Category: Enron

Enron Administration Personal Qualities That Led To The Company Bankruptcy

ABSTRACT

The administration and top executives at Enron were caught involved in unethical activities such as abusing their power by manipulating data, getting involved in inconsistent treatment with internal and external voters, proving unable to provide proper oversight over responsibilities and putting their own interests before that of their stakeholders. As a result, educators of leadership qualities must exercise:

• Share some of the blame for what happened at Enron,
• Integrate ethics into the rest of the curriculum,
• Highlight the responsibilities of both leaders and followers,
• Address both individual and contextual variables that encourage corruption,
• Recognize the importance of trust and credibility in the leader-follower relationship,
• Hold followers as well as leaders accountable for ethical misdeeds.

INTRODUCTION

Enron’s chapter 11 documenting in November 2001 denoted the start of an exceptional rush of corporate embarrassments. Authorities at Tyco, WorldCom, ImClone, Global Crossing, Adelphia, AOL Time Warner, Quest, and Charter. Correspondences joined Enron officials as focuses of SEC tests, congressional hearings, investor claims, and criminal prosecutions. Enron’s inconveniences, which had been the all-important focal point, were before long pushed to the foundation by consequent disclosures of corporate bad behavior.

Later examples of corporate debasement ought not lessen the significance of Enron as a contextual analysis in good disappointment. Enron crumbled in vast part on account of the exploitative practices of its administrators. Looking at the moral inadequacies of Enron’s pioneers, and in addition the variables that added to their mischievous activities, can give critical bits of knowledge into how to address the theme of morals in a business situation.

The organization’s crumple was at last activated by fizzled interests in abroad endeavors and the unwinding of a progression of questionable constrained associations called Special Purpose Entities (SPEs). These SPEs , supported by Enron stock and wrongfully kept running by organization insiders, were intended to keep obligation off the association’s asset reports and helped prop up its offer cost. In any case, when the association’s stock value started to slide, the organization was not able back its assurances. Notwithstanding charges identified with obscure associations Enron stands blamed for:

• borrowing from auxiliaries with no expectation to reimburse the advances (Wilke, 2002, August 5).
• avoiding government assesses despite the fact that a portion of its auxiliaries, similar to Portland General Electric, gathered expense installments from clients (Manning and Hill, 2002).
• contributing to the California vitality emergency by controlling power costs (Fusaro and Miller, 2002; Manning, 2002).
• paying off outside authorities to anchor contracts in India, Ghana and different nations (Wilke, 2002, August 7).
• promptly guaranteeing benefits for long haul extends that would in the end lose cash (Hill,Chaffin, and Fidler, 2002).
• exchanging account adjusts preceding quarterly reports to help obvious income (Cruver, 2002).
• controlling government vitality strategy (Duffy, 2002; Duffy and Dickerson, 2002).
• plotting with investigators to extend a bogus picture of the association’s monetary wellbeing (Fox, 2003).

A significant part of the fault for what occurred at Enron (nicknamed the ‘Screwy E’ for its tilted Capital E logo) can be laid at the feet of organization author Kenneth Lay, his successor Jeffrey Skilling, CFO Andrew Fastow, and Fastow’s best collaborator Michael Kopper. Each neglected to address critical moral difficulties or situations of administration (Johnson, 2001).

Abuse of Power

Lay and Skilling both exercised their power brutally. So many occupants were taken away from the position when they had problem with Lay or seemed as a threat to his power. Hence the vice-chairman position was called the “ejector seat”. In addition to the above, Skilling removed corporate competitors and tyrannized his subordinate officers. Enron also faced a problem concerning relinquishment of power. Occasionally, managers failed to understand their employees – what the employees were working on or how the business was functioning. Moreover, the board members did not have an effective oversight and seldom questioned the management decisions. According to Cruver, the writer of the book Anatomy of greed: The unshredded truth from an Enron, “Many were selected by CEO Kenneth Lay and did business with the firm or represented non-profits that received large contributions from Enron.”

Excess Privilege

The top management at Enron had some excessive privilege. Lay is a son of a Baptist preacher and lived a humble life later changed into money-grabber and started to showing off, trying to make a really big impression. As stated by Cruver, once Lay told his friend,” I don’t want to be rich, I want to be world-class rich.” One time he even joked about giving his wife a $2 million to decorate their new home and his wife, Linda exceeded that budget. As per the writings of Eisenberg, the writer of the book Ignorant & Poor – “The couple borrowed $75 million from the firm that they repaid in stock. Linda Lay fanned the flames of resentment among employees when she broke into tears on the Today Show to claim that the family was broke. This was despite the fact that the Lays owned over 20 properties worth over $30 million.” Through Enron’s period of success, workers also received some of the perks that came with the job. Workers availed benefits such as lavish Christmas parties, aerobic classes, free taxi rides, refreshments, and the services of a concierge (Enron excess, 2002; How Enron let down its employees, 2002)

Fraud

Executives of Enron influenced information unscrupulously in order to preserve their interests and to mislead the public. However, the degree of the deceit is yet to be discovered. The executives and board members together claimed that they had no knowledge of the organization’s off-the-books partnerships developed and managed by Fastow and Kopper (Eisenberg, 2002). Lay and Skilling both were given fair warnings that the organizations bookkeeping approaches were under suspicion. Investigation was carried out to figure out the reasons for Enrons collapse. It was carried out by the Senate Permanent Subcommittee on Investigations and they came to a conclusion that the board members were actually aware of the unlawful activities which were taking place at Eron. Moreover, as stated by Cruver, “Board members specifically waived the conflict of interest clause in the company’s code of ethics that would have prevented the formation of the most troublesome special partnerships.” The employees were promptly moving forward in accordance with the organizations top executives. They stated fictitious profits, concealed expenses, misguided energy regulators etc.

Inconsistent Treatment of Internal and External Stakeholders

The relationship of Enron with its employees and external stakeholders were completely inconsistent. Employees were coerced to invest much of their savings in Enron shares through the retirement plan. Moreover, they were not allowed to sell their shares when Enron shares were in free fall. On the other hand top officials were able to sell their stocks as they desired. According to Barreveld, writer of the book The Enron Collapse: Creative Accounting, Wrong Economics or Criminal Acts?, “Five-hundred officials received “retention bonuses” totaling $55 million at the same time laid off workers received only a fraction of the severance pay they had been promised.”

Friends of Enron were treated as royals. To illustrate, Enron made political donations in order to receive favourable treatment from government agencies. Executives made considerable donations to members of the House and Senate of both Democratic and Republican members and the highest contributor for the Bush campaign was Kenneth Lay. Consequently, the company got the opportunity to nominate favourable candidates for the Security Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC). Federal officials along with the foreign government got involved to stimulate Enron projects, and representatives of Enron played a vital role in positioning federal energy policy that facilitated the removal of regulations of additional energy markets. However, if anyone was considered to be against Enrons interests could anticipate reprisal. At one time, to force Merrill Lynch to fire an analyst who sold out Enrons’ stock, Lay pulled out an underwriting deal. As mentioned by Cruver, Skilling called one analyst an “asshole” when he questioned the company’s performance during a conference call.

