Analytical Essay on Enron Scandal

The largest bankruptcy in US history happened in Houston, Texas 2001. Enron’s corporation was created by two major gas pipeline companies in 1985. These two companies were based on energy trading and utilities. Those companies were the world's best energy companies that provided goods and services related to natural gas, electricity, and communication. Through the pipeline, Enron distribute natural gas all around the united states. After that, they marketed globally. Throughout the late 1990s chairman, Kenneth lay, Jeffrey skilling president of Enron, and Andrew Fastow CFO made changes in the old industry (electricity and gas company) into $150 billion significantly improving on the profitability of world e-commerce investment market. The organization kept developing and building the power plant and generating gas lines and delivering to retail customers. Therefore, from 1998 to 2000 company revenue grew up significantly and earned more than $100 billion. However, the examiner of bankruptcy reported that the company claimed a net income of $979 but the company hardly earn $42 million and they found $154 million negative cash flow in 2000. Enron’s corporate culture was aggressive culture and plays a vital role into the collapse of the company. Enron’s company was based on making a profit and they believed that nobody could go against it. Skilling made a rule of Performance Review Committee ‘rank and yank’. Rank and yank system let 20% bottom if they did not improve on their performance when employees rated after six months. Enron’s corporate culture showed inappropriate financial statements and pushed all the investors and employees into the dark. In August 2001 company established special purpose entities to move all the debt and increase cash flow where they were showing the funds were proceeding through the book when sold assets. CFO Fastow and president skilling set up the fraud financial reporting because they did not represent the accurate financial condition of the company as well as the book did not show much of the information. After that in the 2000 fiscal year financial statement went wrong and the company had to face a shortage of cash shareholders’ equity fell to $1.2 billion but executives took profit from the partnership deal. Because of the cash shortage, Enron nearly lost Northern natural gas.At that time company had already downgraded and found a $4 billion off-balance dept due to pay and they have not got enough resources to pay Dynegy to terminate their deal and Enron’s had to face bankruptcy. 1991 Fastow again got a chance to have another innovation of marked-to-market accounting. In 2001 Enron’s vice president Sherron Watkin asked the employee to find to assets sell-off but no one was able to do that. When Skilling leave the job the CEO started inviting employees regarding their concerns and asked them to put them into box then Watkins was preparing an unidentified memo and placed them into the box. However, when lay held the company-wide meeting he did not mention her memo, but she arranged face to face meeting with him. After one month he stated that Enron had never been stronger and sold his $1.5 billion personal stock option. Watkins warned lay because in the middle of October the company was a quarterly loss of $618 million and 1.2 billion write-off. the company was grateful to her for finding the problem and giving the solution. She did not complain to the government and press but she reached congress after that she felt meaning less and gave resigned.. CFO Andy won ‘The CFO of the year award two years back but he was charged with fraud, money laundering, and conspiracy and had to face 14 years in jail and millions of dollars in fines. Fastow's case was against several off-balance sheet partnerships and first, assert of Enron's claim. Skilling was the mastermind of Enron. He was confident before being accused of saying that ‘I was not aware of any inappropriate financial agreements’ but McMahon said that he would remedy the situation when they had a liquidity crisis and a run bank crisis CEO state how the company had gone so fast to bankruptcy. Then a panel of judges fifth circuit court of appeals in New Orleans refused and refer to the supreme court because of no misconduct or vague. . The law of Enron was firm Vision and Elkins. In 1999 Merrill lynch helped Enron defraud investment and made Enron’s financial statement better than before and took risky investment steps to contribute to financial losses for the organization. Arthur Andersen was a responsible person who provide the accurate financial statement for Enron. During the SEC investigation of the Enron scandal, Anderson found some destroyed auditing documents. Many employees thought that Lay and skilling were impossible to obtain. In 2003 they added more restrictions and regulations for the company. Enron announced their goals to restructure the company and pay off whoever lost their job and retirement pension. However, Enron's bankruptcy was a bad history for the 21st century but still, we get some knowledge from this lesson. After Research about the Enron scandal greed and corporate culture might contribute to faulting for accounting. Unable to prevent senior executive behavior could damage the company's reputation.

