The Enron Accounting Scandal

Enron Corporation was founded in 1985 as a natural gas company before expanding massively into diverse interests. The company, currently called Enron Creditors Recovery Corporation, was a leading American Energy provider company among other commodities based in Houston Texas. This was before the scandal, followed by bankruptcy and eventual collapse in 2001. The company provided electricity, natural gas, pulp and paper as well as communication services. The financial magnitude of the company is demonstrated by the revenues of 2001 which stood at $101bn.

Enron Corporation employed close to 22000 employees making it a large employment provider. Among the principal assets that the corporation had included 38 massive power plants across the globe, remarkable petroleum pipelines, electricity distributions, natural gas businesses, pulp and paper companies and other related companies. The company brought together buyers and sellers by signing independent contracts with each and facilitating the exchange of products in rather risky ventures (Dahlin, 2007). However, the company had qualified personnel to balance the risks out.

This meant that the corporation was a vital pillar in the US economy and the world by extension. Nature of business practices and Industry of Enron Enron was in a risky business that needed highly qualified personnel to guide it through. The cooperation diversified and was in complex contracts with clients. This strong team of qualified personnel helped it to make out, manage and conceal high risks (Buondonno et al. , n. d). The company started out as a natural gas provider but fast expanded to an energy contract trader.

Its massive business interests made it get involved in internet provision and sales services. Events leading Enron Scandal The accounting procedures and practices utilized in misrepresenting financial statements employed intricate tactics. Firstly, the company formed many Special Purpose Entities (SPEs) in which it had controlling share. Some of these SPE were ghost entities. The entities were unethically used to conceal financial results. Enron created partnerships that allowed managers to shift debts and losses off the books (Dahlin, 2007).

Enron used these ghost SPE to transfer money to and from and also borrow money from banks. Banks thus issued ghost companies with loans. For instance, in 2000, Enron had taken loans amounting to $3. 4bn from Citigroup and Morgan Chase making the company to have negative cash flows of $597M and accruing $2M as interest on a daily basis (Buondonno et al. , n. d). In this case, there were extra ordinary intricate financial statements that camouflaged the loans as cash flows, using their “autonomous SPEs” to incur Enron’s losses on paper and ‘create’ profits.

It is said that most of the SPEs transactions were coincidental (or fraudulently back dated) mostly at the end of quarters to give room for incomes to be recorded as earned from them to meet particular amounts of investor expectations (Giroux, 2008). Secondly, the Market-to-Market trading criteria is another tactic the corporation used to perform irregularities. Under this, the process allowed the corporation to increase the value of the present stocks held by the corporation by estimating the future market prices. In other words, valuation was based on future market prices.

Given the company was dominating the energy industry, it subjectively determined the marked-to-market prices which depended on the financial results it wanted to report (Buondonno et al. , n. d). The manipulations never increased cash flows as no money was listed as cash inflows. This was fraudulent since revenue is recognized when earned under GAAP. In the wake of October 2001, the company reported that it has incurred a loss of $638M in the third quarter and to make matters worse, that it had overstated it earnings by $586M during the previous four years.

This was coupled with a debt of $3bn that the corporation was liable to partnerships it had (Dahlin, 2007). The financial woes of the then big corporation would be big than imagined. Wall Street devalued the company’s equity by $1. 2bn. The role of Arthur Andersen Auditing and consulting Arthur Andersen Auditing and consulting was hired by Enron to provide corporate audits on Enron. In fact, the auditing firm had Enron as a big client that paid handsomely on auditing fees. This meant that a strong relationship was inevitable between the two (Sukhraj, 2006).

