Enron Accounting Scandal

Topics: Enron, Accounting scandals, Kenneth Lay Pages: 5 (1706 words) Published: July 29, 2010
The Enron Accounting Scandal of 2001
There are many accounting scandals that have occurred throughout United States History. Many scandals occur even without outsiders knowing anything that had occurred. Companies try their best to keep many of the accounting scandals quiet. Everyday, there are political and business fraud happening, and most of it goes unnoticed. No company wants to admit that there was a problem or that people within the company are not trust worthy. However, when executives in large corporations take scandal to the extreme, there is no way of keeping out of the spot light. Unfortunately, scandals are the tip of the iceberg. They represent visible failures and companies could really go down for such setbacks. Especially in Enron’s case during 2001, an accounting scandal could not be kept silent. It was one of the biggest accounting scandals in history and because of fraud, Enron suffered greatly.

Enron Corporation is an energy trading, natural gas, and electric utilities company based in Houston, Texas founded in 1985. As the deregulation of electrical power markets were rising, Enron with the help of former chairman Kenneth Lay decided to diversify their business portfolio and enter into becoming an energy broker who traded electricity and other commodities. Enron took what would prove be a fatal turn that would ultimately meet their demise by ignoring one of the most important foundations of their business: bringing buyers and sellers together. Instead of Enron bringing them together, they had chosen to enter into a contract with the seller and signed a contract with the buyer, thus profiting on the difference of the selling and buying price of the commodity (Hale, 2). Enron was able to keep its books closed, making them the only party that knew both prices of the commodity, which enabled Enron’s rise to power in the service industry. Enron employed around 21,000 people by mid-2001 before it went bankrupt (Kay, 4). Jeffrey Skilling was hired years after Enron was founded in 1985 by Kenneth Lay, and decided to develop a staff of executives. However, he had many issues such as accounting loopholes and poor financial reporting. After years of hiding billions of dollars in debt, Skilling was finally not able to hide his companies failed deals and projects (Kay, 7). Enron’s auditor has also been accused of conducting business in an unethical manner in its attempt to retain the loyalty of Enron executives. Enron’s limited liability partnership with Arthur Andersen was the start of the companies’ downfall. Arthur Andersen was one of the five largest audit and accounting partnerships in the world (Hale, 6). Enron hired Andersen, the reputable accounting firm, to conduct corporate financial audits. Enron was one of Andersen’s largest accounts, and also a major business partner to Enron as they sold millions of dollars in consulting service. ). Partnering with Skilling, Andersen lost much more than money. Both men lost their businesses, and their reputations as strong business men. It was the job of Andersen Consulting , one of the nation’s top five recognized accounting firms, to ensure the accuracy and reliability of the financial statements of Enron, so that creditors and investors could make good financial decisions (Kay, 2). However, it was Andersen that was under investigation for illegal and unethical accounting practices which put both Andersen and Enron in the spotlight in one of the largest accounting fraud cases of all time (Kay, 2). Due to these relationships that Enron had with Arthur Andersen, it was just too easy for both Enron and the accounting firm to work together in covering up financial losses and debt. Andersen was also responsible for some of Enron’s inside bookkeeping, with some of Andersen’s employees eventually leaving to work for Enron (Hale, 4). The accounting techniques used to fake the financial statements were a combination of many different...

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Kay, Joseph. “Citigroup, Morgan Chase fined for Enron deals: corruption at the
heights of American finance” World Socialist Web Site. August 5, 2003.
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Kay, Joseph. “Former Enron CEO Jeffrey Skilling indicted.” World Socialist Web
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Flood, Mary. “5 guilty in Enron barge scheme” Houston Chronicle. Nov. 4, 2004.
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Watkins, Sherron. Memo to Kenneth Lay. 2001.
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