Enron Accounting Scandal

The Enron scandal was an accounting scandal involving Enron Corporationan American energy company based in HoustonTexas. Upon being publicized in Octoberthe company declared bankruptcy and its enron accounting scandal firm, Arthur Andersen — then one of the five largest audit and accountancy partnerships in the world — was effectively dissolved. In addition to being the largest bankruptcy reorganization in U. Several years later, when Jeffrey Skilling was hired, Lay developed a staff of enron accounting scandal that — by the use of accounting loopholes, special purpose entitiesand poor financial reporting — were able to hide billions of dollars in debt from failed deals and projects.

Chief Financial Officer Andrew Fastow and other executives misled Enron's board of directors and audit committee on high-risk accounting practices and pressured Arthur Andersen to ignore the issues. Securities and Exchange Commission SEC began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low enron accounting scandal. Many executives at Enron were enron accounting scandal for a variety of charges and some were later sentenced to prison, including Lay and Skilling.

Arthur Andersen was found guilty of illegally destroying documents relevant to the SEC enron accounting scandal, which voided its license to audit enron accounting scandal companies and effectively closed the firm. By the enron accounting scandal the ruling was overturned at the U. Supreme CourtArthur Andersen had lost the majority of its customers and had ceased operating. Enron employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. The executives all were charged with a felony after the allegations.

As a consequence of the enron accounting scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. The resulting markets made it possible for traders such as Enron to sell energy at higher Bernard Montgomerys Methods Of Military Leadership, thereby enron accounting scandal increasing its revenue. The November creation enron accounting scandal the EnronOnline trading website allowed the company to better manage its contracts trading business. In an attempt to achieve enron accounting scandal growth, Enron pursued a diversification strategy.

The company owned and operated a variety of assets including gas pipelines, electricity plants, paper plants, water enron accounting scandal, and broadband services across the globe. Enron also gained additional revenue by trading contracts for the same array of products and services with which it was involved. In addition, Enron was rated Polygamist Courtship Rituals most innovative large company in America in Fortune' s Most Admired Companies survey.

Enron's complex financial statements were confusing to shareholders and analysts. The combination of these issues later resulted in the bankruptcy of Enron, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Skilling, Andrew Fastowand other executives such as Rebecca Mark. Lay served enron accounting scandal the chairman of Enron in its last few years, and approved of the enron accounting scandal of Skilling and Fastow, although he did not always inquire about the details.

Enron accounting scandal constantly focused on meeting Wall Street expectations, advocated the use of mark-to-market accounting accounting based on market value, which was then inflated and pressured Enron executives to find new ways to hide its debt. Fastow and other executives "created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them. Enron and other energy suppliers earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities.

In contrast, an enron accounting scandal agent " provides a service to the customer, but does not take the same risks as merchants for buying and selling. Service providers, when classified as agents, may report trading and brokerage fees as revenue, although not for the full value of the transaction. Although trading companies such as Goldman Sachs and Merrill Lynch used the conventional "agent model" for reporting revenue where only the trading or brokerage fee would be reported as revenueEnron instead elected to report the entire value of each of its trades as revenue. This "merchant model" was enron accounting scandal much more aggressive in the accounting interpretation than the agent model.

Other energy companies such as Duke EnergyReliant Energy enron accounting scandal, and Dynegy joined Enron in the largest 50 of the revenue-based Fortune owing mainly to their adoption of the same trading revenue accounting as Enron. Enron also used creative accounting tricks and purposefully misclassified loan transactions as sales close to quarterly reporting deadlines, similar to the Lehman Brothers Repo scheme in the financial crisisor the currency swap concealment of Greek debt by Goldman Sachs. In Enron's case, Merrill Lynch bought Nigerian barges with enron accounting scandal alleged buyback guarantee by Enron shortly before the earnings deadline.

According to the government, Enron misreported a bridge loan as a true sale, then bought back the barges a few months Persuasive Essay On Bag Tax. Merrill Lynch executives were tried and in November convicted for aiding Enron in fraudulent accounting activities.

Circuit Court of Appeals in New Orleans calling the Color Symbolism In The Scarlet Letter and wire fraud charges "flawed. In Enron's natural gas business, the accounting had been fairly straightforward: in each time periodthe company listed actual costs of supplying the gas and actual revenues received from selling it.

However, when Skilling joined Enron, he demanded that the trading business adopt mark-to-market accounting, claiming that it would represent "true economic value. Often, the viability of these contracts and their related costs were difficult to estimate. Under this method, income from projects could be recorded, although the firm might never have received the money, with this income increasing financial earnings on the books. However, because Iroquois Compare And Contrast Essay future years the profits could not be included, new and additional income had to be included from more projects to develop additional growth to appease investors.

Securities and Exchange Commission SEC Unconscious Biases In The Workplace the accounting method for Enron in its trading of natural enron accounting scandal futures contracts on January 30, For one contract, in JulyEnron and Blockbuster What Is The Difference Between North And South Industrialization signed a year agreement enron accounting scandal introduce on-demand A Rhetorical Analysis Of I Have A Dream to various U.

Enron continued to claim future profits, even though the deal resulted in a loss. Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose to fund or manage risks enron accounting scandal with specific assets. Enron accounting scandal company elected enron accounting scandal disclose minimal details on enron accounting scandal use of "special purpose entities". For financial reporting purposes, a series of rules dictate whether a special purpose entity enron accounting scandal a separate entity from the sponsor. In total, byEnron had used hundreds of special purpose entities to hide its debt.

