Enron Accounting Scandal - Case Study Example

ENRON ACCOUNTING SCANDAL It was in 1985 when Texas-based Houston Natural Gas merged with a Nebraska-based natural gas company, InterNorth that lead to the formation of the new company Enron. In its earlier years of operation, Enron started as a natural gas provider. By 1989, it had begun trading natural gas commodities and by 1994 it entered the market for trading electricity (www.mbaknol.com, 2011). Before Enron got into the troubles of “accounting scandal”, it was operating well and even had become one of the top companies in the world. It made revolutionary changes in the trading markets of energy which has opened the door for new power traders and suppliers. It also tailored a nationwide energy-trading network by engaging in electricity and natural gas contracts that reflects the cost of delivery to a specific destination. By year 1999, the company adapted an internet-based system as Enron Online was launched. In 2001, it reported its executed trades on-line averaging to $2.5 billion a day. Having posted a 57 per cent increase in sales between 1996 and 2000, the company was considered as one of the most successful companies in the world. It controlled, 25 per cent of the “over the counter” energy-trading market or the trades conducted party-to-party and not over an exchange like the New York Mercantile Exchange. In addition, in the last week of 2000, its shares hit a 52-week high of $84.87 per share (www.mbaknol.com, 2011). No doubt that among the major player that had a major impact in the gigantic collapse that turned out to be Enron is the accounting firm that handled its auditing. This is Arthur Andersen which garnered ire and revulsion following the events of the scandal. There was the unending debacle over the alleged shredding of important documents moments before they were subjected to an investigation. This was to cover-up the paper trail on the corruption that went on within the company. In 2002, the Houston Court found the company guilty of obstructing justice that led to the lost of over $60 billion by investors. The jury found it guilty on account of an alteration of a company memorandum that was connected with the revelation of the income of Enron. The judgment emphasized the need of accounting firms to monitor corporations and not just to stick with balancing accounts (Thomas, 2002). Though the entire firm had been indicted and found guilty, the most prominent figure that contributed to the catastrophe is their Chicago lawyer Nancy Temple who ordered David Duncan to erase her name from a memo when they already knew the Securities and Exchange Commission was after them. The subject of the memo was on a $1 billion loss of Enron that Temple disagrees with. The whole debacle has placed the entire firm into jeopardy as they lost one-third of their 2,300 clients whereas only 5,000 out of a former 26,000 of their United States employees opted to remain with the company. The editor of Bowman’s Accounting Report has been quoted describing “Arthur Andersen is dead. Once the indictment was handed down, clients started jumping faster than they did off the Titanic” (Thomas, 2002). All these turn of events had led to the realization that there has been transcendence among accounting firms to be more cautious and transparent of their dealings with client companies. This judgment over Arthur Andersen only leads as basis to the public conclusion that there was something awfully wrong with the way Enron conducted its business. The non-disclosure of facts that the company is in ruins which led investors to believe they are putting their money on a viable company when in fact they are not. This case served only as fuel to the public clamor to delve into the culpability of Enron executives and to hold them liable and to make them responsible to the aftermath of the company’s mess. There have been a number of opinions that pertain to the whole situation, some even uncalled for and downright degrading such as the reference to Andersen employees as Androids (Thomas, 2002). This is all for the lack of action that employees rendered despite the rampant dishonesty around them. This eventually led to the mass resignation of Anderson employees which inadvertently became the company’s last hurrah for the final fall. Many blame the deregulation of the trading system as the main reason for the malfeasance of Enron. But the reality is that it is not the deregulation that is to be blamed for the events that ensued and the massive loses of Enron. It is at the core of things the greed of human beings for money which was its downfall. There was relatively no authority to overlook the system and to police the conduct of companies and individuals. Deregulation is derived from the ideas of philosopher Adam Smith who coined the term invisible hand in reference to the machination of a free economy. In this system, “the entrepreneur’s self-interest will guide him into making the most efficient use of his resources. Public welfare