Enron and How it Affected the Accounting Industry
Enron once was one the United States largest energy company and was ranked Fortune’s seventh richest corporation in the United States. When Enron had a filed for Chapter 11 bankruptcy in 2001 it unraveled to be one the biggest accounting scandals in United States history. There are many factors that contributed to Enron’s demise but their aggressive and unethical accounting practices were the key component. As a result, the accounting industry has made major improvements to ensure that an accounting scandal this bid could never happen again. Enron was formed when natural gas pipeline companies Houston Gas and InterNorth Inc, merged in 1985. The original headquarters where in Omaha, Nebraska but after the merge they immediately relocated to Houston, Texas. Enron had provided a 38,000 mile gas transmission system which made it the largest in the United States. The merge of the two companies resulted in a lot of debt which urged the executives to expand. Enron had rapidly transformed from a gas pipeline company into a global energy trader. The bad accounting practice that led to Enron’s demise had started in the early years of the company. In 1987, Enron had faces its first scandal which is known as the “Valhalla Scandal”. Enron had an oil trading company in Valhalla New York called Enron Oil Trading, which was ran Louis Borget who was the president and Tom Mastroeni, the treasurer. Both Borget and Mastroeni were misappropriating funds by opening undisclosed bank accounts in order to do unauthorized transaction. Also, about 2 million dollars of Enron Oil Trading’s money were transferred into Mastroeni’s personal account. They were also manipulating the books to make it seem as if the profits were steady but in reality had been trading beyond their limits. Arthur Andersen, Enron’s auditor, had discovered this misappropriation of funds and had notified the audit committee Instead of disclosing this information to the Securities and Exchange Commission, Enron had decided to declare these fraudulent acts as immaterial and their Arthur, Andersen had gone along with their decision. If these acts were declared material, as they should have been, Enron would have had to restate their earnings which could have potentially caused the company bankruptcy. In spite of the illegal and unethical acts, CEO Kenneth Lay had continued to defend Borget and Mastroeni and decided not to terminate them because of the large profits they were making for the company. Six months later, Borget had done a bad trade again which caused the company to lose a billion dollars which Enron was wable to buff the market and reduce the market to 140 million dollars preventing the company from bankruptcy. Although Borget and Mastroeni helped Enron to bring their debt down tremendously, this event had finally led Kenneth Lay to fire Louis Borget and Tom Mastroeni. The Securities and Exchange Commission had done an investigation on Enron however the focused mainly on Borget and Mastroeni. As a result, three years later both Borget and Mastroeni were charged with fraud and laundering. In 1989, Kenneth Lay hired Jeff Skilling, a former consultant, who later joins Enron and was appointed the company’s Chief Executive Officer. When Skilling started working at Enron he insisted on using mark to market accounting instead of the traditional method of accounting. Enron was one of the first non-financial companies to use mark to market accounting. This technique of accounting was approved by Enron’s Board of Directors and the Securities and Exchange Commission. Mark to market accounting is a technique that required long term contracts to be valued at its expected future value rather than historical cost. As a result, Enron’s estimated future income was included in the financial statements even though the money had yet to be received. The problem with mark to market was the unreliable market value on gas...
Please join StudyMode to read the full document