Enron Accounting Fraud

Report: Enron accounting fraud

In October 2001 it was revealed that reported financial condition of Enron Corporation was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. Enron misrepresented its profits and was accused for a range of shady dealings, including concealing debts so they didn't record it in the company's accounts. On December 2, 2001 the Enron Corporation announced about its bankruptcy and dissolution of Arthur Andersen. Additional to the bankruptcy, the company was recognized as the biggest audit failure in American history of audit.

The Chairman of the board, Kenneth Lay, and CEO, Jeffrey Skilling hired the CFO, Andrew Fastow, and allow him to develop a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Arthur Andersen to ignore the issues.

Enron was founded in 1985 by Kenneth Lay in Omaha, Nebraska. It was formed as a result of merger of Houston Natural Gas and Inter North and it became one of the world's leading electricity, natural gas, communications and paper issuing company. Within 15 years, Enron raised be America's seventh largest company, with the 21,000 staff in more than 40 countries. Over period of late 1990s, Enron was one of the country's most innovative companies. Besides, the building of power plants and operations gas lines, it became known for its unique trading businesses. It implemented a new market, broadcast time for advertisers, weather futures, and Internet bandwidth.

The company raised annual revenues from about $9 billion in 1995 to over $100 billion in 2000. At the end of 2001 the Enron's stock price drop from $90 per share in mid 2000 and to less than $1 per share by the end of November 2001. This resulted to the shareholders' lose nearly $11 billion. After revision its financial statement for the previous five years it was found that there was $586million in losses.

No discussion of the Enron Scandal would be complete without a discussion of the involvement of Enron's accountants, the firm Arthur Andersen, in the scandal itself as well as the subsequent crash of the company from the inside. In asking officials of Andersen if they were guilty of any wrongdoing in the scandal, they maintain that the crash of Enron was the direct result of Enron's faulty business model rather than questionable or poor accounting practices. A closer examination of the facts reveals otherwise; when the Enron scandal was investigated by auditors and law enforcement agencies, it was found that Andersen was negligent at best and at worst completely in conspiracy with Enron to create false earnings reports, thereby hiding huge amounts of debt and artificially inflating stock prices beyond the point of no return. Among the ultimate findings of the investigation into Andersen's role in the whole conspiracy, it was determined that the firm had either directed or personally shredded thousands of documents that showed the true extent of Enron's financial problems. With these documents out of the way, the fraud was able to continue, and in this instance, Andersen's involvement in the fraud was firmly established. Ultimately, the conspiracy led to a total scrutiny of the American accounting system itself.

The Stock Market was also highly influenced by the Enron scandal; while it was too late for the Enron investors, the crash of Enron's stock sent out a loud message to all stock investors that it was extremely important to take a closer look at the stocks that one already owned, as well as any that they were considering purchasing from that point forward. On the enforcement side of the Stock Market, the Securities and Exchange Commission tightened its grip on publicly traded stocks as well as the companies that issue them, effectively raising the bar for the conduct of stock trades from that point forward. Net effect, it can be said that in yet another irony, Enron did in fact lead to the protection of more stock investors than it originally hurt, although those who were hurt can never be made totally whole once again after the terrible experiences of Enron.

The investigation was taken by the U.S. Securities and Exchange Commission