and benefits are only by-products of all the efforts exerted to succeed in his quest for profits and business prominence” (Cantoria, 2011). This is what’s missing in Enron. The company was governed primarily by self-interest and there was little to no regard to public welfare. The company ran on deception and this was evident in the hierarchy of the company tree. Its very own Chief Executive Officer Kenneth Lay is the primary person to blame for the widespread deception proliferated by the company to the public. There were reports that Lay sent letters thru email to Enron employees to pacify their fear that the company is about to crash. More than this, he even encouraged them to buy more stocks. Subsequent to this, he was the first to cash in over $1 billion of stocks and Lay earned an easy $103 million. These facts are clear manifestations of betrayal of public trust. The company took exploited free enterprise of the American economy. Companies in the country are encouraged to form their own identity and strategy within the prescribed trade rules. They have the freedom to be able to promote their company and to draw in as many buyers as they could. Enron battered the tax cutbacks provided by the government to be able to pocket more profit than what is due to them. The executives circumvented these cutbacks to serve as a loophole. “In the final and true accounting of Enrons books, the investors actually didnt gain because the money that was paid out to them as dividends mostly came from borrowed funds and from the capital markets” (Cantoria, 2011). The move to deregulation in gas trading during the 80’s was a pivotal point in the transformation of Enron’s policies to manipulate the system to their gain. They simulated scenarios such as ‘robust selling’ of traders that did not actually took place. In 2000 they were able to send a press release that revenues is more than $100 billion and stocks are selling at $90 each, all this equated to the company’s market value at $700 billion. Quite notable is the fact that even former President George W. Bush reaped the benefits himself when Enron contributed $2 million to his campaign funds. All these seem okay on face value, but a deeper scrutiny would reveal that there was actually no money derived from revenue other than what the investors had put in. the money that stockholders were receiving as dividends was nothing but their own money coming full circle (Cantoria, 2011). Enron was able to shape public opinion and knowledge of gas trading through the press. They were able to create the mindset of the people according to what will benefit them. The question now boils to how Enron was able to do this. The answer is that they were not alone. Enron borrowed from Citigroup and JP Morgan Chase to keep with the show that it is a liquid company. They created fictitious entities completely separate from it such as ‘Mahoria’ and ‘Yosemite’ reported to be in the Cayman Islands. Senate hearings proved that Citigroup and JP Morgan Chase had participated in the cover-up. Through these ‘companies’ they were able to obtain $8.5 billion in loans through 26 transactions between 1992-2001transferred to the concocted companies. The two crediting companies allowed Mahoria and Yosemite “to open escrow deposits in favor of Enron” (Cantoria, 2011). These dealings created the impression that Enron is highly lucrative and allow it to retrieve more funds and be yielded with a high credit score when in fact it is not raising revenue. Andersen Accounting’ chief auditor David Duncan dismissed these facts. These were all to conceal the true data regarding the accounts of Enron. No doubt that everyone benefited in this fraud except the public. The Enron Accounting Scandal means more than a tale of accounting manipulations; it was a complex system of connivance and political clout (Cantoria, 2011). It even involves taking advantage of the current market situation and violation of business ethics only for the entrepreneurs to gain their self-interests. Enron forgot that in a free enterprise, the invisible hands were supposed to guide their self-interest and not their own aspirations and motives to earn more profits in the expense of the public. Public welfare and benefits were out of the Enron’s concern as they deceived the public by their massive disinformation campaign. Bibliography Cantoria, C. (2011, January 1). A Detailed Look at the Enron Accounting Scandal. Retrieved March 13, 2011, from www.brighthub.com: http://www.brighthub.com/office/finance/articles/101609.aspx Thomas, C. B. (2002, June 18). Called to Account. Retrieved March 13, 2011, from Time Magazine: http://www.time.com/time/business/article/0,8599,263006,00.html MBA Knowledge Base. (2011). Case Study: The Enron Accounting Scandal. Retrieved March 13, 2011, from MBAKnowledge: http://www.mbaknol.com/management-case-studies/case-study-the-enron-accounting-scandal/ MBA Knowledge Base. (2011). Case Study: The Collapse of Enron. 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