Enron Scandal And Its Effect On The Accounting World
Enron was involved in one of the biggest Scandals in American History. Enron was a involved in many different businesses but to put it simply was an energy company. To put things into perspective the way Enron was looked at in the year 2000 is how we currently look at Amazon or Apple. They were a bullet proof powerhouse but ultimately not too big to fail.
Enron did just about every unethical trick in the book. What they did was they used a strategy called Mark to Market Accounting. It allows you to recognize revenue when you have none. They projected earnings and pretended like they actually already had them. They had financial advisors look at these made up numbers and tell everyone how great they were and to invest in them. At the time no one had any reason to doubt them so they invested everything. No other firm had such high rates of investment that could match their growth making Enron look like the best choice. This allowed them to portray great stock markets, great revenue debt and so much more. It wasn’t just random investors who were victims it was also employees who lost their investments in their 401ks, retirement funds, it was absolutely everything tied up in Enron’s stock.
How the Fraud Occurred
An example of what Enron would do would be what they did with Blockbuster. Enron signed a 20 year contract with Blockbuster and projected an earning from their contract of 100 million dollars. When Blockbuster pulled out of their contract they didn’t end up making that much in revenue. However, they still put this number of 100 million dollars as their reported revenue. They did this with many more deals besides Blockbuster. They projected earnings and pretended they already had them. As a result making their stock market prices a sham as well.
Enron would then have massive debt but then hid it. Even their liabilities were a sham. Enron set up side companies and then pushed their debt onto them. Making it look as though they solved this problem of debt. The debt would therefore not show up on their financial report making it so non investors would have absolutely no way of knowing any of these numbers were a hoax.
An auditors job is to catch these financial red flags but that is not what happened. At the time there was five major accounting firms, Arthur Anderson amongst them. Arthur Anderson was the accounting firm for Enron and instead of auditing them Enron paid them to look the other way. As a result when the Scandal broke lose Arthur Andersons company went under and never recovered making it so there are now only four major accounting firms.
In December of 2001, Enron was bankrupt. Thousands of people lost their retirements, investments and their jobs. The executives, Ken Lay and Jeff Skilling were heavily blamed for this scandal. They were convicted of Conspiracy of Fraud amongst many other things. However, before Ken even went to prison he died of a heart attack. As for the many others who were also involved, most of them walked away with millions of dollars due to the fact they sold their stocks right before the market crashed with the massive drop. This triggered an uproar due to the fact many of individuals partook in the scandal but all walked away without a scratched except for the executives.
This major American Scandal changed the accounting world forever. Accounting and business firms clearly were not functioning properly, making it so there are now much stricter guidelines and regulations to hold companies more accountable. Ken and Jeff tried to deny accountability and claimed they thought their company was in good standing. As a result CEOs and CFOs now have to certify the financial statements so they cannot deny that they ever saw them.