This strategy allowed Enron to keep reporting revenues with little to no acknowledgment of costs
This strategy allowed Enron to keep reporting revenues with little to no acknowledgment of costs
This accounting practice requires that once a long-term contract was signed, the present value of net future cash flow is calculated and written as a full income although it is not fully earned. It inflated the financial earnings on the books. Such a sudden jump in one year’s report lead to a pressure on the employees because they were expected to come up with bigger numbers otherwise they might see the stock price spiral down. Adventurous and unreasonable projects/contracts continued. Despite potential pitfalls, the U.S. Securities and Exchange Commission(SEC) approved the accounting method for Enron in its trading of natural gas futures contracts.…
Few business episodes have been the subject of so much debate and despair as the swift descent of once-admired energy trader Enron. The saga of this firm, which rose to prominence as rapidly as it subsequently fell, serves as a kind of morality tale of corporations, regulators, and investors. As we have discussed in class, the tragic effects of Enron’s overreaching arrogance provide a textbook example of both the best and the worst of American business culture and practice. Although the catastrophe’s complete impact may never be completely determined, it seems likely that Enron’s collapse caused more than one major company to cease to exist, several industries experienced radically changed environments, regulators and investors modified their behavior, and all firms are now subjected to greater scrutiny and regulatory oversight. So how did one of the brightest stars of American…
This kind of contempt of enterprise culture is the consequence that Enron changed their "focus strategy" and transferred into financial investment and so-called innovative business. In 1997, Enron's business expanded to natural gas derivative financial products transactions. In 2000, the "commodity exchange" accounted for nearly 90% of Enron’s sales. These contracts include interest rate swaps, derivatives and other complex financial products. However, this so-called "innovation" lies in the fact that the traditional accounting system is very difficult to confirm these new contract revenues. This is the "Enron trap". There is no doubt that Jeff Skilling had reversed the corporate values of Enron, especially in 1997, Andy Fausto was appointed as the CEO of Enron, started a new round of "unconventional" expansion under a limited market demand situation. At this time, Enron has already changed from a large energy company to a company engaged in energy derivatives transactions.…
The affect of the unethical behavior of the profitability of Enron was that the third party “outside” independent auditors was not able to backup and have accounting financial statements, some of those auditors and financial institutions may have been misled by the corporation’s net income.…
Some argue Enron’s record-breaking bankruptcy and eventual demise was the result of a lack of ethical corporate behavior attributed, more generally, to capitalism’s inability to check the unmitigated growth of corporate greed. Others believe Enron’s collapse can be traced back to questionable accounting practices such as mark-to-market accounting and the utilization of Special Purpose Entities (SPE’s) to hide financial debt. In other instances, people point toward Enron’s mismanagement of risk and overextension of capital resources, coupled with the stark philosophical differences in management that existed between company leaders, as the primary reasons why the company went bankrupt. Yet, despite these various analyses of why things went wrong, the story of Enron’s rise and fall continues to mystify the general public as well as generate continued interest in what actually happened.…
Enron’s code of ethics prided itself on four key values; respect, integrity, communication, and excellence. Codes of ethics should be a reflection of what the owners, investors, and employees work towards as an organization. Executives overlooked those values as they deliberately corrupted Enron by engaging in money laundering, accounting fraud, falsifying income, and other conspiracies. Employees continued to work their scheduled routine hours and showed loyalty by working through lunches and doing overtime, unaware that their invincible company would soon go under leaving them scrambling for answers. As the company struggled and faced financial ruin, executives betrayed their dedicated employees by informing them that Enron’s foundation was solid and continue to be profitable and had not allowed them to sell their stock in the company. At the same time, executives sold their share of the company and received millions of dollars before filing for bankruptcy and being investigated by the United States Justice Department. The unfortunate employees believed that they helped Enron develop into a successful company that it was and saw everyone as family. A combination of motivation and influential theories can explain Enron’s ultimate failure.…