Loyalties Misplaced

Enron authorities put their faithfulness to themselves over those of every other person with a stake in the organization’s destiny — investors, colleagues, rate payers, nearby networks, outside governments, etc. They likewise double-crossed the trust of the individuals who worked for them. Workers obviously had faith in the organization and in Lay’s hopeful declarations. In August 2001, for instance, he announced ‘I have never rested easy thinking about the prospects for the organization’ (Cruver, 2003, p. 91). In late September, only weeks previously the organization crumbled, he urged workers to ‘talk up the stock’ in light of the fact that ‘the organization is on a very basic level sound’ (Fox, 2003, p. 252). These admonishments came even as he was dumping his very own offers. The feeling of selling out experienced by Enron workers just added to the torment of losing their positions and retirement funds.

Irresponsible Behaviour

Officials and Executives at Enron failed awfully to take the necessary actions and conducted unethical activities by misusing power and not having proper oversight of their organization. Despite the warnings from the CEO of the company, employees at Enron received opportunities to window-frame the company accounts due to lacking of oversight from the management leading to board members being unable to understand company numbers and projects. No one stepped forward to accept the blame after the company collapsed resulting to Lay and Fastow claiming Fifth Amendment privileges. This was done to call this incident as an example of self-incrimination in front of the congressional committees claiming that he had no knowledge of the illegal activities being conducted within Enron. It was visible that the main motives that fueled such unethical activities inside the company’s management were due to greed.

By window-dressing the accounts, employees of Enron created artificially created optimistic reports showing optimistic earnings and hid losses. This tactic was used to keep the stock prices of Enron artificially high which was used as a justification for generous salaries and earnings and allowed the insiders to earn profits from their own stock options. Managers throughout the organization at times received bonuses larger than their salaries by showing artificially met targets. All these benefits compelled the employees of the organization to overlook the shortcomings that the business could face regarding ethics.

Hubris was a major flaw at the Crooked E, that reflected a fact in the company banner that stated: “FROM THE WORLD’S LEADING ENERGY COMPANY — TO THE WORLD’S LEADING COMPANY” (Cruver, 2002, p. 3). Lacking of the social and communication skills of Ken Lay, gives a good example of the haughty spirit of many Enron officials. During the California energy crisis he joked that the only difference between the Titanic and the state of California was that “when the Titanic went down, the lights were on” (Fusaro & Miller, 2002. p. 122).Even the so-called “heroes” of the Enron terribly failed to demonstrate reasons to delay or to prevent Enron’s demise. Complains were received from the company’s treasurer about the financial forgery and window-dressing but retired without going public with these issues.

Vice-president of corporate development Sherry Watkins showed concerns regarding the firm’s questionable financial practices in a letter and in a meeting with Lay (A Hero, 2002). Later Sherry Watkins discussed the same issues with an audit partner at Anderson. Individual greed and pride was magnified by the corporate culture of the company encouraging creativity and risk taking leading to the company’s demise. Employees invented new commodity products earning Enron as a top ranking six straight years on Fortune magazine’s list of most innovative companies (Fusaro & Miller, 2002). The cost of freedom was the pressure to produce that created a climate of terror. Lack of controls, combined with an intense, competitive, results-driven culture made ignoring the company’s code of ethics much easier which was prohibited and conflicted interest such as to seek results at any cost. Anderson’s auditors signed off on its questionable financial transactions fearing of loss of lucrative auditing and consulting contracts with Enron.

Publicly traded firms in the United States are judged by their quarterly earnings reports which greatly victimized Enron. Obsession with short-term results and expectations encouraged Enron executives to commit such unethical activities. Every stock index soared and billions got wasted on Internet start-ups that never had a chance to be profitable.

Enron: Ethics And Corporate Social Responsibility

In 1985, two large gas pipeline companies joined forces and created what we know as the Enron Corporation. The Enron Corporation provided commodities, utilities, and services in natural gas through its vast pipelines. Enron produced, carried and dispersed electricity through the northwestern parts of the U.S, among many other power associated ventures worldwide (Ferrel, Fraedrich, & Ferrel, 2011).

During the 1990s, Ken Lay the Chair, Jeffrey Skilling the CEO and Andrew Fastow the CFO converted Enron into a $150 billion energy company and became a strong Wall Street competitor in the investment market, trading power deals (Ferrel, Fraedrich, & Ferrel, 2011). In two years, from 1998 to 2000, Enron evolved into holding the position of number seven on the list of Fortune 500’s largest companies, with more than $100 billion in profits. Howbeit, that it was discovered by a bankruptcy examiner that Enron’s reported net earnings of $979 million in 2000 were actually $42 million and that Enron’s declared $3 billion cash flow was veritably in the red for $154 million (Ferrel, Fraedrich, & Ferrel, 2011).

As the Enron Company grew into a business powerhouse, its corporate culture grew a huge pretentious ego. Displaying its cultural sentiment in the lobby of corporate headquarters with an enormous banner that declared, “The World’s Leading Company” and how its executives contently affirmed that Enron was so powerful that competition was non-existent for them (Ferrel, Fraedrich, & Ferrel, 2011). There was a mind-boggling sense of pride and the assumption that the people of Enron could deal with growing liability without any uncertainty (Ferrel, Fraedrich, & Ferrel, 2011). Enron’s corporate culture centered on how its executives could monetarily benefit and not on how to build the company, ensure the welfare of its employees or stockholders.

Enron’s corporate culture aided in what is called “Flouting” (Ferrel, Fraedrich, & Ferrel, 2011). Flouting is defined as an open disregard for rules or to treat with contemptuous disregard (Flout, n.d).

Jeffrey Skilling, Enron’s CEO devised a policy whereas the employees were evaluated every six months, forcing those who scored in the low 20 percent out of the company. This created a hostile work environment where everyone within and outside of the company was in full competition with one another (Ferrel, Fraedrich, & Ferrel, 2011). It was stated that Enron’s Chair, Ken Lay said “he felt that one of the great successes at Enron was the creation of a corporate culture in which people could reach their full potential. He wanted it to be highly moral and ethical culture and that he tried to ensure that people did honor the values of respect, integrity, and excellence” (Ferrel, Fraedrich, & Ferrel, 2011). This type of work environment did the exact opposite. It fosters lies and deceit, manifesting a dog eat dog mentality within their employees. Employees that found a way to generate business for Enron were rewarded, whereas those employees that fell short were punished, finding themselves forced to bend the rules to the point where ethical conduct was omitted on the quest to the next big victory (Enron, Ethics And Today’s Corporate Values, 2013).

In 2001 Enron filed bankruptcy after a chain of events revealed that Enron had been utilizing SPE’s (special purpose entities) to conceal their losses. Enron’s chief financial officer, Andrew Fastow, in a meeting told Enron’s lawyers that the SPE’s were initiated so that the equity and liabilities can be reallocated off the balance sheet. Also, to boost the cash flow by displaying that the funds were running in the books when it sold assets. By using SPE’s to reallocate equity and liabilities, painted a different picture as it altered the actual financial status of the company (Ferrel, Fraedrich, & Ferrel, 2011).

