The Smartest Guys in the Room
It was a profound story happened between two giant companies, both of which once marked as one of the greatest companies for decades in the American History. Enron, started as Northern natural Gas Company in 1930, creatively making its way through the Great Depression by opening up the natural gas market with its lower cost and developing extensive pipeline network with the unlimited low-cost labor resource, fell apart due to its creative use of the SPEs and related accounting treatment, and it never gets a chance to surprise the world again with their creativity in the second largest recession only a few years away. Followed the sank of the energy titanic Enron, is the collapse of the most respected accounting firm Arthur Andersen, which has built a reputation of 100% honesty and integrity in the last century. They were known as “think straight, talk straight”, and if their clients wanted to do something they didn’t agree with, they’d either try to change the clients or quit. However, in auditing their big client Enron’s financials, they went off their reputation. Many criticisms were focused on the accounting and financial reporting treatment of SPE-related transactions, in which, Arthur Anderson, as consultant to Enron at the same time, were believed to help cook the book. They not only lost the independence and objectivity in auditing Enron’s financials as an auditor, but also allowed some of the Enron officials to commit multiple counts of fraud for years under its cover. To better understand the story, the following four topics were discussed. 1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List and discuss five parties and or factors that you believe were most responsible for the crisis of confidence. Justify your choices. The Enron debacle was a far reaching scandal that implicated more than its employees and stakeholders. Moreover, it implicated the entire financial services industry, the global economy, and the government’s regulatory agencies. Because all of the previously mentioned parties had a role in Enron’s collapse there was an overall “crisis in confidence” in the accounting profession. The 5 factors that were most responsible for Enron’s collapse were: 1) Enron Management
2) The Enron Culture
3) Arthur Anderson
Enron management created special purpose entities (SPEs) to provide off balance sheet financing for their future business ventures. They engaged in complex related party transactions that allowed them to generate capital through loans on these SPE’s and sell assets that were not generating acceptable returns at inflated prices to other SPE’s and recognize false gains. What was even more perplexing was that the special purpose entities would use Enron stock as collateral for the loans, which was trading at an inflated price because of the unrealizable gains they were recognizing price. Andrew Fastow, Enron’s CFO was the lead perpetrator in this act. In order to keep creditors and the public to keep investing in the company they knew that they needed to beat Wall Street’s expectations every year. They did this by tucking away losses in these special purpose entities and recognizing revenue based on future projections that they would never earn. The Enron Culture
Another factor that contributed to the demise of confidence in the accounting profession was the win at all cost culture created by Enron’s management. The top 10% performing were rewarded with bonuses and the bottom 10% is replaced with 50 new MBA’s. This type of cut-throat culture encouraged the use of faulty accounting practices. Moreover, Enron was not the only company that has this corporate culture. A culture of this nature leads to the demise of many companies and hefty fines for other corporations. Arthur Andersen
Arthur Andersen is...
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