The Enron Accounting Scandal of 2001 There are many accounting scandals that have occurred throughout United States History. Many scandals occur even without outsiders knowing anything that had occurred. Companies try their best to keep many of the accounting scandals quiet. Everyday, there are political and business fraud happening, and most of it goes unnoticed. No company wants to admit that there was a problem or that people within the company are not trust worthy.
However, when executives in large corporations take scandal to the extreme, there is no way of keeping out of the spot light. Unfortunately, scandals are the tip of the iceberg. They represent visible failures and companies could really go down for such setbacks. Especially in Enron’s case during 2001, an accounting scandal could not be kept silent. It was one of the biggest accounting scandals in history and because of fraud, Enron suffered greatly.
Enron Corporation is an energy trading, natural gas, and electric utilities company based in Houston, Texas founded in 1985. As the deregulation of electrical power markets were rising, Enron with the help of former chairman Kenneth Lay decided to diversify their business portfolio and enter into becoming an energy broker who traded electricity and other commodities. Enron took what would prove be a fatal turn that would ultimately meet their demise by ignoring one of the most important foundations of their business: bringing buyers and sellers together.
Instead of Enron bringing them together, they had chosen to enter into a contract with the seller and signed a contract with the buyer, thus profiting on the difference of the selling and buying price of the commodity (Hale, 2). Enron was able to keep its books closed, making them the only party that knew both prices of the commodity, which enabled Enron’s rise to power in the service industry. Enron employed around 21,000 people by mid-2001 before it went bankrupt (Kay, 4). Jeffrey Skilling was hired years after Enron was founded in 1985 by Kenneth Lay, and decided to develop a staff of executives.
However, he had many issues such as accounting loopholes and poor financial reporting. After years of hiding billions of dollars in debt, Skilling was finally not able to hide his companies failed deals and projects (Kay, 7). Enron’s auditor has also been accused of conducting business in an unethical manner in its attempt to retain the loyalty of Enron executives. Enron’s limited liability partnership with Arthur Andersen was the start of the companies’ downfall. Arthur Andersen was one of the five largest audit and accounting partnerships in the world (Hale, 6).
Enron hired Andersen, the reputable accounting firm, to conduct corporate financial audits. Enron was one of Andersen’s largest accounts, and also a major business partner to Enron as they sold millions of dollars in consulting service. ). Partnering with Skilling, Andersen lost much more than money. Both men lost their businesses, and their reputations as strong business men. It was the job of Andersen Consulting , one of the nation’s top five recognized accounting firms, to ensure the accuracy and reliability of the financial statements of Enron, so that creditors and investors could make good financial decisions (Kay, 2).
However, it was Andersen that was under investigation for illegal and unethical accounting practices which put both Andersen and Enron in the spotlight in one of the largest accounting fraud cases of all time (Kay, 2). Due to these relationships that Enron had with Arthur Andersen, it was just too easy for both Enron and the accounting firm to work together in covering up financial losses and debt. Andersen was also responsible for some of Enron’s inside bookkeeping, with some of Andersen’s employees eventually leaving to work for Enron (Hale, 4).
The accounting techniques used to fake the financial statements were a combination of many different complex tactics. The first tactic was using ghost companies (SPEs) which they would transfer money to and take money from. They would also use different banks which would issue these ghost company loans (Kay, 3). The end result was a complex set of financial statements which covered up the loans as cash flow, using their “independent SPEs” to gain Enron’s losses on paper and “create” profits. Another tactic that Enron used was by forecasting the futures market of energy sales (Kay, 2).
The accounting frauds were discovered starting when Enron told investors they were restating earnings for the past 4 and ? years in November 2001 (Hale, 5). Declaring bankruptcy shortly after restating its earnings was also a clue. If that was not enough, the tip over was when Sherron Watkins, the vice president at the time, wrote a memo to chairman Kenneth Lay about the fraud that was occurring. .In August of 2001, Sherron Watkins, sent an email to Kenneth Lay, warning him that Enron would “implode in a wave of accounting scandals” (Watkins, 1). CEO Jeffrey Skilling suddenly resigned wo months after the memo was sent to Lay. Enron, with the help of the Andersen Accounting firm, lost control of their illegal attempt to conceal the debt and losses of the company. The governmental organizations involved in the Enron investigation are the SEC and IRS. The SEC investigated the fraud, issued fines, and filed criminal and civil charges against the companies involved and the Department of Justice (Enron Task Force) prosecuted the accused firms (Flood, 2). Enron’s rights as a private taxpayer, let them keep many parts of the investigation closed off to public view.