Enron used the SPE’s to funnel their funds and stocks while maintaining complete control. When obligations were not met by the partnerships, Enron used their stock to cover the debts. This was viable if Enron stock prices stayed high. Once Enron’s stock prices dropped, cash was needed to meet the deficiency (Ferrel, Fraedrich, & Ferrel, 2011). With continued cover-ups, lack of transparency and disclosures, Enron was on a financial decline directly to bankruptcy.

Appointed to work closely with Enron’s CFO Andrew Fastow in 2001, and now given the job of identifying saleable assets, Vice President of Enron, Sherron Watkins was distressed to find Enron’s obscure, unrecorded book arrangements, only supported by Enron’s shrinking stock (Ferrel, Fraedrich, & Ferrel, 2011). Unable to obtain a clear explanation, she confronted Jeffrey Skilling, Enron CEO. Shortly after, Jeffrey Skilling abruptly resigned. After Jeffrey Skilling’s resignation, Chair Ken Lay returned to the position of CEO. Ken Lay was given a seven-page letter from Sherron Watkins highlighting her concerns and explained that Enron will collapse under apparent scandalous accounting practices if efforts were not made to rectify things (Ferrel, Fraedrich, & Ferrel, 2011). Ken Lay appointed Enron’s law firm, Vinson & Elkins to investigate against the better judgment of Sharron Watkin’s (Ferrel, Fraedrich, & Ferrel, 2011). Shortly thereafter, Ken Lay began to sell his stock options averaging a total of $1.5 million. At the same time, Ken Lay was not honest with Enron’s employees and continued to falsely inform them that the company was doing well. Ken Lay encouraged his employees to continue to invest in the company (Ferrel, Fraedrich, & Ferrel, 2011).

Enron, labeled as the “World’s Leading Company”, employing over 20,000 people fell under the demise of greed filled leadership, unethical corporate culture, unscrupulous business practices, deceit, and lies.

It was stated that, Enron collapsed because their executive pursued “profits, power, greed and influence” at all costs: by engaging in and rewarding lying, cheating, and other forms of rule-breaking; by punishing whistle-blowers and ridiculing under-performers who did not embrace rule-breaking: and by “shifting the blame and pointing fingers’ instead of taking responsibility (Munro & Thanem, 2018).

This scandal saw many members of this organization faced with federal criminal charges associated to accounting and corporate fraud, corruption, insider trading, and conspiracy, just to name a few (Edwards, Hawkins, & Schedlitzki, 2019). Thousands of employees were out of work, many losing their retirement portfolios, and billions of dollars were counted as investor losses (Ferrel, Fraedrich, & Ferrel, 2011). Enron had become a major example of business ethics failure, causing changes in legislation that places heavier restrictions on companies in hope to reduce the chances of such enormous ethical business ills of reoccurring in such a magnitude (Edwards, Hawkins, & Schedlitzki, 2019).

When reviewing the history of Enron, it is clear to see that many factors contributed to the bankruptcy and demise of this progressive company. Enron’s corporate culture was a great contributor to its bankruptcy because it promoted a culture of deceit and fraud on every level. The executives of Enron encouraged their employees to believe that practically anything could be made a financial product with the help of statistical techniques and traded for profit (Ferrel, Fraedrich, & Ferrel, 2011). Leadership incited its employees to produce by any means necessary resulting in decisions being made that may have been unethical, placing their employees in the position to cover up shortcomings and falsify vital information in order to be seen as productive in order to maintain their employment with Enron (Edwards, Hawkins, & Schedlitzki, 2019).

As a result, Enron’s financial information was inflated, and did not represent the company’s true financial status, the company’s stockholders were not taken into consideration and decisions made were based on how Enron’s executives could personally benefit monetary, other than protecting the company, its employees and stockholders (Ferrel, Fraedrich, & Ferrel, 2011).

Corporate culture was not the only culprit in Enron’s demise. Major responsibility lays also on Enron’s bankers, auditors, and attorneys. They all were part of manipulating financial information, making hidden investments and transactions, and overlooked fraudulent activities to have Enron’s financials appeal to investors (Munro & Thanem, 2018).

The role of a CFO is to ensure that financial records of a company are in order, to provide reliable data to the company board, management and stockholders to assist with critical decision making, to oversee and address any compliance issues, prevent fraud and to look out for the financial wellbeing of the company, its employees and stockholders (Biery, 2015). Enron’s CFO, Andrew Fastow failed in all CFO responsibilities, thus playing a huge part in creating dilemmas that led to Enron’s financial issues. As the gatekeeper of Enron’s financial health, Andrew Fastow ensured that he and the Enron executives personally profited by his taking part the fraudulent activities to inflate Enron’s financial standing. Andrew Fastow federally charges with fraud, money laundering, conspiracy and obstruction of justice for his part in Enron’s demise (Ferrel, Fraedrich, & Ferrel, 2011).

The Enron Scandal represents one of the largest business debacles in the United States, riddled with acts of greed, deceit and a host of fraudulent activities, which has changed the course of business today, proving that leadership that does not foster an ethical corporate culture, transparency and integrity can led an organization down the road of ruin.

The managing partner at Target Rock Advisors, Richard Rudden stated, “Ethics and integrity are at the core of viable, continued success”. The basis building a just and ethical corporate culture is to create fair and lasting business principles. Companies will be measured by the traditions they build and how they manage their relationships with shareholders, communities, and employees (Silverstein, 2013).

Dan Amos is the CEO, chairman and leader of the Fortune 500 Company, the America Family Life Assurance Company (AFLAC) and is known to have set a guideline for corporate culture and ethical business practices (Grillo, 2010). Through his character, integrity and strong moral principles, Dan Amos has lead AFLAC to being recognized as Fortune’s Most Admired Companies, 100 Best Companies to Work For List and the World’s Most Ethical Companies (Bowman, 2017). Dan Amos’s philosophy is, “Treat others the way they would like to be treated, not the way you want to be treated, it’s all about them. Dan Amos goes on to say, “Failure is a stepping stone to success, if you are not failing you are not taking enough risk therefore, don’t limit the failures”, “Leading with character and integrity encourages company loyalty that breeds dedication, ensuring reputation and success. “Walk the talk and don’t be afraid to stand alone when it’s right. Take the right moral ground” (Bowman, 2017). Dan Amos believes that if you give your employees all that is needed to be successful, they will in return give their all to help the success for the business (Grillo, 2010). Dan Amos encouraged his employees to take risks, without the fear of making mistakes. If mistakes are not being made, you are not taking enough chances. Decisions should be made to push the envelope a bit. If everything you do is right, then maybe you are too comfortable (Bowman, 2017).

According to Dan Amos, “Many times people are afraid to make mistakes and afraid they will be penalized. Here at AFLEC, we do not have that attitude. Job security is what an employee need to succeed”. (Grillo, 2010). In the 20 years that Dan Amos has been CEO of AFLAC, there has never been job cuts (Grillo, 2010).

Dan Amos has demonstrated many characteristics of an ethical leader by maintaining his high moral standards and integrity, by creating an ethical corporate culture whereas his employees can strive in a work environment that promotes fairness, honesty, encourages resourcefulness, and values his employees. Above all, Dan Amos leads by example.