In 2001, Enron, one of America’s leading energy companies, disappeared overnight. At its height, Enron had “a stock price over $90...a marker value of 70 billion… [and] gigantic executive compensation incentive packages” (Giroux). After being exposed of unethical business and accounting methods, Enron eventually went bankrupt. Enron was convicted of fraud, money laundering, conspiracy, and over 50 other charges. The Enron Scandal is a watershed moment in accounting because of the exposure and reevaluation of faulty business administration and unethical business ethics, the creation of the President’s Corporate Fraud Task Force, and the creation of the Sarbanes-Oxley Act.…
The purpose of this paper is consider three possible rationales for why Enron collapsed—that key individuals were flawed, that the organization was flawed, and that some factors larger than the organization (e.g., a trend toward deregulation) led to Enron’s collapse. In viewing “Enron: The Smartest Guys in the Room” it was clear that all three of these flaws contributed to the demise of Enron, but it was the synergy of their combination that truly let Enron to its ultimate path of destruction.…
Enron, a Houston-based commodities, energy and service corporation, was named “America’s Most Innovative Company” for six consecutive years by Fortune Magazine. Ironically, its shares price had peaked at $90.75 in August 2000 and dropped massively to $0.67 in January, resulting in shareholders losing approximately $11 billion. In the November of 2011, it was revealed that Enron’s earnings had been overstated by several hundred billion dollars because enormous debts had been kept off from the balance sheets and U.S. Securities and Exchange Commission (SEC) opened a formal investigation into Enron’s transaction. Enron incorporated “market to market accounting” for its energy business and used it on an unprecedented scale for its trading transactions,…
Two years after Enron filed for bankruptcy in 2001, Nancy b. Rapoport wrote this essay expressing her unique perspective on the real cause of Enron’s demise. This essay catches the reader’s attention instantly, because unlike abundant other articles written on the biggest corporate scandal in American history, the author here rejects Jeff Skilling’s (former president of Enron) argument1 of what brought about Enron’s downfall. She instead uses another metaphor, arguing that Enron’s downfall was more like Titanic’s- hubris and over reliance on checks and balances that led to its demise rather than a ‘Perfect Storm’ of events. The purpose behind her preference of the metaphor ‘Titanic’ over ‘Perfect storm’ clarifies and warns readers about not being misled into believing that Enron’s downfall was based on factors ‘outside of the company’s control’ rather was caused by a ‘synergetic combination of human errors’. In justifying the Titanic as a more apt analogy to the downfall of Enron, the author offers strong arguments such as how the Enron is in some sense a larger-than-life disaster much like the Titanic. While Titanic’s failure was tied to the unrealistic faith in technology to protect passengers, Enron’s failure was tied to the unrealistic faith that formal and informal checks and balances could always keep the market honest. However, her strongest argument of ‘hubris’ found both in the top executives of Enron as well as the officers of Titanic is not convincing. As much as the greed for money is evident in Enron employees and their arrogant behavior, her equivalent assertion that the Titanic can trace the loss of life directly to human arrogance (pg 209) lacks adequate evidence. Whether her proof of…
people lost their jobs and investments. As a result, new laws for publicly traded companies and…
It is not unusual for businesses to fail after making bad or ill-timed investments. What turned the Enron case into a major financial scandal was the company’s response to its problems. Rather than disclose its true condition to public investors, as the law requires, Enron falsified its accounts. It assigned business losses and near-worthless assets to unconsolidated partnerships and “special purpose…
By making the managements incentives focal to the ‘dramatic rise’ in stock options, the Enron senior execs gave their managers all incentive to manipulate the earnings report so that their compensations would be greater. John Coffee, the author of “What caused Enron? A Capsule Social and Economic History of the 1990s” states that a major flaw in the corporate governance as that Enron management ‘compensation schemes that encourage managers to manipulate accounting reports to gain more compensation.’ Enron’s senior execs had not taken on the responsibility of planning for this potential business risk by setting up the “inappropriate objectives and business strategies” as explained in the text Auditing & Assurance Services. Thus, by making the managements incentives based upon their financial statements stating an increase…
1. ENRON were able to misrepresent their respective earnings reports and stock activity in a fraudulent manner…
By misrepresenting earnings reports while continuing to enjoy the revenue provided by the investors not privy to the true financial condition of ENRON, the executives of ENRON embezzled funds funneling in from investments while reporting fraudulent earnings to those investors; this not only proliferated more investments from current stockholders, but also attracted new investors desiring the enjoy the apparent financial gains enjoyed by the ENRON corporation.…