There is no clear answer as to roles that the IRS played during the investigation, according to Business Week. Ultimately, Enron became bankrupt. This scandal is the one of America’s largest investigations into a firm’s illegal accounting practices and attempt to conceal it from the shareholders and credit lenders. It was too late for Enron to keep quiet and the many accounting issues that they were going through were now about to be out in the open. Enron’s stock was at its highest reaching at over $90 per share but quickly bottomed out at 9 cents per share.
Stockholders, investors, and creditors wanted to know how one of the nation’s top accounting firms could have missed such changes and irregularity in Enron’s accounting practices. This was one reason that led to investigation into the accounting practices of the firm (Kay, 7). As a result, the US Department of Justice brought obstruction of justice charges against Andersen which ultimately ran Andersen out of business. Because of these charges, Andersen’s limited liability partnership found themselves in unfamiliar territory, and filed for bankruptcy shortly thereafter.
Enron was estimated to have about twenty-three billion in liabilities which included outstanding debt and guaranteed loans. There were so many people and companies involved with the Enron Scandal of 2001. So many people lost their jobs, their lives due to bankruptcy, and their dignity. Another key person involved with this accounting scandal is chief executive officer Joseph F. Berardino. Berardino fired the lead Enron auditor David Duncan after he learned that he had ordered the shredding of Enron audit related documents. Those papers that were destroyed would have revealed the truth about Enron’s financial records (Watkins, 1).
Arthur Andersen was also in charge of some of the key factors that could have explained the random quick rise and quick fall of earnings and growth. Enron’s fall affected many companies including, JP Morgan Chase, Citi-Group, and Andersen Accounting of course. All of these large corporations were involved in the scandal and felt the effects of the fraud. CEO of Enron Jeffrey Skilling, founder of Enron Kenneth Lay; and auditor Arthur Andersen are the main individuals involved behind this scandal. Although there are many others involved, the values and ethical behaviors of these three individuals have been called into question.
The former CEO Jeffrey Skilling was charged with fraud and insider trading, making him the highest ranking former executive charged in the collapse of Enron (Flood, 2). A total of 36 charges were held against Skilling because he took part in the use of different sneaky tactics to manipulate Enron’s financial statements. He faced 10 counts of insider trading, 15 counts of securities fraud, 4 counts of wire fraud, and 6 counts of making false statements to auditors (Flood, 1-3). Skilling was also accused of selling more than 500,000 shares of Enron’s stock for more than $21 million.
He was able to benefit from this by cashing in more stock a couple of months before the collapse of Enron (Flood, 1-3). The Enron scandal is one of the largest accounting scandals in United States History. Enron’s rapid success ended up being just a scam involving lies about its profits and the hiding of debts that did not show up on the company’s accounting books (Kay, 5). This scandal really showed the need for a complete look into the ethical quality of business within leading organizations and the reconstruction of accounting and corporate laws concerning these misconducts.
Overall, Enron and its businessmen showed that the drive for greed and illegal acts within themselves was more important than ethical behavior and staying legal. The hiding of information, destroying of documents, and accounting wrongdoings, explains the causes behind the scandal which eventually lead to the downfall of Enron. References Hale, Briony. “Kenneth Lay: A fallen hero. ” BBC News: Business. January 24, 2002. Kay, Joseph. “Citigroup, Morgan Chase fined for Enron deals: corruption at the heights of American finance” World Socialist Web Site. August 5, 2003. < HYPERLINK “http://www. wsws. rg/articles/2003/aug2003/enrn-a05. shtml” http://www. wsws. org/articles/2003/aug2003/enrn-a05. shtml> Kay, Joseph. “Former Enron CEO Jeffrey Skilling indicted. ” World Socialist Web Site. Feb 24 2004. < HYPERLINK “http://www. wsws. org/articles/2004/feb2004/skil-f24. shtml” www. wsws. org/articles/2004/feb2004/skil-f24. shtml> Flood, Mary. “5 guilty in Enron barge scheme” Houston Chronicle. Nov. 4, 2004. < HYPERLINK “http://www. chron. com/cs/CDA/ssistory. mpl/special/enron/barge/2883572” http://www. chron. com/cs/CDA/ssistory. mpl/special/enron/barge/2883572> Watkins, Sherron. Memo to Kenneth Lay. 2001.