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Enron Scandal

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Category: Business

Autor: anton 23 July 2011

Words: 471 | Pages: 2

Enron went bankrupt in December 2001 after it was revealed that the company had hidden hundreds of millions of dollars in debt. Enron’s infamous collapse resulted from the disclosure that it had reported false profits, using accounting methods that just did not follow generally accepted procedures.

Enron undertook some creative accounting schemes to avoid reporting its increasing losses and also to give the appearance of rapid earnings growth. For example, they claimed that contracts due in the future were worth more than they actually were. But, most famously of all, Enron hid its losses in “special purpose entities”(SPEs). The result was that many of Enron's debts and the losses that it suffered were not reported in its financial statements.

Many companies use SPEs as a common financing system. Companies can cut their risk by moving assets into separate partnerships or a limited company of some type, which can be sold to outside investors. In Enron’s case, assets that were losing money were sold to partnerships. Enron then listed the sales of these assets as earnings. Yet, to be legitimate, accounting rules require that an SPE be isolated from the company that created it. But not in Enron’s case, because the SPEs relied upon Enron’s managers for leadership and Enron’s stock for capital. When the outside auditors told Enron to treat some of the 4,000 SPEs it had created as part of Enron, the company had to take the $1-billion charge against its earnings. (Refer to Figure 1)

Enron’s managers, whose actions brought the company to the rim of devastation, escaped with millions of dollars as they retired or sold their company stock before its price dropped. Insiders and some high level executives at Enron may have known about the company’s financial secrets and situation for most likely some time. A number of top Enron executives have been charged with fraud. In addition to Enron employees, Arthur Anderson, LLP, the accounting firm responsible for auditing Enron, was convicted of obstruction of justice. Three British bank workers have also been indicted on charges of wire fraud. Michael Kopper, a former Enron executive was the first to be convicted. After pleading guilty to charges of money laundering and wire fraud, Kopper cooperated with investigators to help uncover other people involved in the scandal. Kopper’s confessions and the evidence gathered by the authorities, pointed to the elaborate system that masked Enron’s debt and made millions for insiders like CFO Fastow, Kopper, and Kopper’s wife.

It appears that, the company’s audit committee and especially the company’s board of directors failed to meet their responsibilities, due to the fact that they lacked information about Enron’s complicated financial strategy. Furthermore, they had close ties to management and received generous compensation for their service, so apparently they felt little motivation to ask any difficult questions.

Sources:

How Did Enron Defraud Shareholders?

http://www.securitiesfraudfyi.com/enron_fraud.html

Enron Accounting

http://www.uic.edu/classes/actg/actg516rtr/Notes/13%20Enron%20Notes.PDF

Wikipedia-Enron Scandal

http://en.wikipedia.org/wiki/Enron_scandal

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