Accounting Essay W/ Enron Scandal

Accounting

Accounting is a very important part of the business world today. It helps protect, defend, and keep businesses running. Accounting regulates businesses and makes sure everything balances out, so that things are not unfair. The role of accounting in a business is to control activities and expenditures, improvement of operational plans, accountability, reporting on project outcomes, and the writing of bids for new funds. There are many jobs that the accounting system accomplishes. Accounting has to do with the profitability of a business. It relays vital operating information to managers who need to analyze the information and make important decisions. Accountants are the "middle men" between workers and managers. They analyze the profitability and all of the transactions. They make reports on them. They give these to the managers. The managers make decisions based on the information presented to them. Accounting can also help protect the public. When businesses "cheat," accountants are suppose to pick this up. There are two basic types of accounting: financial accounting and managerial accounting. Accounting could have provided much help in cases where businesses become corrupt. One example of this is the Enron scandal. Accounting plays a major role in every business, as evidence by the impact it had on a major multi-million corporation like Enron. Accounting plays a major role in every business.

The Enron Corporation pulled a huge scam that will go down in history. Many people were affected in this scam. Accountants at the time made a huge mistake, which caused many people lots of money. Enron declared bankrupt in November 2004. They forced the stock to plummet, making many people lose money. "Not surprisingly, public confidence in the integrity of the financial reporting process and auditors took a big hit" (Walker). Many of the public stopped trusting the worthy accounting profession after they took such a big hit. The big mistake is blamed on the auditors. They basically misread the fake information given to them and they mad the company seem more profitable than it really was. "Although most auditors did not participate in such schemes, all too often the result was audited financial statements that inappropriately accelerated revenues, deferred expenses, artificially smoothed earnings and boosted earnings per share" (Walker). The accountants did not participate in the scam. They were mislead and did not catch the trap. The Enron scam is very complicated to breakdown, but has a quite simple concept. The way that they did is not told, but they disguised expenses as revenues. At the end of a period the auditors make sure all the numbers check out. When the auditors audited Enron, they saw that there was more revenue than expenses. This made the companies value increase. The stock sky rocketed and many people invested in it. When the truth was discovered, the actual value of the company fell dramatically. Instead of being a profitable corporation, it was actually in debt. The stock fell quickly. Investors lost almost all of their money. The company went bankrupt. Everyone lost their jobs and their retirement savings. The mistake can be blamed on the pressure the accountant faces to make numbers fit. "Pressure from clients on their accountants to make the numbers add up is so great that accountants are faced with a dilemma when

there's a problem, betray the client, or overlook it, hoping no one notices and risk getting caught, industry watchers said" (Chartier). Obviously, the path that those auditors took was the wrong path. Auditors need to start to catch the problem at an early stage. This will prevent problems from escalating into the size of the Enron scam. Both sections of accounting, financial and managerial are to blame for the collapse of Enron. The financial statement called the balance sheet did not really balance out. The auditors forced it to balance out, allowing the scam to seem right and succeed. But the balance sheet was based on false information given by management. The false information caused the huge mistake on the balance sheet, leading to the lie of profitability. The executives and CEOs agreed to this scam to benefit themselves. They can only hold their spot for three to four years. So they hoped to trick the stockholders, giving them a big profit. Then they would sell all their shares at the high price and leave the company. "The changes in executive compensation in the 1990s, designed to align executive interests with those of shareholders, provided an irresistible incentive to managers to inflate earnings, even if this was not sustainable, as they could bail out before the inevitable reality confronted the shareholders" (Clarke). This is the basis of the Enron scam. Even though the accountants failed, they still caught the mistake and helped save it from becoming a bigger disaster than it actually was. The Securities and Exchange Commissions caught the mistake. Most people in the business world also blame the success of the scam on lack of education of the accountants. "The Department of Labor estimates that only about 15 percent of the 5.5 million people in finance and accounting are actually CPAs involved in public accountancy" (Miller). The Enron case is an example of how the accounting field is used in huge corporations. Although it did lead to the biggest bankruptcy in American history, it often saves people rather than hurt them. The accounting profession is a vital profession that limits cases like this. If there was no accounting, cases like this one would arise everyday. Accounting is a vital part of the economy and keeps everything fair and moving.

The first type of accounting is financial accounting. Financial accounting is related to external members of a company. Financial accounting is useful to those making investment and credit decisions that have a reasonable understanding of business and economic activities. It is also helpful to present potential investors and creditors in assessing the amount, timing, and uncertainty of future cash flows. Financial accounting focuses on collecting information on businesses. Then it makes financial reports. The three main reports are: income statement, balance sheet, and statement of cash flows. The income statement reports the profitability of a business. It reports all of the revenues and expenses of a business. If the revenues hold more value than the expenses, than the business had made profit, but if the expenses are more than the revenue than the business has a net loss. This can help people make the right decisions before investing in a company. If one sees a major profit than they might wish to invest in that business. The balance sheet is basically a check up for the company. The business reports all of its transactions throughout