Enron Scandal. One of the biggest scandals that shocked America and the entire world was that the fall of Enron. There are some reasons of the Enrons collapse major of which are the insider trading, the disgraceful phenomenon of spreading the confidential information at a stock exchanges, false financial statements, hiding the profit etc. Concerning the financial faults there were a full set of the moral, ethic and legal rules violations. What is more the auditing company got involved into the Enrons illegal operations. Enron practiced the debt hiding and some of the recognized banks assisted the company in it1. False financial records helped Enron to boost its real financial results. One of the main violations of the regulations was hiding the debts by establishing partnerships.
Some of them are following: RADR (was secretly funded by Enron, bought from Enron windmills then sold them back with the profit that was taken by the Enrons top management).
Chewco, a company formed by the executives of Enron. Later Enron bought the interest in Chewco price of which was boosted thus making profit for the Chewco stakeholders, i.e. executives of Enron2. The securities fraud was the general accepted practice in the Enrons operation. The officials of Enron made untrue statement to deceive the security analysts in order to manipulate the value of the shares3. Enron provided the banks with the false finance statements in order to obtain the loans4. Professor Van Horne reveals some of the mechanisms used by Enron and which are used by other companies to hide the real financial information5. He compares the collapse of Enron with the neutron bomb in accounting. He says Even without fraud, the financial statement can be misleading6.
1.1 IntroductionFinancial accounting statements are summaries of monetary data about an enterprise and are used in an attempt to help make informed decisions in the present and future.Financial statements portray the effects of transactions and other events by grouping them into broad classes (or elements) according to their economic characteristics.The three basic financial statements are the ...
The main objective of the corporation is to become profitable and bring money to investors. If corporation fails to do so it tries at least to look profitable. There are certain tools which are not fraudulent, but may mislead the investors. “Pro forma earnings statements allow companies to determine what they think should matter to investors, not necessarily what investors think is best,” he says. The Pro forma earnings give the investors the sense of the companys future value. This was widely used by Enron. Company was manipulating with the figures of the revenue at the end of the quarter. For instance company may cut deals and reduce the prices to make revenue stream.
The practice of off balance sheet debts was widely used by Enron. The main principles of it were that Enron transferred the liabilities to its subsidiaries thus transferring the risks. This technique made company look stronger than it really was. The profession of accountant presupposes certain ethic rules which have been worked out by the Institute of Management Accountants. The Code of Ethics of accountant is based on the following four principles: COMPETENCE Defines the professional skills of the accountants. The accountant is the key figure on the enterprise and his/her professionalism is among main factors defining the successful operation.
CONFIDENTIALITY Accountant is a person who has access to the financial state of the enterprise. The disclosure of the financial operation of the enterprise may bring big losses for the enterprise. INTEGRITY Accountant should avoid any conflicts of interests of the enterprise as well as any other actions which may bring the losses to the enterprise. OBJECTIVITY The information released by the accountant should be objective and fair. Accountant should disclose fully all-relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented7. In case of Enron these principles were violated completely.
1. Consider Exhibit 10 on page 22 of the case; does it include the factors you consider most important in the selection process? Which factors would you be inclined to weight most heavily? Quantitative Criteria 1. Design and Foundation 2. Request Definition 3. Documentation 4. Receiving 5. Supply Management 6. Project Tracking 7. Miscellaneous 8. Interfaces 9. Training 10. Other Yes. It does ...
The Enron scandal brought some lessons to general accounting practice. It disclosed that the company was able to hide its losses for almost five years. The system of accounting was so complicated that the auditing companies could not reveal all the rule violations. The internal control did not work properly8 as well. The top management of Enron succeeded in inventing the creative accounting a fraudulent ways to hide the losses. The management of Enron hid losses in partnerships created by Enron.
It was called the special purpose entities9. Bibliography Banks Helped Enron Hide Deals, Report Says, Sentinel Wire Services, Thursday 14 August 2003, available at http://www.truthout.com/docs_03/printer_081603D.sh tml How Did Enron Defraud Shareholders?, available at http://www.securitiesfraudfyi.com/enron_fraud.html Rex Nutting, Details of charges against Lay, CBS.MarketWatch.com, July 8, 2004, available at http://cbs.marketwatch.com/news/story.asp?guid=%7B 9FA778C3-FA46-4762-B374-FD6237B9401F%7D&siteid=goo gle&dist=google Margaret Young, Even Without Fraud, Financial Statements Can Be Misleading, STANFORD GRADUATE SCHOOL OF BUSINESS, May 2002, available at http://www.gsb.stanford.edu/news/headlines/vanhorn e.shtml Code of Ethics, Institutes of Management Accountants, available at http://www.imanet.org/ima/sec.asp?TRACKID=&CID=191 &DID=323 Enron Scandal, Encarta, available at http://encarta.msn.com/encyclopedia_701610398/Enro n_Scandal.html#s6 Citation Sentinel Wire Services How Did Enron Defraud Shareholders? Rex Nutting Ibid Margaret Young Ibid Code of Ethics Enron Scandal Ibid.