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The largest bankruptcy in the US history had been happened in Houston, Texas 2001.Those companies were world best energy company which provided goods and services related natural gas, electricity, and communication. (Dahl, 2004). Through the pipeline Enron’s distributed the 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 worldwide investment market. The organisation 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 the vital roles to collapse the company. Enron’s was 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 employee rated after six months. Enron’s corporate culture showed the inappropriate financial statement and pushed all the investor and employee 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 book when sold assets. In 2000, the fiscal year financial statement went wrong, and company had to face shortage of cash and shareholders’ equity fall to $1.2 billion but senior executive taken profit from partnership deal. In that time company had already downgraded and found $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 employee to finding to assets sell off but no one able to do that. After Skilling leave the job then CEO started inviting employees regarding their concern and asked them to put into box then Watkins was preparing unidentified memo and placed 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 months he sold his $1.5 billion personal stock option and he stated that Enron had never been stronger. Watkins warned lay because in 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 meaning less and gave resign. (Hill, 2003). CFO Andy won ‘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 dollars of fine. Skilling was 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 situation but when they had a liquidity crisis and ‘a run a bank crisis’ CEO said that 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 that before and took the risky investment step to contribute financial losses for the organisation. Arthur Andersen was a responsible person who provide the accurate financial statement for Enron. During the SEC investigation of Enron scandal Anderson was found block of justice because he destroyed auditing document. Many employees were thought that for Lay and skilling it was impossible to obtain. In 2003 they added more restriction and regulation 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 bankruptcy was a bad history for 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 behaviour could damage the company reputation. (Anonymous, 2002).
Enron’s corporation was created by two major gas pipeline companies in 1985.These two company were based on energy trading and utilities. In 2002 Security Exchange committee (SEC) took responsibility to do investigate on Enron’s accounting practice representing whistleblowing by bookkeeping shakedown. The shakedown was accomplished using special purpose entity (SPE) with the aim of overestimating 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 accounting firm was Enron business. In that time Arthur Andresen was one of the best responsible accuracy persons in accounting firm including top five biggest audit and accounting partnership in the world. Because of that he was permitted to auditor of Enron. From that investigation they found that he was involved on fraud which showed absolutely dishonour to accounting firm. (Roy, 2015).Enron was influenced by political power as well. In that time Enron was very profitable company as a result most of the shareholders invested on Enron because of past years success. (moureau, 2013) After that company follow the corporate governance which helps for enron scandal because
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The biggest corruption on US history was Enron bankruptcy which affected among the top 500 companies. Many of the employee laid off their job, many of the pensioner lost their retirement saving and shareholders lost billions dollar. Enron’s corporation was created by two major gas pipeline companies in 1985. These two company were based on energy trading and utilities. (Dahl, 2004) which indicate big audit failure. The main factor of 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 Enron scandal happened not only top management they hire corrupt employee who helped them to hide 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 company and other important information of the company. (Sarra, 2002). As a result, company must face shortage of cash and nearly lost 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 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 support for Enron share selling by company top management or other executives. Beginning of December 2000, Skilling start sold his share every seven days 10,000 share 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 first assert of Enron claim. Another contribution of Fastow for Enron bankruptcy was traditional historical accounting method to move mark to market accounting method. Mark to market method helped to provide realistic current financial statement of 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 were designed for hide the company loses and show the high profitability of company that actual reports. In addition, auditor Anderson played a major role for Enron accounting Firm because he destroyed the important document of Enron bankruptcy while SEC was investigating Enron scheme. (Segal, 2017). For Enron scandal CFO play the important role. While investigating of Enron bankruptcy, investigator blamed on CFO because he was taking millions of dollars through develop off balance sheet and increase stock price. Therefore, one of the major reasons of 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 employee lost billion dollars of retirement benefits. As a result, employee and shareholders get opportunity to led new regulation and legislation to upgrade the accuracy of financial reports and statements to public held company. Moreover, Financial Accounting standards Board (FASB) significantly increased the level of an ethics conducts, companies board of director became more independent and able to avoid accountability. (Segal, 2017) one the other hand the main problem of 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 biggest financial crisis for the company. (moureau, 2013)