Enron Case: Accounting Controversies - Essay Example

Accounting Controversies INTRODUCTION They say that accounting is the language of business. A German investor would be ably informed of how the United States company Kentucky Fried Chicken or any other enterprise has performed in terms of generating profits. The accounting language has its own set of technical words that a person studying basic accounting would easily understand. Accounting is governed by United States generally accepted accounting principles. The External auditor issues an opening as the fairness of the financial statements. The following paragraphs explain that some persons preparing the accounting statements do not follow the U.S. GAAP. BODY The Enron and Arthur Andersen hit the headlines for their accounting controversy. The external auditors were declared not guilty of audit fraud in the Enron Case. Also, the Enron external auditor, Arthur Andersen, was convicted in June 2002 by the federal jury in Houston, Texas. In addition, the users of the financial statements need unbiased or fairly presented financial statements. Further, the suppliers need the financial statements to determine if the company will not file for bankruptcy. Furthermore, Enron violated generally accepted accounting principles. Finally, Generally accepted accounting principles are the foundations of the income statement, balance sheet and statement of cash flows. The external auditors were declared not guilty of audit fraud in the Enron Case. The Enron Company hit the headlines several years ago. Enron's external auditors, Arthur Andersen, entered a plea deal with the judge. The Arthur Andersen auditing engagement team was led by Partner David Duncan. However, it was later proven by the court that the external auditor, Arthur Andersen, was innocent of any wrongdoing. The government actions before the case was settled had precipitated to the disintegration of Arthur Andersen. Tens of thousands of Arthur Andersen employees started trooping to the unemployment lines after losing both their Arthur Anders accounting jobs but also their pensions as well. Arthur Andersen stopped getting new auditing clients in August of 2002. The auditing firm was sentenced to pay $500,000 and sentenced to five years probation. Surely, the external auditors were not guilty of audit fraud in the Enron Case ("Stopping IRS Misconduct," 2007, p. A17). Also, the Enron external auditor, Arthur Andersen, was convicted in June 2002 by the federal jury in Houston, Texas. The company was convicted for obstruction of justice for deliberately shredding all their accounting work done in auditing the Enron Company. The Enron company had filed for bankruptcy. The accountants of the company did not follow United States generally accepted accounting principles or GAAP in the preparation of their financial statements. The financial statements include the balance sheet, the income statement and the statement of cash flows. Generally Accepted Accounting Principles show the how, when, where and why and business transaction or event is recorded a0s such. The work of the external auditor is to give an opinion stating that the financial statements of the company are fairly presented. The reason for the fairness is that the financial statements are used by many sectors of American and International societies. Glaringly, the Enron external auditor, Arthur Andersen, was convicted in June 2002 by the federal jury in Houston, Texas (Peterson, 2002). In addition, the users of the financial statements need unbiased or fairly presented financial statements. The creditors need the financial statements to determine whether to approve the company's new loan application. The board of directors need the financial statements to determine whether the company has been generating net profits for the past year or years of business operations. The suppliers need the financial statements to determine if the credit line application of the company will be approved. For, a company that shows a net loss income statement will raise doubts that the company will be able to pay its accounts payables when the payment due date arrives. The customers need the financial statements to determine if the company will last long enough to supply their product needs. A company that has been generating net losses for the past years of operation may cast doubt as to how long the company will be open for business. Many companies that generate net losses would file for bankruptcy and close shop in order to stop future net losses if the business continues to open its doors to the public. Unquestionably, the users of the financial statements need unbiased or fairly presented financial statements (Geisst, 2004, p. 398). Further, the suppliers need the financial statements to determine if the company will not file for bankruptcy. The suppliers will look for other customers if they find that the company is on the verge of closing down due to its trend of generating net losses for the past year or years of operation. The employees need a fairly presented financial statement to