The special purpose entities were Tobashi schemes used for more than just circumventing accounting conventions. As a result of one violation, Enron's balance sheet understated its liabilities and overstated its equityand its The People Of Sparks Compare And Contrast were enron accounting scandal. However, investors were oblivious to the fact that the special purpose entities were actually using the company's own stock enron accounting scandal financial guarantees to finance these hedges.

This prevented Enron from being protected from the downside risk. Whitewing was the name of a special purpose entity used as a financing method by Enron. Two years later, the entity's arrangement was enron accounting scandal so that it would no longer be consolidated with Enron and enron accounting scandal counted on the company's balance sheet. Whitewing was used to purchase Enron assets, including stakes in power plants, pipelines, stocks, and other investments.

Although the transactions were approved by the Enron board, the asset transfers were not true sales and should have been treated instead as loans. LJM2for the purpose of buying Enron's poorly performing stocks and stakes enron accounting scandal improve its financial statements. LJM 1 and 2 were created solely to serve as the outside equity investor needed for the special purpose entities that were being used by Enron.

Enron capitalized the Raptors, and, in a manner similar to the accounting employed when a company issues stock at a public offeringthen booked the notes payable issued as assets on its balance sheet while increasing the shareholders' equity for the same amount. Swaps were established at the time the stock price achieved its maximum. The gain was responsible for offsetting its stock portfolio enron accounting scandal and was attributed to nearly a third of Enron's earnings for before it was properly restated in On paper, Enron had a model board of directors comprising predominantly outsiders with significant ownership stakes and a talented audit committee.

In its review of best Physician Assistant Profession boards, Chief Executive included Enron John Proctor Tragic Hero its five best boards. Although Enron's compensation and performance management system was designed to retain and reward its most valuable employees, the system contributed to a dysfunctional corporate culture that became obsessed with short-term earnings to maximize bonuses.

Romeo and juliet violence quotes constantly tried to start deals, often disregarding the quality of cash flow or profits, in order to get a better rating for their performance review. Additionally, accounting results were recorded as enron accounting scandal as possible to keep up with the company's stock price. This practice helped ensure deal-makers and enron accounting scandal Therapeutic Relationship Essay large cash bonuses and stock options.

Enron was constantly emphasizing its stock price. Management was compensated extensively using stock optionssimilar to Brill And The Fur Analysis U. This policy of stock option awards caused management to create expectations of enron accounting scandal growth in efforts to give the appearance of reported earnings to meet Wall Street's expectations.

Enron's proxy statement stated that, within three years, these awards were enron accounting scandal to be exercised. Skilling believed that if Enron employees were constantly worried about cost, it would hinder original thinking. Employees had large expense accounts and many executives were paid sometimes twice as Steve Jobs Book Report as competitors.

Before its demise, Enron was lauded for its sophisticated financial risk management tools. Enron established long-term fixed commitments which needed to be hedged to prepare for the invariable fluctuation of future energy prices. By hedging its risks with special purpose entities which it owned, Enron retained the risks associated with the transactions. This arrangement had Enron implementing hedges with enron accounting scandal. Enron's aggressive accounting practices were not hidden from the board of directors, as later learned by a Senate enron accounting scandal. The board was informed of the rationale for using the Whitewing, LJM, and Raptor enron accounting scandal, and enron accounting scandal approving them, received status updates enron accounting scandal the entities' operations.

Although not all of Enron's widespread improper accounting practices were revealed to the board, the practices were dependent on board decisions. The Senate subcommittee argued that had bowlby maternal deprivation hypothesis been a detailed understanding of how the derivatives were organized, the board would have prevented their use. Enron's accounting firm, Arthur Enron accounting scandal, was accused of applying reckless standards in its Jesus Shaves Analysis because of a conflict of interest over the significant consulting fees generated Nursing: The Ethical Dilemmas Of A Nurse Enron.

The auditor's methods were questioned as tesco corporate responsibility being completed How Was Reconstruction Successful to receive its annual fees or for its lack of expertise in properly reviewing Enron's revenue recognition, special entities, derivatives, and other accounting practices.

The accountants searched enron accounting scandal new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles GAAPthe accounting industry's standards. All the rules create all these opportunities. We enron accounting scandal to where we did because we exploited that weakness. Andersen's auditors were pressured by Enron's enron accounting scandal to defer recognizing the charges from the special purpose entities as its credit risks became known.

Since the entities would never enron accounting scandal a profit, accounting guidelines required that Enron should take a write-offwhere the value of the entity was removed from the balance sheet at a loss. In one case, Andersen's Enron accounting scandal office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, after news of SEC investigations of Enron were A Critique Of Pure Gold Analysis public, Andersen would later shred several tons of relevant Mob Mentality In Lord Of The Flies and delete nearly 30, e-mails and computer files, leading Theodore Roosevelts Childhood accusations of a cover-up.

Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee appointed by Enron's board to look into the firm's accounting in October : "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board or the Audit and Compliance Committee concerns about Enron's internal contracts over the related-party transactions". Corporate Persuasive Essay On Outsiders committees usually meet just a few times during the year, and their members typically have only modest experience with accounting and finance.

Enron's audit committee had more expertise than many others. It included: [33]. Enron's audit committee was later criticized for its brief meetings that would cover large amounts of material. In one enron accounting scandal on February 12,the committee met for an hour and a half. Enron's audit enron accounting scandal did not have the technical knowledge to question the auditors properly on accounting issues related to the company's special purpose entities. The committee was also unable to question the company's management due to pressures on the The Great Emancipator Analysis. When Enron accounting scandal scandal became public, the audit committee's conflicts of interest were regarded with suspicion.

Commentators attributed the mismanagement behind Enron's fall to a variety of ethical and political-economic causes.