This led to the auditing firm even offering internal consulting services and internal book keeping for Enron. Eventually, some of Andersen’s employees came to work with Enron. Arthur Andersen committed unethical acts as such a move was meant to secure Enron’s loyalty. The auditing firm thus, due to the lasting relationship with Enron, cooperated to conceal the dubious accounting procedures (Giroux, 2008). Thus, a conflict of interest was the result of Arthur Andersen offering consultancy and auditing services making the independence of the auditor to exist only by name. Unethical issues of Enron

The scandal underlines one of the darkest scams in US corporate history where a company hides under dubious schemes to imply rapid successes and lucrative financial results. The scam involved lies about lucratively huge profits and rapid concealment of debts that were never reflected on the accounting books of the corporation (Giroux, 2008). The ethical issues clearly demonstrate the urgency in which ethical virtues in leading organizations may be deficient. The scam further indicates the need for reconstitution of the accounting and corporate laws to prevent misconducts in future (Buondonno et al.

, n. d). The ethical issues under the Enron can be classified into personal, organization and systematic levels. At the personal level, the case in question is how greed and ill motives in an individual employee contributed to the scandal. Persons like former president and CEO of Enron, Jeffrey Skilling, former CFO Andrew Fastow and Founder, Chairman and CEO Kennedy Lay and Auditor Arthur Andersen are responsible. For instance, Jeffrey Skilling is accused of fraud and insider trading. He had 25 counts of securities fraud, 10 counts of insider trading and 4 counts of wire fraud among others.

The others had various counts of fraud, fraudulent scheming, money laundering, public misrepresentations and impediment of justice (Dahlin, 2007). The ethical question is whether the persons under the management authority valued the company’s future and the stakeholders’ interests. Many managers fraudulently initiated partnerships and share sales that they personally benefited from at the expense of the Enron. At the organizational level, the point is the unhealthy and unethical decisions that were made by the organization and the management to defraud the public through inflated financial results (Sukhraj, 2006).

The managers were responsible for making the decisions possibly demanded by their managerial roles and internal pressures. In the corporate culture, ‘the end justified the means’. Lastly on the systematic level, the external influence and parties’ contribution to the Enron scandal fall under this category. In this, the legal and regulatory structure pitted the managers to involve themselves in unethical tactics. The current laws allow an auditing firm to provide consultancy and bookkeeping services and turn around to offer auditing services, a recipe to conflict of interests (Sukhraj, 2006).

Legislation malice is the allowance by current laws for a company to manage own pension funds which the company can use for greedy schemes against employees’ interests. Lessons on how to prevent such in future The Enron case represents a modern classical example on the importance of ethics in corporate culture of any company. For instance, by allowing employees to conduct personal transactions with and on behalf on the company, this was the lowest of moral practices that the company allowed. The improper creation of profits by declaring bank loans as cash inflows and hiding debts in the SPEs is a moral issue (Giroux, 2008).

FASB thus altered accounting standards after the scandal to prevent this. It is vital that an auditor should remain independent (Buondonno et al. , n. d). The Andersen auditing firm facilitated the fraud thus robbing the public billions of dollars in value. Andersen should have chosen to remain as an auditor or internal consultant and not both (Sukhraj, 2006). The law ought to be rectified to ensure that the independence of auditors is not questionable. Ideally, the pension of employees should be managed separately by another firm externally from the firm to prevent abuse. Conclusion

The Enron scandal is a case study of the ethical dilemmas that huge companies face in regard to observing moral rights or wrongs and the desire to report impressive financial results to investors. The independence of the auditor and the execution of prudent accounting and regulatory laws are vital in preventing scandals of this nature in future. Particularly, the formation of SPEs that did not exist and the declaring of loans to the ghost SPEs as incomes and concealing debts in them is a serous accounting malpractice. In addition, the Market-to-Market valuation of stock in estimated future market prices is completely unethical.Finally, the Enron scandal remains one of the largest accounting scandals in US corporate history.

References

Buondonno J et al (n. d) The Enron Accounting Scandal Retrieved 12 June 2009 from http://www. crazymonkies. com/papers/Accounting%20-%20Enron%20Scandal. pdf Dahlin L. A (2007) Where have all the ethics gone? Business ethics and social responsibility through the years, Proceedings of the Northeast Business & Economics Association, 360-366 Giroux G (2008) What went wrong? Accounting Fraud and lessons from the recent scandals, Social Research 75(4) 1205-1238 Sukhraj, P. (2006) Enron disaster ‘could never happen here’ Accounting Age, 2-2