning of Global Market Hence, the learning that the global market can derive is that in order to reduce the issue of financial scandal, the management and the board of directors of an organisation should be more vigilant and attentive. Furthermore, different auditing firms should be encouraged for performing the operations of audit in order to improve the transparency. This aspects should be maintained by the organisations and auditors in order to sustain in the global market. Conclusion Conclusively, it can be affirmed from the above discussions that the scandal of Enron Corporation occurred due to lack of corporate governance within the public organisations. In addition, due to inappropriate rules and regaulations system of the organisation, the transparency was not maintained with the stakeholders and the customers. Moreover, soaring rates of compensation is also the other noteworthy cause responsible for the downfall of Enron Corporation. Along with these, defects in the system of management is also liable for the downfall of Enron. References American-Business, 2011. Enron Corporation History. Business History. [Online] Available at: http://american-business.org/2952-enron-corporation-history.html [Accessed March 05, 2012]. BoardSource And Independent Sector, 2003. The Sarbanes-Oxley Act And Implications For Nonprofit Organizations. Main Provisions Of The Sarbanes-Oxley Act. [Online] Available at: http://www.boardsource.org/clientfiles/sarbanes-oxley.pdf [Accessed March 05, 2012]. Cunningham, G. M. & Harris, J. E., 2006. Enron And Arthur Andersen: The Case Of The Crooked E And The Fallen A. Global Perspective On Accounting Education Vol.3, pp. 27-48. Cornell University Law School, 2010. Criminal Law. Legal Information Institute. [Online] Available at: http://www.law.cornell.edu/wex/criminal_law [Accessed March 05, 2012]. Chartered Institute of Management Accountants, 2009. Corporate Fraud. Application. [Online] Available at: http://www.cimaglobal.com/Documents/Thought_leadership_docs/MigratedDocsMarch2010/Resouces%20(pdfs)/Topic%20gateways/Corporate%20fraud.pdf [Accessed March 05, 2012]. Cannaverde, J.Y., 2009. Preventing the Next Enron. Salve Regina University. [Online] Available at: http://escholar.salve.edu/cgi/viewcontent.cgi?article=1035&context=pell_theses&sei-redir=1&referer=http%3A%2F%2Fwww.google.co.in%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3D%2524%2B2%2Bmillion%2Bof%2Brevenue%2Btransferred%2Bto%2Bmastroeni%2Bfrom%2Bapple%2Bbank%2Baccount%2B%252B%2Benron%252Cpdf%26source%3Dweb%26cd%3D2%26ved%3D0CC0QFjAB%26url%3Dhttp%253A%252F%252Fescholar.salve.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1035%2526context%253Dpell_theses%26ei%3Dg59UT4v3JZDzrQf-48j6AQ%26usg%3DAFQjCNGg5vLeDOeK0yvtghfhxg-WeD35Dg%26sig2%3D8s-mXy0N_8cP1CR08P9Zow#search=%22%24%202%20million%20revenue%20transferred%20mastroeni%20from%20apple%20bank%20account%20%2B%20enron%2Cpdf%22 [Accessed March 05, 2012]. Clayton, R. J. & et. al., 2002. Enron: Market Exploitation And Correction. Financial Decisions, Vol.1. Dharan, B. G. & Bufkins, W. R., No Date. Red Flags In Enron’s Reporting Of Revenues And Key Financial Measures. The Titanic Analogy. [Online] Available at: http://www.ruf.rice.edu/~bala/files/dharan-bufkins_enron_red_flags.pdf [Accessed March 05, 2012]. Drennan, W. A., 2008. Einstein's Theory of Taxation. The Berkeley Electronic Press. [Online] Available at: http://works.bepress.com/cgi/viewcontent.cgi?article=1003&context=william_drennan [Accessed March 05, 2012]. Government Printing Office, No Date. Off-Balance Sheet Transactions. Congress. [Online] Available at: http://www.gpo.gov/congress/joint/jcs-3-03/vol1/389-403.pdf [Accessed March 05, 2012]. Healy, P. M. & Palepu, K. G., 2003. The Fall Of Enron. Journal Of Economic Perspectives—Vol. 17, No. 2, pp. 3-26. Howard Rice Nemerovski Canady Falk & Rabkin PC, 2005. Howard Rice Alert. Director Liability In The Wake Of The Worldcom And Enron Settlements. [Online] Available at: http://iln.com/articles/pub_169.pdf [Accessed March 05, 2012]. IWS, 2002. CRS Report For Congress. The Enron Collapse: An Overview Of Financial Issues. [Online] Available at: http://www.iwar.org.uk/news-archive/crs/9267.pdf [Accessed March 05, 2012]. Kantakji, No Date. Corporate Governance The New Strategic Imperative. A White Paper From The Economist Intelligence Unit. [Online] Available at: http://www.kantakji.com/fiqh/Files/Companies/l152.pdf [Accessed March 05, 2012]. Myers, R., No Date. Enron Family Bush. The Timeline. [Online] Available at: http://raenergy.igc.org/Enron_Family_Bush.pdf [Accessed March 05, 2012]. Santa Clara University, 2004. Corporate Ethics, Governance And Social Responsibility: Comparing European Business Practices To Those In The United States. A Study Conducted For The Business And Organizational Ethics Partnership Markkula Center For Applied Ethics Santa Clara University. [Online] Available at: http://www.scu.edu/ethics/publications/submitted/hurst/comparitive_study.pdf [Accessed March 05, 2012]. Scrivener Publishing, 2009. Enron Oil Trading (A): Untimely Problems From Valhalla (A). This Environment Is Hardly Giving Us Room To Breathe. The Last Thing We Need Is A Public Scandal. [Online] Available at: http://www.scrivenerpublishing.com/cart/images/ArbogastCaseStudy1.pdf [Accessed March 05, 2012]. SEC, No Date. Study And Recommendations On Section 404(B) Of The Sarbanes-Oxley Act Of 2002 For Issuers With Public Float Between $75 And $250 Million. As Required By Section 989G(B) Of The Dodd-Frank Wall Street Reform And Consumer Protection Act Of 2010. [Online] Available at: http://www.sec.gov/news/studies/2011/404bfloat-study.pdf [Accessed March 05, 2012]. Tavakoli Structured Finance, Inc., 2003. Structured Finance: Uses (And Abuses) Of Special Purpose Entities. Special Purpose Entity (SPE). [Online] Available at: http://www.tavakolistructuredfinance.com/spe.pdf [Accessed March 05, 2012]. Wells Publishing, Inc, 2004. AIG Forks Up $126 Million To SEC On PNC Deals. News. [Online] Available at: http://www.insurancejournal.com/news/national/2004/11/24/47993.htm [Accessed March 05, 2012]. Read More