Collapse Factors And After Effects Of Enron

Enron was the seventh largest corporation of America. The company gave a vision of a steady company having very good revenue, but in real that was not the situation the large part of the company’s profit was just on the paper. All of this could be possible just because of planned accounting and traders reforms. Their debts and there hiding nature put the company in big trouble which in turn lead Enron in bankruptcy by late 2001.

There were many factors which resulted in the downfall and eventually the collapse of the Enron few of them are stated below:- Mark to Market Accounting – this type of accounting had an adverse effect for the company. The forceful accounting figures of the company had corrupted the Enron in this limit that it didn’t had an ability to assume about the future profits. Cash is an important asset to run a company and for Enron who were having the revenues just on paper was aware that they have been struck by cash crises.

Enron culture

The Company had a policy that says if you are a good money maker then you will be awarded by bundles of cash as a bonus. This policy got competition among the employees they just wanted to finish the deals somehow and wanted the bonus. The performance review committee was the main reason for the employee’s aggressive nature.

Enron was surrounded by the people who thought they are intelligent than one another having this attitude they thought they will always be escaped by the CRIME.

• JEFFREY SKILLING was responsible for the mark to market accounting principle in Enron. They launched an internet based service namely EnronOnline which helps the energy contractors to trade directly with Enron. At the end they were not able to cover their capital cost which was one of the reasons of their bankruptcy.
• ANDEW FASTOW, the Chief Financial Officer of Enron was mastermind of some special entities like LJM1, LJM2. He was the one who helped them in hiding their debts and losses.
• REBECCA MARK, Head of the failed business of Enron International and Azurix. It was mentioned by the one of the executive that whenever she travelled for business purpose it always cost $60000.
• KENETTH LAY, is the CEO and Chairman of Enron he and his family members misused the company’s asset. It is said that they used the company’s jet for their personal use.

AUDIT ISSUES

Commercialisation and independence – an effective auditor will be independent from the management and financial representations of all users of financial statements. Anderson earned less than 30% of his salary from auditing and the rest he covered by charging his consulting fees. Anderson was playing the role of external auditor in spite of being internal auditor. It was seen that whenever the audit team saw issues relating to accounting they choose to ignore it and applied some accounting schemes to give a cover to their client.

Internal control weaknesses- auditors do have an access to the internal controls of the company to depend on the clients accounting system. The CFO was free from the dispute of interest policy and internal controls above SPE’s were fraud which was there as an existence but not as in substance. The foreign assets of the Enron were not secure in their hands. The daily handling of the cash was done in a careless way, the matured debt was not planned, the debt which was not in the balance sheet was always ignored but they did existed there. Overall it can be said that the internal control were insufficient, the contingent liability was also not shown and all these facts were ignored by Anderson.

Evaluation of Accounting – under this section the auditors give a note about material misrepresentation. There were many errors that came into light about Enron but it was all rejected by the Anderson. There were many other errors that were there and could have rectified by the further investigations.

Related party transactions- the CFO of Enron in substance behaved as a buyer and seller in the same transaction which gave challenging task to the auditors.

Internal controls at Anderson – we need to gain the confidence of the investors by the financial reporting which is only followed when the internal controls of the company and the audit firm is strong. But Anderson had very poor internal controlling skills. Enron was Andersons second biggest client still the accounting advice passed by Anderson was not followed by the audit team, no effort was shown for the assurance of advice was followed.

AFTER EFFECTS OF ENRON

The bankruptcy of Enron was most affected by the 21000 employees of the company. Many people lost their steady income, there were many who were looking forward to their pension and also lost their hopes of secured future.

Sarbanes Oxley Act was introduced after the Enron scandal; it stated that the set of standards were regulated by the public company boards, managements and the accounting firms. Most important introduced reforms were that the company should have independent directors and the audit committee should have financially educated member and an expert.

On 14th January 2004 ANDY FASTOW and wife lea was guilty and was sentenced for 10 years. Lay was guilty by the six charges on him and was prison for maximum of 45 years. Exactly after 41 days Lay died due to heart attack. On October 23, 2006 Skilling was sentenced by 24 years and 4 months prison.

CONCLUSION

The bankruptcy of Enron was due to various factors, some of them are mark to market method, the competitive working environment, audit risks etc. The main players behind everything were Lay, Skilling, Fastow and Mark. Enron scandal was about the people who made it possible. It is about the people whose decision not only affected them but also did effect the present and future of 22000 other employees and whole of the America.

The History And Activity Of Enron Company

The Enron Corporation of Houston Texas was the result of two Houston companies merging together in 1985. Up until that point, Enron had been struggling financially and continued to struggle after the merge until ‘the deregulation of the electrical power markets took effect, and the company redefined its business from “energy delivery” to “energy broker”’ (Ronald, 2). In doing this Enron was able to begin making trades and contracts while profiting off of them. Workers were held by high expectations Chief Executive Officer Jeffry Skilling, which in turn gave the company a great work output. These employees worked so hard that they began to push the limits of ethical conduct so much so that it went unnoticed as they were chasing their success. This overlooked ethical conduct is what helped Enron succeed in becoming the biggest and fastest growing corporation America had ever seen to later filing for bankruptcy in just a single month. This bankruptcy, however, would not happen for many years. With the company’s growing success Enron was able to conceal any red flags investors might have. They created partnerships as an easy way to raise money, kept their debt hidden from analysts to ensure that the company was still thriving, and encouraged workers to invest in the company’s stocks. One of Enron’s biggest crimes was committing accounting fraud with the help of Arthur Andersen. He did this by having his ‘employees destroy important documentation regarding the Enron audit’ (Nelson). With the crimes of the Enron Company and Arthur Andersen exposed, the Sarbanes-Oxley Act of 2002 was put into place. This act was meant to monitor and regulate corporation audits so that theft and fraud could be avoided. To understand more about this act, it is first important to understand more about the Enron scandal and the ethics behind it.

As previously mentioned one of the ways Enron deceived the public was by forming partnerships. These partnerships resulted in writing down the profits that were anticipated to be made before a deal was made- if even made at all. The mental mindset that Skilling’s enforced on his workers began blurring the line of what needed to be done to make the company be the best and what was ethical. The other way Enron kept its reputation was by concealing the debt that they were in by keeping it off its balance sheet. This could also be seen as an ethical issue, however the company fought it by saying that this was merely a timing issue. ‘Moving debt was as easy as pre-dating a check, and would harm no one, and therefore was not an ethical issue’ (Ronald, 3). The most elusive move made by Enron, however, was keeping partnerships at a distance. They did this by making sure their partnerships were not viewed as Enron subsidiaries. Essentially these smaller companies were not ‘owned’ by Enron, and thus the accounting methods did not have to be as strict. In order to do this though, Enron needed help. This is where an outside accountant by the name Arthur Andersen came in.

