Enron
Corporation was an American energy company, which also dealt in commodities and
services such as electricity, natural gas, pulp and paper, and communications.
This company enjoyed untold success until it went bankrupt in 2001. At the
close of 2001, Enron’s institutionalized, systematic, and ingeniously planned
accounting fraud (known as the Enron scandal) was uncovered. The Enron scandal
has since then become one among the most prominent examples of self-willed
corporate fraud and corruption.
Enron
was involved in large scale financial statement fraud. Enron got into debt
after several years of domestic and international expansion, involving
complicated contracts and deals. It managed to conceal its debt from
shareholders by getting into partnerships with other companies, practicing
fraudulent accounting, and getting illegal loans. Partnerships Enron had with
entities such as RADR and Chewco (funded by Enron executives) permitted the
concealment of the debt.
On August 15 2001, Sherron Watkins, an Enron VP, wrote an anonymous
letter to Ken Lay that suggested Skilling (former CEO of Enron) had left
because of accounting improprieties and other illegal actions (Obringer,
n.d.) .
Later that same month, Chung Wu, a UBS PaineWebber broker in Houston, sent an
e-mail to 73 investment clients saying Enron was in trouble and advising them
to consider selling their shares (Obringer, n.d.) . In October 2001, Enron announced that
it was currently worth $1.2 billion
less than previously reported, prompting and investigation by the Securities
and Exchange Commission (SEC).
The
investigation revealed complex layers of deception and illegal practices
committed by high-ranking Enron executives, investment banking partners, and
the company’s accounting firm, Arthur Andersen. The following key players were
highly implicated in the fraud at Enron:
· Kenneth Lay; former CEO
and chairman of Enron, charged with 6 counts of conspiracy and fraud,
· Jeff Skilling; former CEO
of Enron (February-August 2001), convicted of (and found guilty of) 19 counts
of conspiracy, fraud, insider trading, and making false statements.
· Andrew Fastow; former CFO
of Enron, charged with 78 counts of fraud, conspiracy, and money laundering,
·
Michael Kopper; former
director in the global finance unit,
·
J. Clifford Baxter; former
Vice Chairman of Enron,
·
Sherron Watkins; Head of
Enron Global Finance,
·
Mark Koenig; Head of Enron
Investor Relations.
This
scandal also engendered the dissolution of the Arthur Andersen
accounting/auditing firm, given that they were Enron’s auditors yet failed to
declare the real financial position of Enron. Although Arthur Andersen was not
implicated in directly assisting Enron in ‘cooking its books’, it was found to
have been deplorably negligent in its role as overseer and auditor of Enron’s
financials. Additionally, Andersen was found guilty of obstruction of justice
since it shredded its Enron audit files.
Before
the Enron scandal, Arthur Andersen was one of the ‘Big Five’ accounting firms.
As a result of the 2001 Enron scandal, Arthur Andersen voluntarily relinquished
its licenses to practice as Certified Public Accountants (CPAs) in the U.S. When
the scandal broke, the world was shocked that not only could a Fortune 500
company pull off such massive fraud, but one of the world’s largest accounting
firms looked the other way during the audacious crimes
This
scandal led to a revision of the accounting practices in the U.S. and led to
the enactment of the Sarbanes-Oxley Act (2002). This act was enacted by the
U.S. Congress to protect shareholders and the general public from fraudulent
practices and accounting errors carried out in enterprises; and also improve
the accuracy of corporate disclosures.
Works
Cited
Naylor, T. J. (2014, April 03). How The Arthur
Andersen And Enron Fraud Changed Accounting Forever. Retrieved November
25, 2015, from benzinga:
www.benzinga.com/markets/14/04/4429482/how-the-arthur-anderson-and-enron-fraud-changed-accounting-forever
Obringer, L. A. (n.d.). How Cooking the Books Works.
Retrieved November 25, 2015, from HowStuffWorks:
http://money.howstuffworks.com/cooking-books8.htm
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