determine if it is feasible for the employees to ask for a raise in salary. A company that has high net profits has a higher probability of increasing the employee's salaries as compare to a company that has been deep in net losses for the past few years of operation. The government is interested to use a fairly presented financial statement to determine if the company has been complying with environmental and other laws of the land. Environmental laws include anti -air pollution laws and anti -river pollution company practices. The community is interested to know the financial statement reports of the company in order to determine if the company will be able to help the community in terms of charity donations and hiring of local residents to work in the company. Arthur Andersen fell from its number one spot in the auditing firms industry in the United States. During 2001, Arthur Andersen employed eighty -five thousand employees stationed in three hundred ninety offices scattered over eighty five countries. Clearly, the suppliers need the financial statements to determine if the company will not file for bankruptcy. (Ainslie, 2006). Furthermore, Enron violated generally accepted accounting principles. To be frank, Enron prepared fraudulent financial statements to deceive the users of the financial statements. The fraudulent activities of Enron were discovered in 2001. However, the fraudulent activities started in the 1990s yet. Enron stock market prices dropped from $90 per share to only a few pennies. Enron had prepared sales figures which were really coming from their own special purpose entities or partnerships. These entities and partnerships were controlled Enron itself. Generally accepted accounting principles state that sales between parent and subsidiary or parent and branch should be eliminated or erased. Enron falsified its financial statements by not including many of its major net losses and large liabilities. This is in total violation of United States generally accepted accounting principles. For, the basic accounting equation taught in fundamentals of accounting is that assets = liabilities + capital. Thus, removing the liabilities part from the formula would increase the assets or decrease the capital or stockholders' equity or partner's capital portion. The net losses are deducted from the capital, the stockholders' equity or partners' capital. Definitely, Enron violated generally accepted accounting principles (Madrick, 2002). Finally, generally accepted accounting principles are the foundations of the income statement, balance sheet and statement of cash flows. The balance sheet includes the assets, liabilities and capital of the company. The assets are the resources controlled by the company as a result of past business transactions and events from which future economic benefits will accrue to the company. The assets are the properties owned by the company. The liabilities represent the present obligations of an entity arising from past transactions or events. The settlement of the liabilities is expected to result to an outflow from the company of resources that generate economic benefits. Surely, generally accepted accounting principles are the foundations of the income statement, balance sheet and statement of cash flows (Cates, 2003). CONCLUSION: The Enron and Arthur Andersen hit the headlines for their accounting controversy. Surely, the external auditors were not guilty of audit fraud in the Enron Case. Glaringly, the Enron external auditor, Arthur Andersen, was convicted in June 2002 by the federal jury in Houston, Texas. Unquestionably, the users of the financial statements need unbiased or fairly presented financial statements. Clearly, the suppliers need the financial statements to determine if the company will not file for bankruptcy. Definitely, Enron violated generally accepted accounting principles. Surely, generally accepted accounting principles are the foundations of the income statement, balance sheet and statement of cash flows. Surely, generally accepted accounting principles are the foundations of the income statement, balance sheet and statement of cash flows. Conclusively, Enron and Arthur Andersen hit the headlines for their accounting controversy. References Ainslie, E. K. (2006). Indicting Corporations Revisited: Lessons of the Arthur Andersen Prosecution. American Criminal Law Review, 43(1), 107+. Cates, D. C. (2003). Time for New Metrics: Sarbanes-Oxley Is Part of the Solution, but a Management/analyst-Led Shift to Non-GAAP Metrics Could Lead to True Transparency. ABA Banking Journal, 95(4), 45+. Geisst, C. R. (2004). Wall Street: A History : from Its Beginnings to the Fall of Enron. New York: Oxford University Press. Madrick, J. (2002). Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. Challenge, 45(3), 117+. Peterson, J. R. (2002). Where the Money Is: Willie Sutton Wasn't the Only One to Recognize a Deep Pocket When He Saw One. Now the Plaintiffs Bar Is Targeting Banks. ABA Banking Journal, 94(7), 47+. Stopping IRS Misconduct. (2007, July 25). The Washington Times, p. A17. Read More