The Enron Scandal

The Enron Scandal

Introduction

The Enron scandal is one of the most memorable scandals in American history. It is a symbol of excessive fraud and unethical practices for the world. Enron scandal raised the issue of compliance, risk management and ethics on a larger scale. The auditor, Arthur Anderson was accused for forming partnerships off-the-books in order to hide the debt burden, increasing executive's capital, destroying the relevant official documents and breaching the trust of its employees. The total loss to investors was about US$64.2 billion during the time period of August 2000 till December 2001, when the Enron's shares got delisted from the exchange (Neuman. E. 2005).

The Enron's image was distorted before its investors mainly for two apprehensions. Firstly the management of Enron fabricated the operations and manipulated the official documents to increase the profits and secondly, top management expressed their unawareness and carelessness regarding the Enron scandal. All the executives and mangers responsible for falsifying the documents and accounts to show wrong figures of profit as per the orders of top management were charged for this crime. Their purpose was only to earn personal incentives offered by Enron. False profit figures resulted in an increase in stock price, keeping stockholders investment at risk. On the other hand, executives' and managers claimed to be unaware of all the dishonest activities taken place under one roof, reason being the complexity of business.

The case study of Enron

Enron began its operations in 1985. Its main areas of functions were electricity, gas, communication and paper productions. Enron got bankrupted in 2001. Enron revenues were once US$9 billion in 1995, and US$1 billion in 2000, these were the years when Enron earned the maximum profits out of its operations. In December 2001, It was discovered that its financial statements were misrepresented and prepared falsely in order to boost profits and revenues. This news caused a decline in the stock price of Enron from US$90 in 2000 to less than US$1 in 2001. Such a massive decline in stock price led to the further losses caused to investors i.e. US$11 billion. At the end, when Enron was forced lawfully to prepare correct financial statements for the last five years, then it was revealed that it had incurred a total loss of US$586 million (Li. Y. 2010).

The Scandal of Enron had raised the issue of regulation for financial institutions. It was evident now that Investment banks can earn far more money in process of under writing as compare to relying only on broker fees. Therefore it had been a conflicting situation for the employees to either make happy their employers or executives by showing them profitable results in reports or picturing the true image in front of investors.

Causes of Enron Failure

Mark to Market Accounting

Enron applied the method of mark to market accounting in trading business for the first time in 1990s. According to mark to market rules, all the remaining assets, derivatives and liabilities should be adjusted to fair market value at the end of every period ...