Accounting Scandals: The Influence Of Trust In Accounting

Introduction

Trust is a very important concept in accounting. According to the American Institute of Certified Public Accountants (AICPA): “Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action.” These economic decisions are made by companies, stockholders, consumer, and many other parties. These decisions have to do with money, therefore directly impact the lives of everyone who puts their trust in accountants to paint an accurate financial picture on which these parties make their decisions. However, sometimes it can be beneficial to one party to paint an inaccurate picture, or in other words, report false financial information. This is where accounting scandals come into play. Sometimes big companies use accounting reports to lie about their finances to keep making money. One very notable and infamous instance where such an accounting scandal occurred was with Enron from the late 1990s until the end of 2001.

Background information

Enron Corporation was born in 1985. The government had started deregulation of natural gas pipelines, and Houston Natural Gas and InterNorth, two existing companies merged to create Enron. The deregulation of the gas pipelines however, caused Enron to not have exclusive rights to pipelines and because of the merger, Enron had a lot of debt. To keep itself afloat the company needed a new business strategy to get cash flowing and profits coming in. Kenneth Lay was the CEO of Enron at that point, and he hired Jeffery Skilling, who dealt with asset and liability management, as a consultant to co...

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...of the largest accounting firms in America, in charge of auditing Enron then became involved, and destroyed any of Enron’s documents that could prove that they were breaking the law.

Consequences and Conclusion

In the end, Enron could not keep itself afloat once it turned to fraud. Shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. Lives were ruined. Lay died before serving time. Skilling got 24 years in prison. Fastow agreed to become an informant and therefore got less time in prison. The company filed for bankruptcy. Arthur Andersen was found guilty of falsifying Enron’s account and destroying evidence, and the firm failed. People still talk about the Enron scandal today, and accounting practices are now held to a higher standard in order to avoid a catastrophe like this again.