Executive summary:

The largest bankruptcy in US history happened in Houston, Texas 2001. Those companies were the world's best energy companies that provided goods and services related to natural gas, electricity, and communication. (Dahl, 2004). Through the pipeline, Enron distributed natural gas all around the united states. After that, they marketed globally. Throughout the late 1990s chairman, Kenneth lay, Jeffrey skilling president of Enron, and Andrew Fastow CFO made changes on the old industry (electricity and gas company) and significantly improved profitability from the worldwide investment market. The organization kept developing and building the power plant and generating gas lines and delivering to retail customers. (Li, 2010)Therefore, from 1998 to 2000 company revenue grew up significantly and earned more than $100 billion. Enron’s corporate culture was arrogant and aggressive culture and plays a vital role in to collapse of the company. Enron was a profit-based company and they believed that nobody could go against it. Skilling made a rule of Performance Review Committee ‘rank and yank’. Rank and yank system let 20% bottom if they did not improve on their performance when employees rated after six months. Enron’s corporate culture showed an inappropriate financial statement and pushed all the investors and employees to the dark. (Smith, 2001). . In August 2001 company established special purpose entities (SPE) to move all the debt and increase cash flow to show the funds were proceeding through the book when sold assets. In 2000, the fiscal year financial statement went wrong, and the company had to face a shortage of cash and shareholders’ equity fall downfall to $1.2 billion but senior executives took profit from the partnership deal. In that time company had already downgraded and found a $4 billion off-balance dept due to pay and they have not got enough resources to pay. (Dahl, 2004). In 2001 Enron’s vice president Sherron Watkin asked the employee to find to assets sell-off but no one able to do that. After Skilling leave the job then CEO started inviting employees regarding their concerns and asked them to put them into box then Watkins was preparing an unidentified memo and placed them into the box. However, when lay held the company-wide meeting he did not mention her memo, but she had arranged face to face meeting with him. After one month he sold his $1.5 billion personal stock option and he stated that Enron had never been stronger. Watkins warned lay because in the middle of October the company was a quarterly loss $618 million and 1.2 billion write-offs. (Watkins, 2003). The company was grateful to her for finding the problem and giving the solution but she did not complain to the government and press but she reached congress after that she felt her role was meaningless and gave resigned. (Hill, 2003). CFO Andy won the ‘CFO of the year award two year back but he was charged fraud, money laundering, and conspiracy and had to face 14 years jail and millions of millions of dollars of fines. Skilling was the mastermind for Enron. He was confident so before being accused of said that ‘I was not aware of any inappropriate financial agreements’ but McMahon said that he would remedy of the situation but when they had a liquidity crisis and ‘a run a bank crisis’ CEO said how the company gone so fast to bankruptcy(Neil, 2003). The law of Enron was firm Vision and Elkins. In 1999, Merrill lynch helped to Enron defraud investment and made Enron’s financial statement better than before and took the risky investment step to contribute to financial losses for the organization. Arthur Andersen was a responsible person who provide the accurate financial statement for Enron. During the SEC investigation of the Enron scandal, Anderson was found to block of justice because he destroyed the auditing documents. Many employees thought that Lay and skilling it was impossible to obtain. In 2003 they added more restrictions and regulations for the company. Enron announced their goals to restructure the company and pay off whoever lost job, and retirement pension. (Anon., 2007) However, Enron's bankruptcy was a bad history for the 21st century but still, we get some knowledge from this lesson. After Research about the Enron scandal greed and corporate culture might contribute to the faulting for accounting. Unable to prevent senior executive behavior could damage the company's reputation. (Anonymous, 2002).