Arthur Andersen played a crucial role in the Enron audit failure. His role as an auditor was to review Enron’s finances and in doing so he had to ensure that the company was maintaining its social responsibility. Social responsibility in this case is defined as ‘the continuing commitment by business to behave ethically and contribute to economic development…’ (Linthicum). However it has already been brought up that Enron had been deceiving investors through partnerships and debt avoidance. It was Andersen’s job to make sure these red flags stayed concealed through the financial papers of Enron. The corporation valued its reputation above anything else, and this is seen when Skilling pressured his workers into performing despite unethical values being present. Skilling, however, decided to leave the corporation in August of 2001 and sold all of the stocks he had bought for a large sum of money. It is when Skilling left that the company began to crack. ‘Only two months later, Enron restated earnings, stock prices dropped, and the company froze shares in an attempt to help stabilize the company’ (Ronald, 4). With workers slowly becoming aware of the fraud going on within the company and word spreading about this the public starting to question Enron and its ethics. While addressing the possible scandals and trying to calm the situation, Andersen was behind the scenes shredding any papers revolved around Enron’s finances. It is later on that Andersen admits he and his firm shredded the papers, which in turn ruined both his and Enron’s reputation. ‘Following AA’s admission of document shredding and the release of the Powers Report suggest that the market questioned AA’s independence, and thus questioned the credibility of AA’s clients financial statements’ (Linthicum).

Following this series of events on the second of December, 2001, the Enron Corporation ‘filed the biggest bankruptcy petition in the history of the United States” (Gledhill). Arthur Anderson was criminally charged ‘of obstruction of justice for “knowingly, intentionally, and corruptly” inducing employees to shred documents relating to Enron’ (Gledhill).

Ethical Considerations Of Enron Scandal

INTRODUCTION

This report discuses about the Enron scandal of Enron corporation which is an American energy company based in Houston, Texas. It was basically publicized in October 2001 which resulted in bankruptcy of the company and the defacto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. Also along with being the largest bankruptcy reorganization in American history it was also cited as the biggest audit failure. This report also discusses the recognition and respond in a mature reflective manner to the ethical conflict and turbulence in their professional career and the workplaces and to understand the philosophical theories and professional body.

Enron was formed in 1985 by Keneth Lay after merging the Houston natural gas and inter north. Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high of US $90.75 per share in the mid 2000. Then as a result the US Securities and Exchange Commission started investigation, and a rival Houston competitor Dynegy dealt to buy the company at a very low price. The deal was a failed and on December 2, 2001, Enron filed for a bankruptcy under the chapter 11 in US bankruptcy code. The assets of $63.4 billion made Enron the largest corporate bankruptcy in US history (Sale, 2004).

Rise of Enron: Enron’s stock increased from the start of the 1990 s until the year end 1998 by 311%, only higher than the average rate of growth in the standard and poor 500 index. Then the stock was increased by 56% in 1999 and more 87% in 2000. By the December 31, 2000, Enron’s stock was at a price of $83.13 and its market capital also exceeded up to $60 billion, 70 times the earnings and 6 times the book value. In addition, Enron was rated as the most innovative largest company in America.

Causes of downfall Enron’s complex financial statements were confusing to shareholders and analysts. Also its complicated business model and unethical practices required that the company use accounting limitations to misrepresent earnings and to modify the balance sheet to indicate favorable performances. Moreover some business ventures proved to be disastrous. The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or the actions of lay. However in practices being ethically is not just about giving large number of charity’s money but recognizing and acting on potential ethical issues before they become legal problems are more important aspects to taking care of them. Enron collapsed and it was due to the unethical practices such as equivocation of taxes and fraud accounts practices. The Enron scandal fraud was one of the most significant collapse in the US because the failures of many savings and loan banks during the 1980s. This scandal facilitates the requirements for a close look at an ethical quality of the culture of business and of the business corporations in the united states. Various organization are needed to implement the ethics and integrity their corporates cultures and also into their definition of success. The unethical and illegal business practices at Enron resulted to the formulation of Serbanes Oxley act of 2002. This report will describe the illegal and unethical practices its impact on the stakeholders and lessons from the Enron case.

When the business ethics is replaced by the desire to get whatever ahead it takes, the good of the company suffers later on. Enron lastly brought down due to the constant allegations surrounding it. The practices of few people who are deprived of virtual ethics destroyed the name of Enron. Despite of behaving in unethical ways, the top executives who are engaged in the fraud should have the highest good sense to realize doing right thing which almost always bring about a drastic change in the long run. The right act is actually the one doing the most good. Also, in addition those with good character care equally for themselves and for others. But this behavior was nonexistent for the top level of executives. They definitely care much more about themselves than they cared about any other employee of Enron, or about Enron as a whole. This also evaluates that accounting a fraud is very unethical behavior and it was being engaged in by many top level of executives lacking the ethical behavior. They should have the moral character to run the business in an ethically proper way that was self-serving. Then as a result both the actions and consequences of the fraud have important implications for the failure of Enron. (Gledhill, Schneider, Schneider, Aiyer, and Shore, 2003).

The main approaches for development and in acquiring relevant system for organization can be done by the management control this report focuses on the cultural environment surrounding Enron’s management control systems, and the influence of the powerful risk-taking culture on Enron’s controls. Robert Simons working on management control system, highlights on the needs to incorporate culture in understanding management control systems. A leading organizational psychologist Edgar Schein researched which suggests a strong link between executive leadership actions and the nature of an organization’s culture. Enron provides a copy of how insufficient attention to changes in leadership and culture can determine. While many companies might claim to have sophisticated management controls, the final effectiveness of such kind of controls is dependent completely on the organization’s culture and leadership.

THE ASSOCIATION OF ENRONS SCANDAL WITH ETHICAL CORPORATE GOVERNANCE AND THE SABANE OXLEY ACT -2002

After the prolonged periods of corporate scandals in the united states from 2000 to 2002 the Sarbanes Oxley act was enacted in July 2002 to restore investors’ confidence in the financial market and close loopholes that allowed public companies to defraud investors. This act had a profound effect on corporate governance in the US. The Sarbanes Oxley act needs the public companies to make their audit committees strong and to perform the internal controls tests, make directors and officers personally liable for the accuracy of financial statements and to strengthen disclosure. The Sarbanes Oxley act also establishes tight criminal penalties for securities fraud and changes how public accounting firms are operated. The Sarbanes Oxley act of 2002 was passed by congress in response to widespread corporate of fraud and failures. The act establishes new rules for corporations, such as setting new auditor standards to reduce conflicts of interest and to transfer responsibility for the complete and accurate handling of financial reports. For the frauds and misappropriation of corporate assets, this acts imposes cruel penalties for the rule breaker. To increase the transparency, this act enhances the disclosure requirements like disclosure of material off balance sheet arguments. Now what does the Sarbanes Oxley act do?

A direct effect of Sarbanes Oxley act on corporate governance is the strengthening of public company’s audit committees. The audit committee takes wide leverage in top management accounting decisions. The audit committee is a subset of board of directors consisting of non-management members who gained new responsibilities such as approving numerous audit and non-audit services and selection and looking out for external auditors and handling the complaints regarding the management’s accounting practices. (Li, 2010).

