An Explanation of the Causes and Effects of the Enron Accounting Scandals
Do Minh Tam
December 24, 2010
From the 1980s until now, there have been a lot of accounting scandals which were widely announced on by media. The result of this situation is many companies were bankruptcy protection requests, and closing. One of the most widely reported emulation of accounting scandals is Enron Company. Enron Corporation is one of the largest energy companies in the world. Enron was founded in Houston, Texas, America in July 1985 by the consolidation between Houston Natural Gas and InterNorth of Omaha, Nebraska (“Enron and Enderson: The story”, n.d.). According to Sridhanran, Dickes & Caines (2002, p.1), Enron’s rank number is the seventh in the United States by Fortune magazine in April 2002. Their businesses were sale of nature gas, electricity sector, water, metal, broadband and newsprint. Enron has been altered from the old economy company to the new economy company and focus on HFV (Hypothetical Future value). The profits were grown by buying electric at stable prices from the suppliers and sale the different prices for customers. When the falsehood of their profits was opened, the investors withdraw the capital. Enron start collapse (“Case study: The collapse”, n.d., pp.1-2).
Accounting scandals are political and business scandals using illegal accounting systems and fraud in the financial statements. According to Hanson (2002, p.1), Enron accounting scandal is the most important common failure in the banks during the 1980s in the United States. This leads to changing in business and the law. When Enron was bankrupt, the economy of America was dropped, and many employees were lost their jobs.
Outline and Limitations
The assignment will explain two main reasons and two effects of Enron accounting scandal. The assignment will conclude with review the Enron accounting scandal and giving the lessons for another company.
The Causes of Enron Accounting Scandal
A business fraud is one of the most important reasons which made bankruptcy of Enron. Firstly, limited partnership companies were opened by CFO Andy Fastow. He used many partnership companies such as J.P.Mogan Chase and Merill Lynch to hide their enormous debts and losses from investors. They borrowed the great amounts of money from financial institutions to buy many assets; this led to wrong view about Enron condition. It helped the stock price increase (“Enron accounting scandal”, 2009). In addition, the financial strategy, the business consultants and the accounting techniques are wrong choice of Enron. They used established investment money to build securitization abilities. According to Buondonno, David, Pufky and Rollings (n.d., pp.11-12), Enron has distorted the financial statements using the complex methods. They used fake companies (SPEs) to move money between different banks and created false financial statements. This led to misunderstanding of shareholders about the real financial statements. Moreover, Enron predicted the future market of energy price. As a result, the sale prices of Enron known as mark-to-market, which control the energy trading business and the reports which they want to show. Furthermore, Enron used wrong accounting system. They used mark-to-marked trading which is greatly hard to change to another system. The reports were shown losses or gains on the stock and security price at the end of the year. Enron was able to use SPE (special purpose entities) to trade in legal time or illegal time so that income could change to correct with investor expectances. Lastly, Enron had a huge negative dollar cash flow from bank loans. They needed to pay around two million dollars per day by cash.
A Corruption and a Lack of Accounting Techniques
According to Buondonno, David, Pufky and Rollings (n.d., pp.18-20), Management...
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