Introduction:

Enron’s corporation was created by two major gas pipeline companies in 1985. These two companies were based on energy trading and utilities. In 2002 Security Exchange Committee (SEC) took responsibility to do investigate Enron’s accounting practice representing whistleblowing by bookkeeping shakedown. The shakedown was accomplished using a special purpose entity (SPE) with the aim of overestimating the resources and liabilities of the company. After the investigation, they found that chairman Kenneth lay, and CEO Jeffery skilling were mainly convicted of Enron’s scandal. The main business partner of the accounting firm was the Enron business. In that time Arthur Andresen was one of the best responsible accuracy persons in an accounting firm including the top five biggest audits and accounting partnerships in the world. Because of that, he was permitted to audit Enron. From that investigation, they found that he was involved in fraud which showed absolute dishonor to an accounting firm. (Roy, 2015). Enron was influenced by political power as well. At that time Enron was a very profitable company, as a result, most of the shareholders invested in Enron because of past years' success. After that company follow corporate governance which helps for Enron scandal because

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Main body paragraph

The biggest corruption in US history was Enron's bankruptcy which affected the top 500 companies. Many of the employees were laid off from their job, many pensioners lost their retirement savings and shareholders lost billions of dollars. Enron’s corporation was created by two major gas pipeline companies in 1985. These two companies were based on energy trading and utilities. (Dahl, 2004) which indicates big audit failure. The main factor of the Enron scandal was corporate culture. But Ken lay said that the significant success of the company was corporate culture. According to ken lay the main slogan of Lay wanted to be the company need to follow moral and ethical culture unfortunately moral and ethical culture was ignored by top executives and made a special purpose entity rule to hide billions of dollars. But the Enron scandal happened not only because top management hire a corrupt employee who helped them to hide the correct financial statement. CFO Fastow and president skilling set up the fraud financial reporting because they did not represent the accurate financial condition of the company and other important information of the company.. As a result, the company must face a shortage of cash and nearly lost northern natural gas companies. CFO. According to the University of Chicago professor Richard Leftwich, “it takes two years for the FASB to issue a ruling and two weeks for an investment banker to figure out a way around it”. In the word of court filing based on public record, from 1999 to mid of 2001 Enron’s insider members received $1.1 billion by selling $17.3 million companies share. The lawyers of Enron said that they did not have any evidence that support Enron's share selling by company top management or other executives. Beginning of December 2000, Skilling started selling his share every seven days for 10,000 shares because he received $66.9 million for 1.1 million shares.. Merrill Lynch said: 'We believe there is no basis for this claim and we intend to defend vigorously against it.'. Fastow's case was against several off-balance sheet partnerships and first, assert of Enron's claim. Another contribution of Fastow to Enron's bankruptcy was the traditional historical accounting method to move mark to the market accounting method. Mark to market method helped to provide a realistic current financial statement of the company but it can be manipulated because it is based on fair value. That method was based on current market value instead of book value when we measured the value of securities. Mark-to-market practices were designed for hiding the company's loses and showing the high profitability of the company that actual reports. In addition, auditor Anderson played a major role in Enron's accounting Firm because he destroyed the important document of Enron's bankruptcy while SEC was investigating Enron's scheme.

In Enron scandal CFO play an important role. While investigating Enron's bankruptcy, investigators blamed on CFO because he was taking millions of dollars through develop off the balance sheet and increasing the stock price. Therefore, one of the major reasons for the Enron scandal was the short-term focus and allowing massive executive pay.

Conclusion:

In conclusion, Kenneth lay Chairman, Jeffrey skilling president, Andrew Fastow CFO, and Arthur Anderson played major roles for Enron's bankruptcy. Enron collapse was the biggest accounting and financial corporate in the world where shareholders lost $74 billion, and employees lost billion of dollars of retirement benefits. As a result, employees and shareholders get the opportunity to led new regulations and legislation to upgrade the accuracy of financial reports and statements to publicly held companies. Moreover, the Financial Accounting Standards Board (FASB) significantly increased the level of ethical conduct, companies' board of directors became more independent and able to avoid accountability. on the other hand the main problem of the Enron scandal was not only accounting manipulating but various external and internal executive members were also play a vital role. After analyzing this case study the relevant knowledge of Enron's bankruptcy is extremely concerned with power, poor regulation, accounting misconduct, and non-effective board members can lead biggest financial crisis for the company.