The Sarbanes Oxley act changes management’s duty for the financial reporting. This act basically needs the top of the managers personally certifies the accuracy of financial reports. If any one of these top managers makes a false certification purposely or knowingly, he or she can face a prison for 10 to 20 years. If the company is forced to make the accounting restatement due to management’s misconduct, top managers can be asked to give up their bonuses or the profits make from selling the company’s stock. Or a condition in which the director or the officer is convicted of a security law violation, he can be prohibited from serving in the same role at public company. The Sarbanes Oxley act possess harsher punishments for obstructing justice, security fraud, mail fraud, and the wire fraud. The maximum sentence termed for the securities fraud has increased to 25 years and the maximum prison time for the obstruction of justice is about 20 years. The act increase the maximum prison for the mail and wire fraud from 5 to 20 years. It also significantly increases fines for public companies committing the same offense. Lastly the Sarbanes Oxley act established the public company accounting the oversight board, which promotes the standards for the public accountants, limits their conflicts of interest and requires lead audit partner rotation every five years for the same public company. (Bhasin, 2013).

Revenue recognition: Enron and other energy suppliers gets the profits by giving services like wholesale trading and risk management in order to build and maintain electric power plants, natural gas, pipelines, storage and processing facilities. While accepting the risk of buying and selling the merchants are allowed to report the selling price as the revenues and the product costs as the cost of goods sold. In reverse the agent provides the customer a service but does not take the same risks as merchants for buying and selling. When these service providers are been classified as the agents might report the trading and brokerage fees as revenue. Enron used some special purposes entities limited partnerships or companies created to fulfill a temporary or particular purpose to manage the risks associated with specific assets. The company selected to disclose minimal details on its usage of special purpose entities. These companies were elected by the sponsor, but these are funded or managed by the independent investors. For the financial reporting purposes, a series of rules are made whether the special purpose entity is a separate entity from the sponsor.

CONCLUSION

At the end this scandal was concluded as it was a mixture of audit failure, accountant deceptions, the absence of operational audit and it was deprived of internal control insufficiencies. With the enforcement of Sarbanes Oxley act, the organization will be able to identify the internal weakness, develop new policies and formulation of new procedures and have a more complaint culture within the organization. Along with this, the requiring corporate governance more independent audits, as well as operational audits which would require testing the systems of internal control.it also draws attention to accounting and corporate fraud as its shareholders lost $74 billion in the four years leading up to its bankruptcy and its employees lost billions in their pension benefits.

REFERENCES

1. Bhasin, M.L., 2013. Corporate accounting scandal at Satyam: A case study of India’s enron. European Journal of Business and Social Sciences, 1(12), pp.25-47.
2. Cernușca, L., 2011. Ethics in accounting: the consequences of the Enron scandal. Agricultural Management/Lucrari Stiintifice Seria I, Management Agricol, 13(3).
3. Da Silveira, A.D.M., 2013. The Enron scandal a decade later: Lessons learned.
4. Gledhill, J., Schneider, J., Schneider, P., Aiyer, A. and Shore, C., 2003. The Enron scandal: global corporatism against society. Social Analysis, 47(3), pp.130-153.
5. Li, Y., 2010. The case analysis of the scandal of Enron. International Journal of business and management, 5(10), p.37.
6. Sale, H.A., 2004. Banks: The Forgotten Partners in Fraud. U. Cin. L. Rev., 73, p.139.

Enron Scandal: Fraud, Losses And Solutions

Company Profile

Enron Corporation was an American vitality, items, and Service Company situated in Huston, Texas. It was established in 1985 by Kenneth Lay as the aftereffect of a merger between Houston Natural Gas and Inter-North. Enron Corporation was one of the main providers of Natural Gas, communications, pulp and paper. Enron utilized around 20,000 staff with guaranteed incomes. The organization’s director and CEO is Jeffery skilling, previous President, and COO Andrew Fas-tow, previous CFO Rebecca Mark-Jusbasche , previous Vice Chairman , and CEO of Enron International Stephen F. Cooper , Interim CEO and CRO.

The Scandal and Fraud

Enron scandal was pop at the top of 2001, it had been reveal that it’s apprize condition was sustained primarily by institutionalized, systematic, and creatively planned accounting fraud, referred to as the ‘Enron scandal’. Enron has since become a preferred image of willful company fraud and corruption. The scandal includes Enron Corporation and its Auditor Arthur Andersen that was detecting in 2001. When a series of detections include irregular accounting step managed throughout the 1990, Enron was on the rim of bankruptcy by Nov. 2001.

The company had been exploitation accounting loopholes to cover billions of dollars of waste debt, whereas at the same time inflating the company’s earnings. The scandal resulted in stake-holders losing over billions of dollars as Enron’s share worth folded from around ninety dollars to below one dollar around a year. The company’s chief operating officer, Jeff Skillings, and former chief operating officer, Kenneth Lay, had kept billions of dollars of debt off the company’s balance sheet. Additionally, that they had pressured the company’s auditing firm, Arthur Andersen, to ignore the issue. The corporate went bankrupt in Dec. 2001.

Enron’s auditor firm, Arthur Andersen, was accused of applying reckless standards in its audits attributable to a conflict of interest over the numerous consulting fees generated by Enron. The external auditor was also engaged in this fraud, as a result of the neglected Enron audits, Enron’s nontransparent financial statements didn’t clearly depict its operations and finances with shareholders. Increase accounting: actual prices and actual revenues were received and recorded once commerce it. Mark-to-market accounting: financial gain was calculable because the gift price of future income, however prices were hard to be recorded.

The losses

Enron scandal, revealed in Oct 2001, eventually lead to the bankruptcy of the Enron Corporation. On Oct. sixteen, 2001 Lay announced losses of 618 billion dollars. On Nov. 2001 it admitted accounting errors, inflating income by 586 million dollars. It begins losing two billion during a week. It stock price dropped to sixty one cents. It had to payback 690 million dollars in two weeks. It had been delisted from New York Stock Exchange. In 2001, workers lost 1.2 billion dollars in retirement funds. Average severances pay 4500 dollars. Top executives were paid bonuses totaling 55 Million dollars and cashed 116 Million dollars in stock.

The manipulation

They established shell corporations by exploitation Special purpose entities system however managed by freelance equity capitalist and debt finance. Enron used SPE to manage risks related to specific assets and disclose smallest details of its SPE. By 2001, Enron had used many SPEs to cover its debt. As results of one violation, Enron’s balance sheet understated its liabilities, immoderate its equity and profits. A special purpose entity may is a legally separate business that absorbs risk for an organization. A special purpose entity may also be designed for the reverse state of affairs, wherever the assets it holds are secure although the connected corporation enters bankruptcy. This arrangement allows a organization to shift unrelated activities and risk away from its financial statements. Special purpose entities have several legitimate functions, however will be abused to create an organization look less risky and a lot of profitable than is absolutely the case.

Conclusion

Enron was a noteworthy and innovative company within the world; its success cannot be neglected. But there’s an interest question for Enron’s bankruptcy: Is there an organization will get success without ethics? To see from the facts, the solution is “no.” Whether, Enron and Anderson they finally acquire their fault on ethics. We see ethics drawback would bring a fatal strike to a company, in spite of however it absolutely was successful.

Solution

To avoid this scandal we should begin again and replace all accounting staff and hiring new accounting staff with high experience and if the financial situation is weak, it must bring a partner who will help the company financially and we should make a perfect balance sheet and income statement and annually should be finding good internal and external auditors to audit quart and also should be transfer all money through bank system at the end of every month reconcile the statement of the bank.

