The Enron Scandal

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The Enron Scandal
Background
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.[1] Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the Enron scandal. Financial Frauds

Enron’s downfall is basically the accumulated effect of its unethical practices in financing and reporting. Enron's non-transparent financial statements did not clearly depict its operations and finances with shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to portray a favorable depiction of its performance. Enron's accounting and financial transactions is designed to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books. The combination of these issues later led to the bankruptcy of the company: Aggressive Revenue Recognition

As an energy supplier, Enron can be considered as merchants or agents. As merchant, it take on the risk of buying and selling products, and allowed to report the selling price as revenues. In contrast, as "agent" who provides a service to the customer, it doesn’t take on the same risks as merchants for buying and selling and report only trading and brokerage fees as revenue. Although trading firms 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 revenue), Enron...
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