Accounting Scandal - Essay Example

Enron was one of the most prodigious companies that flourished against competition in its quest to achieve dominance in the 21st century. However, Enron’s fraudulent activities are also the embodiment of critical American culture that continues to catalyst the push for sales and income. Due to Enron’s scandal, the core principles of auditing have dynamically changed. This paper will seek to portray the keen principles of Enron’s root cause of its downfall and the potential impact it made that has crippled other companies. Choose an accounting scandal (from the link below) and summarize it.  http://www.forbes.com/2002/07/25/accountingtracker.html  Please include the following in the summary:  1) A brief description/background of the company.  One of the biggest frauds that has ever taken place in the modern 21st century commerce was the case with Enron. Enron’s scandal without a doubt has been the focal point for one of the biggest busts in the history of American entity. The Enron Scandal and the Neglect of Management Integrity Capacity Enron was a very prosperous and prominent firm that was an American energy company established in Houston, Texas. Enron was formed in 1985 by Kenneth Lay after he had acquired two other gas companies in his quest to become a conglomerate in the American history. Nonetheless, after Enron’s biggest scandal, shareholders lost around $11 billion as the company continued on the downward spiral. Enron finally filed for bankruptcy at its $63.4 billion in assets were completely diluted. Many of the stockholders got measly pennies back for the huge investments they had in the company. 2) When the scandal was (or is believed to be) formed.  Enron was charged with “cooking the books” along with their associates Arthur-Anderson. In essence, the company was running a Ponzi scheme. A Ponzi scheme is a strategy used by creditors to attract new investors in the company and utilize their funds to pay of old debts. Enron’s financial statements did not comply with the operations and finances with the shareholders and analysts. The Enron Scandal and the Neglect of Management Integrity Capacity Moreover, the Enron management continued to implement unethical practices as they would modify the balance sheet in order to favor the revenue goals that the corporate wanted to achieve. The continuous spiral of modifying the financial statements became a continuous habit and the lead cause of the downfall for the company. Undoubtedly, managers in corporate America have to protect the interests of the corporate executives along with the goals of the stakeholders. The management clearly neglected responsibility of overseeing the unethical practices that were plaguing the corporation. The Enron scandal continued to grow worse every year as it became a problem that was out of control. The primary motivation for Enron was to keep their gross income high along with cash flow while diminishing their liabilities and long-term debts. 3) An in-depth analysis of the accounting scandal.  As mentioned before, Enron ran a Ponzi scheme that continued to over-inflate the revenues that they were actually earning. Enron and other energy suppliers earned sales by providing services such as electricity, natural gas and providing other risk management products. Traditionally, companies similar to Enron such as Goldman Sachs and Merrill Lynch used simple pure “brick and mortar” model for reporting income. However, Enron took upon a new model known as “the merchant model.” This model was however not adapted by Enron as they utilized the merchant model, which was aggressive, risky and was based on a subjective representation of revenues that were estimated. Although the system did thrive as Enron continued to promise huge compensations for its executives, it also lead to the downfall for the company. For instance, the company’s revenue from 1996 to 2000, Enron’s revenues were grossly inflated to be increased by 700%. This extensive inflation was highly unjustified as the market for energy itself is only figured to be around 2%. Enron’s success in the market was the key cause of investors taking keen interest in allocating their funds. 4) How the scandal was discovered. The scandal was discovered after the Ponzi scheme crippled to thrive under the current system. As investors began to lose confidence, it was evident that investors’ confidence had diminished. By the end of August 2001, the company was struggling to give adequate earnings per share. The President of Enron insists that investors just needed reassurance to invest even though the Ponzi scheme was not gaining any steam. When investors realized that the company’s performance has struggled to retain any ground in the market as cash flow continued to be in critical condition. After the 9/11 attacks, the media swayed its attention from the issue. However, on October 16, the news snowballed once again as Enron announced on October 16 that its financial statements contained many flaws and violated auditing rules. The company’s stock price plummeting and the board of directors befuddled about the changing the situation was the “icing on the cake” that made the scandal notorious worldwide. 5) The outcome of the scandal. (e.g. where is the person (or people) who were held  responsible for the scandal today?)  Due to Enron’s fraudulent activities, many controls have been accounted have been placed by the government to ensure that these type of fraudulent activities might not occur. First and foremost is the creation is the creation of the Sarbanes-Oxley Act .This essential piece of legislation was implemented to eliminate fraud by extending the consequences of destroying, fabricating, and modifying records in a case of a federal investigation. The second end product that resulted due to this scandal was the strict incorporation of internal auditing in every organization. The Enron scandal undoubtedly shed a lot of light in the role of the audit committees that were responsible for preventing frauds and abuses in financial disclosures. The internal audit committee in every organization now is strict with the financial protocols it receives from its executive board. Each auditor is held responsible for their work to ensure that the company continues to follow the necessary guidelines. In the dynamic corporate America, it is quite essential to understand the gravity of situations in order to avoid fraud. First and foremost is the fact that revenues should not be the catalyst as a motivation for employees. Companies must understand that complying with the legislatures is beneficial for them in the long-run. These short term goals of pleasing stockholders are a cat and mouse game that usually results in the company going bankrupt. In addition, the external auditors must also be accountable for this chaos. Clearly, Arthur Anderson was a prominent firm at that time and should have taken the correct protocols to address these issues. Moreover, the management neglected moral deliberation that was a key towards their downfall. The neglect of moral integrity in Enron’s case was the root cause of Enron’s legal and financial problems. The idea of integrity capacity is the idea that individuals need to be aware of the moral awareness and demonstrate balanced judgment to avoid these types of fraudulent behavior. If one key issue is at stake, it can erode and jeopardize the credibility along with the reputation of the firm’s integrity. The Enron executives pleaded to the “fifth degree” and somehow finally understood the gravity of their consequences. Lastly, the idea of raising high capital by investing in risk venture areas should be avoided. In order to maintain a high credit, Enron relocated its high venture assets into a separate “special purposes entity.” Clearly, the management should be aware of these flaws and do must everything in its power to avoid this for the sake of the company’s ability to thrive in the long run. ***You may add other information (facts) that you believe is important in understanding the  nature of the accounting scandal which you have chosen. Works Cited "The Corporate Scandal Sheet - Forbes.com." Information for the World's Business Leaders - Forbes.com. N.p., n.d. Web. 5 Dec. 2011. Read More