Major Players Of Enron Scandal

Enron corporation was a very successful American energy, commodities and services company. Founded in 1985 and Headquartered in Houston, Texas. It was a merger between Houston Natural Gas and InterNorth, which were both small regional companies. The company used to sell and trade in more than 30 different products, but when it first got started it mainly produced natural gas and electricity. But then Enron wanted to Introduce new ways of doing business by integrating the laws of supply and demand into the energy business. It had a large staff of 29,000 employees. Enron was also named “America’s Most Innovative Company” six years in a row in 2000. Enron had many key players, like the company’s founder Kenneth L. Lay, who also was the chairman and served as CEO. Jeffrey Skilling also had a big role in the company when he was elected as CEO in the beginning of 2001 instead of Kenneth L. Lay. But later that same year Jeffrey resigned after a lot of time on the payroll for what he called personal reasons, which then led to Kenneth L. Lay being re-elected to be once again the CEO of Enron. There also was Mark Frevert, who was the company’s vice Chairman, Jeffrey Mcmahon who was the chief financial officer. And Lawrence Greg Whalley, the president and chief operating officer. But suddenly everything went south when the famous Enron Scandal took place in 2001 which later led to the company’s bankruptcy.

The Enron scandal happened due to the company and its CEO at the time, Jeffrey Skilling, hiding the financial losses of Enron’s trading business. And also hiding billions of dollars in debt from failed projects. They did that by coming up with ways and plans to make the company look profitable more than it really was by setting up partnerships to bury the losses and generating imaginary revenues. Andrew Fastow, who was just promoted to chief financial officer back in 1998, came up with a tight plan to show as if the company was in good financial shape. Although, many of the company’s subsidiaries were actually losing. What Enron would do was they would fabricate a benefit, for example, a force plant, and quickly guarantee the anticipated benefit on its books, despite the fact that the organization had not made one dime from the advantage. In the event that the income from the force plant was not exactly the anticipated sum, rather than assuming the misfortune, the organization would then exchange the resource for an under the table enterprise where the misfortune would go unreported.

All the parties involved in the fraud had a scheme to use special purpose vehicles (SPVs) which are also known as special purpose entities (SPEs), and they used these to cover up it the enormous amount of debt and toxic assets from the investors and creditors. How this worked was that Enron transfers some of its rising stock to SPV in exchange for cash, then the SPV uses the stock to evade an asset listed on the balance sheet for Enron. Then, Enron would guarantee the SPVs value to reduce evident counterparty jeopardy. The main goal of these SPVs wasn’t to hide operating results as much as it was for hiding the accounting realities. In spite of the fact that their point was to conceal bookkeeping real factors, the SPVs were not unlawful. In any case, they were not quite the same as standard obligation securitization in a few huge and possibly tragic ways. One significant distinction was that the SPVs were promoted completely with Enron stock. This affected the ability of the SPVs to avoid fall of share prices in case of Enron’s share prices falling. Similarly, as hazardous as the second critical contrast: Enron’s inability to uncover irreconcilable situations. Enron uncovered the SPVs’ presence to the contributing open despite the fact that all things considered, not many individuals comprehended them it neglected to satisfactorily reveal the non-arm’s-length bargains between the organization and the SPVs. Enron accepted that their stock cost would keep on acknowledging—a conviction like that encapsulated by Long-Term Capital Management, a huge multifaceted investment, before its breakdown in 1998. In the long run, Enron’s stock declined. The estimations of the SPVs additionally fell, compelling Enron’s certifications to produce results.

Another major player in the Enron scandal was one of the biggest accounting firms in the world, Arthur Andersen and partner David B. Duncan, who managed Enron’s books. Arthur Andersen LLP was founded in 1913 by Arthur E. Andersen, and used to provide tax, accounting and auditing services, before it was defunct nearly 17 years ago for being involved in the Enron scandal. Because the scandal and the relationships between the companies was so complex, a lot of people are not familiar or sure about the details of Arthur Andersen’s involvement with Enron or its role in the scandal. Although Arthur Andersen was not associated directly in helping Enron in cooking its books and hiding the debts, the company was found to be tragically careless and negligent of its role of regulating, inspecting and auditing Enron’s financials. But in spite of Enron’s mediocre accounting practices, Arthur Andersen was approving corporate reports for quite a long time and offering its stamp of approval. That’s why by April 2001 numerous investigators began to suspect Enron’s profits and its transparency.

So, the auditing company didn’t have a huge role in the scandal, but it still was involved with the fraud where it was found guilty of obstruction of justice because it shredded multiple documents concerning its audits for Enron. The entire industry and even the world were stunned when the scandal became public because not only could a fortune 500 company pull off such an enormous fraud, but also one of the largest accounting firms looked the other way during these horrible crimes. That’s why when the truth was revealed, this shameful scandal made the news all around the world and people were shocked and talking about it everywhere. Around the time of the scandal, analysts started to reduce their rating for Enron’s stock, and the stock slipped to a 52-week low of $39.95. In October of 2001 Enron stated its first quarterly loss since the company’s founding, which led to it closing its ‘Raptor’ SPV so it would not need to allocate 58 million shares of stock, which will lead to their income decreasing even more. That act seized the attention of the SEC. Soon after that the SEC declared it was investigating Enron and its SPVs. The last blow happened when Dynegy (NYSE: DYN), a company that announced earlier on that its merging with Enron, backed out of the deal on November 28. Enron would go on to file for bankruptcy at the end of 2001. And the shareholders of the company lost an astounding 74 Billion dollars in the four years leading up to Enron’s bankruptcy. Enron was using accounting techniques like Mark-to-Market accounting method that the SEC approved in 1992, Mark-to-Market is calculation of fair value of accounts that may change over time like; Assets, liabilities. Its goal is to deliver an accurate and realistic assessment of a company’s present financial position. But the method can also sometimes be manipulated because it’s not based on “actual” cost but on “fair value” which may be harder to pin down, and it can cause a huge problem because it lets the company record estimated profits instead of actual profits.

So, in conclusion, Enron failed miserably as a corporation due to the complexity of the accounting methods and ways to keep track of profit that they used. Also, the substantial amount of greed and collusion of all the parties that were involved, and maybe if it did not want to hog and control the entirety of the capital market it would have survived. To avoid scandals like this a company needs to have a straightforward code of ethics to inspire that ethical business decisions be a priority. Also, to focus on core values that guide the most useful principles, companies should also have a broad understanding of assets, tools and resources which can be very helpful for managers and leadership to find creative solutions for each problem encountered.

The Peculiarities Of Enron’s Scandal

Since Ethics is a fundamental part of management, it is very important for the managers and directors to know the language of ethics. Also to understand how it is impossible to separate or escape from the language of business. Any decision made in business can follow a rule or break a rule and norms, and its consequences and effects can be seen on stakeholders. Any business decision is made for the corporation is reflected by the character of managers and their corporations.

