Enron Scandal Essay

Accounting scandals are political or business scandals which arise with the disclosure of pecuniary misdeeds by trusted executives of corporations or governments. These days, non too often, these scandals are splashed as headlines across media. wherefore? Because there are complex groups of s handleholders who might be seriously alter by the scandals. Enron scam was the around remarkable scandal in 20 centuries by their institutionalized, systematic, and creatively planned accountancy fraud. The scandal excessively brought into wonder the accounting practices and activities of galore(postnominal) corporations in the United States.The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting federation. This report will reveal the whole story of Enron scam and auditors mapping from the situation in to a greater extent depth. It will also include the flowing situation of those responsible for the fraud. 2. Background of U. S in nineties The 1990s of U. S were a beat of prosperity and this prosperity period is originated from exploitation in IT corporates and in accordance with increase in productivity as technical schoolnology develops with IT. In the mid- to late-90s, societys expectations of what the Internet could offer were unrealistic. some(prenominal) investors foolishly ignored the fundamental rules of investing in the stock food mart and instead, investors and entrepreneurs became preoccupied with new ideas that were not yet proven to have market potential. Furthermore, they ignored the blatant signs that the bubble was about to burst. (IT Bubble in 90s) thither are two main reasons for the bubble with investors optimistic expectation, there were a lot of Window dressing in accounting. As Enron decayd, the growth of the tech sector proved to be illusory, and bubble started to sober. 3. Enron- who are they?Enron Corporation is an brawniness occupation, communications company which was formed in 1985 based in Houston, Texas. Enron marketed electricity and natural gas, delivered energy and other physical commodities. Company branched into some(prenominal) non-energy- cerebrate fields as well, including such areas as spirited-speed Internet bandwidth, and financial and risk management with 21,000 employees at mid-2001. The company reported revenues of $101 zillion in 2000. It has stakes in nearly 30,000 miles of gas pipeline, owns or has entrance to a 15,000mile fiber optic network and has a stake in electricity generating operations around the world. 4.Enron- what they did? The Enron fraud case is extremely complex. on that point are several main characters who are spearheading the Enron scam. One of them was Jeff Skillng. Jeff Skillng, who was a adviser in Mckinsey, took charge in consulting Enron. He found problems and also potence of Enron and he proposed the idea of gas bank to Enron, which is a system that is unite financial system and gas supply and demand system, and taking the brim from the two system(as bank does). This was an ideal idea in theory and Enron asked him to take charge for this business, and later he became the president of Enrons trading operations.Also, he convinced federal regulators to permit Enron to use an accounting method cognize as mark to market. Using this method allowed Enron to count projected wages from long-term energy contracts as current income. This was money that might not be collected for many long time. It is thought that this technique was utilize to embroider revenue metrical composition by manipulating projections for future revenue. The problem is that it doesnt fight back realised profit and real cash flow. especially, Enrons main trading was long term future contract which is hard to make military rating for the future.Use of these techniques made it difficult to see how Enron was really making money. The numbers were on the books so the stock prices remained high, barely Enro n wasnt paying high taxes. When the telecom industry suffered its first downturn, Enron suffered as well. Eventually, the house of cards began falling. When Enrons stock began to decline, the Raptors began to decline as well. On August 14, 2001, Enrons CEO, Jeff Skilling, resigned ascribable to family issues. Enron chairman Ken Lay stepped in as CEO. 5. One face of fraudEnrons too much Off-Balance Sheet Transactions Enron used off-balance-sheettechnique for anytime, for many purposes, because it would enable Enron to present itself more attractively as measured by the ratios favored by analysts and investors. Skillng used securitisation to supply more liquidity and also to clean up the assets that is hardly generating income from it. He also hided most of the debt by securitisation. So, Enron needed Special purpose entities(SPE) for the securitization purpose. JEDI was one of the SPE. atomic number 20 PERS and Enron invested by $25000m each.As soon as the JEDI established, Enron started to sell energy related stock to JEDI and it grew JEDI by 23% per year on average. It made Skillngs ECT business spoiltger and bigger. 6. Consequences for the stakeholders The key stakeholders affected by the collapse of Enron were its employees and retirees. Stakeholders and mutual funds investors lost $ 70billion market value. Banks were also affected by the meltdown of the company. Not only the stakeholder and bondholder lose out, the confidence in the company also fell. This was the major setback for the company.The actions of Enron management left a sibylline scare for its 4000 employees which lost out their jobs and also impacted others around them. approximately blamed Arthur Andersen Enrons accounting firm and some blame the hop on of directors for insufficient oversights. The damage was so big that it was likely to take years for the court to sort the wreckage. The company did not think of its future and took many bad steps just to earn money. The CEO should hav e looked into the company matters long time ago and took action so that hundreds of jobs could have been saved.The companies who were associated with the big firm were affected on a very large scale. This was the biggest failure of a firm with $63. 4 billion in assets. 7. Auditors in this scandal, and their use The external auditing body of Enron company was Arthur Anderson LLP, formerly one of the big 5 accounting firms, providing auditing, tax, and consulting services to large corporations. Andersen definitely Knew Enron Was in Trouble but they overlooked at it and even conspired with Enron to manipulate the financial statements. They knew Enron was in dread as early as Feb.2001, a company memo showed, and Andersen debated drop the collapsed energy firm all together, Reuters reported. Additionally, Andersen knew in mid-August of a senior Enron employees concerns about improprieties in the energy companys accounting practices. Andersen substantiate that a memo dated Feb. 6 reco unted a meeting amid Andersen executives about whether Andersen should retain the now-bankrupt Enron as a client. Auditors are responsible straight off under the law especially the international standards to report directly to the shareholders on the status of the companys or a banks account at a particular point in time.They to a great extent misconducted as auditors as they received money and hided about Enrons truth. 8. Ramifications It is not easy to apparatus rigorous standards without changing Incentives. This situation can be seen in South East Asian countries like Singapore, Thailand, Hong Kong, China. Each coarse can implement its own accounting standards, but did not implement the substantial institutional changes required to make these standards effective. According to various studies conducted in this area, new standards did not result in better-quality financial reporting.9. Conclusion In search of better standards and ethics The ENRON Scandal is considered to be o ne of the most notorious within American history an unofficial blueprint for a case study on White Collar crime. Enrons doings has confirmed that the treatment of off-balance-sheet dodge, American accounting standards are too lax. It is time for another effort to realign the system to function more in shareholders interests. Companies need stronger non-executive directors, paid enough to devote proper attention to the job.