Enron and Madoff: Behavior and Outcomes

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Enron

Actions of Arthur Andersen’s employees: supposed and actual

In 2001, Enron that at the time was recognized as the seventh-largest company in the USA declared its bankruptcy. Its auditor, Arthur Andersen (or the AA) was proved to play a key role in the incident. The AA helped Enron to hide its financial losses. According to GAAP, the AA and Enron were to provide fair reports and transparent disclosure of their numbers. Instead, they deliberately misinterpreted the company’s value and revenue misleading the investors.

The main drivers of Arthur Andersen’s behavior

Enron and Arthur Andersen had been partners since 1985, and therefore, the employees of these parties were granted the same privileges and had to marks differences. The employees of both companies formed close relations, some of which resulted in marriages. Also, the employees were able to move within the hierarchies of both companies regardless of their initial workplace. For instance, Richard Causey moved from the AA and became chief accounting officer at Enron. The tight connections between the two companies and personal interests drove the errors based on the human factor.

The consequences of Arthur Andersen’s behavior for Enron and their investors

The fraud committed by Arthur Andersen resulted in multiple lawsuits due to a massive loss of the investor’s capital. Enron’s problems have started years before the bankruptcy was declared, but with the help of Arthur Andersen, they were masked sucking more money out of the investors. Overall, the investors of Enron lost hundreds of millions of dollars.

Madoff

Actions of SEC officials: supposed and actual

Madoff Securities is currently characterized as one of the largest Ponzi schemes in history. The US Securities and Exchange Commission (SEC) whose duty was to control Madoff’s transactions and block their activities in case of a violation received several reports and warnings about the fraud through the years. The SEC conducted five investigations of Madoff’s operations during which they were to check the clearing account of the firm and discover that no trading was done. Instead, they ignored this account and failed to reveal the fraud.

The main drivers of the SEC behavior

The investigation of the SEC’s errors showed that its employees were not bribed. They were unable to deliver a detailed and thorough investigation due to several factors such as the good reputation of Bernie Madoff, the complexity of his trading scheme (involving the hidden accounts and the adoption of foreign companies), and the overall lack of skills and insufficient training of the investigators. Also, facing difficulties while examining Madoff’s operations, the SEC employees were reluctant to ask for help from a third party who would be more professional.

The consequences of the SEC’s behavior for Madoff’s investors

Due to the SEC’s unprofessionalism, over four and a half thousand investors located all around the globe were affected by the fraud. Among these investors, there were separate individuals (such as Hollywood players), investment banks (UniCredit, Banco Santander, and HSBC), hedge and charity funds (Mortimer, JEHT Foundation, Man Group PLC), organizations (the International Olympic Committee) and universities (such as Carnegie Mellon and New York Universities).

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