The largest bankruptcy in US history had happened in Houston, Texas 2001. Those companies were the world's best energy company which provided goods and services related to natural gas, electricity, and communication. (Dahl, 2004). Through the pipeline, Enron’s 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’s and Andrew Fastow CFO were made changes on the old industry (electricity and gas company) significantly improved on profitability from the worldwide investment market. The organization kept develop and build the power plant and generate gas line and delivered 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 roles 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 increasing cash flow to show the funds were proceed 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 falls to $1.2 billion but senior executives have taken profit from the partnership deal. In that time company had already downgraded and found a $4 billion off-balance debt due to paying and they have not got enough resources to pay. (Dahl, 2004). In 2001 Enron’s vice president Sherron Watkin asked employees to find to assets sell-off but no one able to do that. After Skilling leaves the job then CEO started inviting employees regarding their concern and asked them to put it into the box then Watkins was preparing an unidentified memo and placed it into the box. However, when lay held the company-wide meeting he did not mention her memo, but she had arranged face to face meetings 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 quarterly loss $618 million and 1.2 billion write off. (Watkins, 2003). The company was grateful to her for found the problem and gave 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 resign. (Hill, 2003). CFO Andy won the ‘CFO of the Year’ award two years back but he was charged fraud, money laundering, and conspiracy and had to face 14 years jail and millions of dollars of fine. Skilling was the mastermind for Enron. He was confident so before accused off 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 that how the company has gone so fast to bankruptcy(Neil, 2003).
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 the risky investment step to contribute financial losses for the organization. Arthur Andersen was a responsible person who provides an accurate financial statement for Enron. During the SEC investigation of the Enron scandal, Anderson was found a block of justice because he destroyed the auditing documents. Many employees were thought that for Lay and skilling it was impossible to obtain. In 2003 they added more restrictions and regulations for the company. Enron announced that 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 Enron scandal greed and corporate culture might contribute the faulting for accounting. Unable to prevent senior executive behavior could damage the company's reputation. (Anonymous, 2002).
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 was main 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 accounting firms including the top five biggest audits and accounting partnerships in the world. Because of that, he was permitted to the auditor of Enron. From that investigation, they found that he was involved in fraud which showed absolutely dishonor to an accounting firm. (Roy, 2015).Enron was influenced by political power as well. In that time Enron was a very profitable company as a result most of the shareholders invested in Enron because of past years' success. (moureau, 2013) After that company follow the corporate governance which helps for Enron scandal because
The biggest corruption in US history was Enron bankruptcy which affected among the top 500 companies. Many of the employees laid off their job, many of the pensioners lost their retirement saving 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. Lay wanted to be the company need to follow moral and ethical culture unfortunately moral and ethical culture ignored by top executive and made a special purpose entity rule to hide billions of dollars. But the Enron scandal happened not only in top management they hire corrupt employees who helped them to hide the correct financial statement. (Kitchen, 2006). 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. (Sarra, 2002). As a result, the company must face a shortage of cash and nearly lost the northern natural gas company. CFO. (Dahl, 2004).
According to the University of Chicago professor Richard Leftwich “it takes two years the FASB to issues a ruling and two weeks for an investment banker to figure out a way around it”. ((moureau, 2013, p. 318) 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 he did not have any evidence that supports for Enron shares selling by company top management or other executives. Beginning in December 2000, Skilling start sold his share every seven days 10,000 shares because he received $66.9 million for 1.1 million shares. (Leslie, 2002). Merrill Lynch said: 'We believe there is no basis for this claim and we intend to defend vigorously against it.' (Michaels, 2002). Fastow case was against several off-balance-sheet partnership and the first assert of Enron claim. Another contribution of Fastow for Enron bankruptcy was the traditional historical accounting method to move mark to 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 practice was designed to hide the company losses and show 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 bankruptcy while SEC was investigating the Enron scheme. (Segal, 2017). For Enron scandal CFO play an important role. While investigating Enron bankruptcy, the investigator blamed on CFO because he was taking millions of dollars to develop an off-balance sheet and increase the stock price. Therefore, one of the major reasons for the Enron scandal was short term focus and allow massive executive pay.
In conclusion, Kenneth lay Chairman, Jeffrey skilling president, Andrew Fastow CFO, and Arthur Anderson were played major roles for Enron bankruptcy. Enron collapse was the biggest accounting and financial corporate in the world where shareholders lost $74 billion, and employees lost billions of dollars of retirement benefits. As a result, employees and shareholders get the opportunity to lead new regulation and legislation to upgrade the accuracy of financial reports and statements to a public holding company. Moreover, the Financial Accounting Standards Board (FASB) significantly increased the level of ethics conducts, company's board of directors became more independent and able to avoid accountability. (Segal, 2017) one 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 analysis, this case study the relevant knowledge of Enron bankruptcy is extremely concern of power, poor regulation, accounting misconduct, and non-effective board members can lead the biggest financial crisis for the company. (moureau, 2013)