Analysis Of Enron Fraud: Reasons, Consequences, And Lessons Learned
Introduction
Fraud and corruption can never give you the return which you want from an organization. Enron scandal proved this line completely as the energy Giant in U. S. with assets of more than dollars sixty Billion and highest shares of Enron reached to $90. 45 per share value but fell down after declared as the Fraud, misleading and corrupt organization in 2002. Moreover, the career of another big auditing and accounting firm Arthur Andersen LLP in U. S. also ended with the declined of Enron Corporation as Andersen firm was also found guilty to placed misleading financial statements for Enron top management. As this was the mega scandal in the business history of United States so that’s why it created a bad image for the laws and regulations of the financial world. After this incident things went differently in the field of accounting and finance sectors.
Energy department is a key sector for any country and its people to improve the economy. So that’s why most countries pay much attention towards energy department. Back in 1985 when two energy companies Houston Natural Gas Corporation and InterNorth Inc. came together and this merger became Enron Corporation. Enron was founded by Kenneth Lay who served the company as Chief Executive Officer (CEO) and Chairman from 1985 to 2000. Government of U. S. deregulated the Natural gas industry which gave a chance to energy sector to improve its Revenue and profits. Moreover, one more prominent name in Enron Corporation was Jeffrey Skilling who worked as a consultant and Chief Operating Officer later. Skilling became CEO in 2001 but for a very short time and then resigned from his position of CEO and 0. 45 million shares of Enron. A well-known institute of U. S. gave the title of “One of the most innovative companies” to Enron.
Jeffrey Skilling gradually changed the culture of the organization to give importance towards aggressive trading. He enlisted top candidates from MBA programs around the country and made aggressive environment inside the organization, in which the attention was increasingly on closing as many cash generating trades as could be possible in minimum time. One of his most brilliant enlisted people was Andrew Fastow, who rapidly rose through the ranks to become Enron's CFO (chief financial officer). Fastow administered the financing of the organization through investments in increasingly complex instruments, while Skilling directed the working of its huge trading activity.
The positively trending business sector of the 1990s energized Enron's aspirations and added to its rapid growth. There were deals to be made all over the place, and the organization was prepared to make a business opportunity for anything that anyone was eager to trade. It’s along these lines traded derivative contracts for a wide assortment of commodities including power, coal, paper, steel and even for the weather. An online trading division, Enron Online, was launched during the dot-com boom, and the organization put resources into building a broadband telecommunications network system to encourage rapid trading.
Reasons
As the boom years arrived at an end and as Enron confronted expanded challenge in the energy trading business, the organization's profits shrank quickly. Under strain from investors, organization administrators started to depend on questionable accounting works on, including a system known as 'Mark-to-market accounting,' to hide the inconveniences. Mark-to-market accounting enabled the organization to compose hidden future gains from some trading contracts into current income statements, hence giving the figment of higher current profits. Besides, the disturbed tasks of the organization were transferred to alleged special Purpose entities (SPEs), which are basically restricted associations made with outside parties. Although numerous organizations dispersed resources for SPEs, Enron abused the activity by utilizing SPEs as dump locales for its troubled assets. Exchanging those assets for SPEs implied that they were kept off Enron's books, making its losses look less extreme than they truly were. Amusingly, a portion of those SPEs were controlled by Fastow himself. Consistently, Arthur Andersen served as Enron's auditor as well as a consultant for the organization.
The seriousness of the situation started to wind up apparent in mid-2001 as various analysts started to checking the details of Enron's released financial statements. An internal audit was started following an update from an organization VP, and soon the Securities and Exchange Commission (SEC) was exploring the exchanges among Enron and Fastow's SPEs.
As the details of the accounting fakes emerged, the stock price of the organization dove from a high of $90 per share in mid-2000 to under $1 before the end of November 2001, taking with it the estimation of Enron workers' 401(k) benefits, which were primarily tied to the organization stock. Lay and Skilling resigned, and Fastow was fired two days after the SEC examination began.
Consequences
On December 2, 2001, Enron petitioned for Section 11 bankruptcy insurance. Numerous Enron administrators were arraigned on a variety of charges and were later condemned to prison which included top management of Enron as Kenneth Lay sentence 45 years in Prison and followed Skilling 24 years but after sometime it reduced to 10 years behind the bars. Moreover, the finance mind of Enron Fastow also faced 10 years prison. Arthur Andersen went under extreme investigation and lost majority of its customers. The damage to its reputation was severe to the point that it was forced to break up itself. Other than government claims, several civil suits were also recorded by shareholders against both Enron and Andersen.
The scandal brought about a need of new laws and regulations intended to expand the accuracy of financial reporting for traded an open market organizations. The most essential of those measures, the Sarbanes-Oxley Act (2002), forced strict punishments for destroying, modifying, or creating fake financial records. The demonstration additionally restricted reviewing firms from doing any simultaneous counseling business for similar customers. Furthermore, this scandal leads to investors and analysts to be more focused on the financial credibility of the firm before becoming the capital market investor. Enron scandal raised many questions for financial and accounting industry. It also changed the angel of viewing the stock market and other markets for many investors.
Learning outcomes
- As Enron’s business model was not easy to understand and additionally it’s accounting Mark-to-market practice made it even more difficult to understand. So don’t try to invest if you can’t understand it.
- Lack of management skills can damage your organization. It’s important to having good management to perform all tasks with integrity and honestly. Otherwise it leads to huge damage for organizations reputation and puts a bad impact to your companies’ image in market.
- Pay more attention towards the financial situation of the organization which you are going to invest with different angles so that it becomes easy to understand the market trends. Moreover, take consultancy for your investments from different consultants and analysts before investing in any company.
- Organizations should not aggressively go with the high risk leverage strategies. In leverage strategy you used the money you borrowed from investors as borrowed capital.
- Fraud should not be the option in any case because it ruins everything and don’t pay anything. Furthermore, investors will not trust on your organization if they find any misleading statements.
- Your product/services should be better and updated to compete in market rather than false tactics. You should prefer to spend your time on updating and improving your product/service rather than busy your mind and time on other unnecessary activities.
