EXAMPLES OF FRAUDS IN FINANCIAL REPORTING
ENRON
Enron was a company founded in the year 1985 based in Houston, USA. It was one of the world's largest energy trading and Distribution Company having an income of nearly hundred billion dollars during 2000 and was also regarded as America’s most Innovative companies for 6 consecutive years by the fortune magazine. In the last quarter of 2001, it was exposed that it’s declared financial condition was maintained significantly by systematized and skillfully premeditated accounting fraud, known thereafter as the Enron scandal. They hid major debts and did not book them in the balance sheet. The inflated figures in their balance sheet shot up their stock price to unprecedented levels, taking advantage of the situation executives with insider information traded in millions of dollars of Enron stocks. The senior executives and insiders were aware of the offshore accounts that were covering up losses for the Organization; the investors were kept in the dark. This sent across a domino effect which resulted in shareholders losing seventy four billion dollars, loss of hundreds of jobs and thousands of investors and employees losing their retirement accounts.
“Enron incorporated “mark-to-market accounting” for the energy trading business in the mid-1990s and used it on a huge scale for its trading transactions. These rules, when companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular financial quarter must be adjusted to fair market value, declaring unrealized gains or losses to the Balance Sheet of the period” (C. William Thomas, 2002). Andrew Fastow, the CFO, The CEO Jeff skilling and its former ...
... middle of paper ...
... rupees in 2008. Ramalingam Raju and his brother were charged with breach of trust, conspiracy, cheating and falsification of records.
These were examples of just two frauds that happened in USA and India. Numerous numbers of frauds have materialized in different countries namely, The WorldCom Scandal, Lehman Brothers, Tyco scandal, HBSC scandal, HIH Insurance Company scam, the Libor Scam etc. All these involved manipulation of financial accounts for personal benefit. Some common techniques used were over-optimistic valuations of assets and extensive under-reporting of liability, under pricing and reserve problems, insider trading and non adherence of laws about payment of taxes. All the companies involved in accounting frauds went bankrupt and had a huge impact on the economies of their respective countries and eventually lead to arrests of executives involved.
Another reason for Enron’s bankruptcy was the unnecessary personal spending by corporate managers. It was a direct loss to the company’s shareholders. In the later stages before its bankruptcy, the luxuries were paid from the company’s borrowing, as it had no real profits. Therefore in the later stages, the creditors were at a loss rather than its shareholders.
The Enron Corporation was founded in 1985 out of Houston Texas and was one of the world 's major electricity, natural gas, communications, and pulp and paper companies that employed over 20,000 employees. This paper will address some of the ethical issues that plagued Enron and eventually led to its fall.
Investors and the media once considered Enron to be the company of the future. The company had detailed code of ethics and powerful front men like Kenneth Lay, who is the son of a Baptist minister and whose own son was studying to enter the ministry (Flynt 1). Unfortunately the Enron board waived the company’s own ethic code requirements to allow the company’s Chief Financial Officer to serve as a general partner for the partnership that Enron was using as a conduit for much of its business. They also allowed discrepancies of millions of dollars. It was not until whistleblower Sherron S. Watkins stepped forward that the deceit began to unravel. Enron finally declared bankruptcy on December 2, 2001, leaving employees with out jobs or money.
The Enron scandal is one of the biggest scandals to take place in in American history. Enron was once one of the biggest companys in the world. It was the 6th largest energy company in the world. Due to Enron’s downfall investors of the company lost nearly 70 billion dollars. This was all due to many illegal activities done by Eron's employees. One of these employees was Andrew Fastow, the chief financial officer of the Enron corporation had a lot to do with the collapse of the Enron company.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The circumstance for the exposure to the fraud was Raju’s acquisition attempt. Both of the companies were owned by his two sons, with the companies valuing at US$1.3 billion and US$300 million. There was immediate resistance from investors towards this deal. Although Satyam broke off the deal, they couldn’t undue the damage.
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Enron was in trouble because of something that almost every major corporation during this time was guilty of. They inflated their profits. Things weren't looking good for them at the end of the 2001-year, so they made a common move and they restated their profits for the past four years. If this had worked to their like they could have gotten away with hiding millions of dollars in debt. That completely admitted that they had inflated their profits by hiding debt in confusing partner agreements. Enron could not deal with their debt so they did the only thing that was left to do, they filed for chapter 11 bankruptcy. This went down as one of the largest companies to file for bankruptcy in the history of the United States. In just three months their share price dropped from $95 to below $1.
Enron Corporation was based in Houston, Texas and participated in the wholesale exchange of American energy and commodities (ex. electricity and natural gas). Enron found itself in the middle of a very public accounting fraud scandal in the early 2000s. The corruption of Enron’s CFO and top executives bring to question their ethics and ethical culture of the company. Additionally, examining Enron ethics, their organization culture, will help to determine how their criminal acts could have been prevented.
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,