ETHICS IMPACT ON ENRON CORPORATION

In the business world, Morality is very important. Morality is defined by human nature which is a law or rule which is undocumented. Morals meet when people learn the difference between good and evil. In year 2001, almost 2 decades ago, Enron was the fifth largest company among the Fortune 500 companies. Enron also leads the market in production of energy, distribution and trading. However due to Enron’s model of not following ethical accounting, Bankruptcy was over the company which caused many problems among many people

Enron’s case is very disgraceful for the company. At the beginning, The company developed at a good growth rate and was not supposed to follow ethics problems. The company was admired by the White House and Wall Street after this energy industry became the cornerstone of this business. Enron was enhancing its position as a competition to the businesses globally. To diversify its business, Enron used deregulation of financial products. As finance and other transactions became stiff, Enron began working on fraud accounting practices.

Enron looked like a good corporate body with all corporate responsibility. However, the Enron scandal is the biggest one in the business history, a symbol of well planned corporate fraud, the scandal of Enron had illegal and unethical activities. CEO Ken Lay played an vital role in the Enron Scandal which is said by Carroll and Buchholtz (2008). They all worked on conspiracy for maximising profit on fraudulent basis. There was a big lie to investors and employees about the catastrophic financial situation of companies in the sale of their stocks.

THE ENRON SCANDAL

There were at least 4 members in the article on the front page of Enron Scandal (Wall Street daily newspaper). To deal with issues ranging from conflicts and market fraud, there were more than 10 Congressional committee investigated and they all submitted 32 Enron bills Reforming accounting rules and conducting fraud to review audit supervision.

Case : From the seed of business to growth, Fraud was a big threat to business. The Enron scandal became a threat to the other businesses as well. This scandal helped the birth of contemporary forensic accounting. As a result like Enron, hundreds of companies received similar audits. In addition to help other companies like exposing this similar fraud accounting practices, they also created safety of shareholders by creating annual audit systems.

ETHICAL ACCOUNTING FAILURE

After the biggest bankruptcy restructuring in the history of United States, the Enron Scandal is undoubtedly the biggest audit failure. It involved Enron and its Auditor Arthur Andersen’s fiscal scandal. This was revealed at the end of the year 2001. This embarrassment prompted the disintegration of Arthur Andersen, one of the best five bookkeeping firms on the planet. After a progression of exposures, including casual bookkeeping systems all through the 1990s, Enron connected for liquidation insurance in December 2001.

Enron started living in 1985 and is by all accounts a nova in the business world. Alongside the bookkeeping firm Arthur Anderson, he ended up one of the greatest bookkeeping embarrassments in the historical backdrop of Enron. Notwithstanding numerous unlawful demonstrations during the expansion and reduction of Enron, there are as yet numerous ethical problems. In this article I will clarify the historical backdrop of the organization, the genuine emergency inside Enron, and how the organization reacts to the outrage. Enron outrage is the greatest insolvency throughout the entire existence of the United States and 4,000 representatives are out of work. In the event that things being what they are, there is an issue with Enron’s accounting, it will make a move in the interest of the US Securities and Exchange Commission. By 31 October 2001 the overview was moved up to a formal examination and Enron petitioned for financial protection on 2 December 2001.

THE FALL OF ENRON

Afterward, Enron started utilizing bookkeeping outrage called advertise based bookkeeping. With this, Enron had the option to anticipate the potential benefit following the finish of the agreement. This technique is known for Jeffery Skilling, contracted by Lay as another CEO. This technique does not think about whether Enron increases some profit by the agreement. With this outrage, Enron can possess an organization that does not make benefits. Aptitude is likewise in charge of encouraging a profoundly deceptive corporate culture with Enron.

The breakdown of Enron, this is an account of old style burglary and horrendous conduct, prompting the part of the arrangement. Capable supervisors can just play out this sort of extortion. Enron’s governing rules have not been affirmed, and numerous individuals who partake straightforwardly or by implication become rich. Individuals, power, and voracity are the start of the part of the bargain. To comprehend what’s going on with and it (Enron), we have to comprehend the significance of legitimate administration framework inside the association. ‘Framework hypothesis has majorly affected the administration science and the comprehension of the association. As a matter of first importance how about we see what the framework is:’ The framework is a coordinated arrangement of parts to accomplish generally objectives When a piece of the framework is erased, the nature of the framework has additionally changed. ‘Contrasted and Enron,’ framework ‘is a gainful organisation. What is happening is to accomplish this objective.

There were five noteworthy examiners before Enron fallen in 2002, and since Arthur Anderson shut, the number has now been decreased to four, the last in charge of evaluating Enron It is an organization. A claim that blamed bookkeeping firms for getting to be one of the emergency components of Enron harmed the organization’s notoriety in that it caused chapter 11 subsequent to rising above investment funds and losing client trust. The organization has a past filled with tasks for a considerable length of time.

DECISION MAKING PROCESS

By and large, the basic leadership procedure enables chiefs and different business experts to tackle issues by inspecting elective decisions and settling on the best course to take. Utilizing a well ordered methodology is a proficient method to make mindful, educated choices that positively affect your association’s short-and long haul objectives.

The business basic leadership procedure is normally separated into seven stages. Supervisors may use a large number of these means without acknowledging it, yet increasing a more clear comprehension of best practices can improve the adequacy of your choices.

STEPS OF DECISION MAKING PROCESS

1. IDENTIFY THE DECISION – The initial phase in settling on the correct choice is perceiving the issue or opportunity and choosing to address it. Decide why this choice will have any kind of effect to your clients or individual representatives.
2. GATHER INFORMATION – Next, it’s a great opportunity to accumulate data so you can settle on a choice dependent on realities and information. This requires making a worth judgment, figuring out what data is significant to the current choice, alongside how you can get it. Ask yourself what you have to know so as to settle on the correct choice, at that point effectively search out any individual who should be included.
3. IDENTIFY ALTERNATIVES – When you have a reasonable comprehension of the issue, it’s a great opportunity to recognize the different arrangements available to you. All things considered, you have various choices with regards to settling on your choice, so it is imperative to think of a scope of choices. This encourages you figure out which strategy is the most ideal approach to accomplish your target.
4. WEIGH THE EVIDENCE – In this progression, you’ll have to ‘assess for plausibility, agreeableness and attractive quality’ to realize which option is ideal, as indicated by the executives specialists Phil Higson and Anthony Sturgess. Chiefs should almost certainly gauge advantages and disadvantages, at that point select the choice that has the most elevated odds of accomplishment. It might be useful to search out a confided in second conclusion to increase another point of view on the current issue.
5. CHOOSE AMONG ALTERNATIVES – At the point when it’s a great opportunity to settle on your choice, make sure that you comprehend the dangers engaged with your picked course. You may likewise pick a blend of choices since you completely handle all important data and potential dangers.
6. TAKE ACTION – Next, you’ll have to make an arrangement for execution. This includes recognizing what assets are required and picking up help from representatives and partners. Getting others installed with your choice is a key part of executing your arrangement successfully, so be set up to address any inquiries or worries that may emerge.

Basic decision making and leadership is an essential aptitude in the business working environment, especially for chiefs and those in initiative positions. Following a consistent methodology, alongside monitoring regular difficulties, can help guarantee both keen basic leadership and positive outcomes.

REFERENCES

1. https://ideas.darden.virginia.edu/ethical-business-decisions-the-framework
2. https://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/#43e432b45ab8
3. https://www.essaybot.com/sample/essays/detail?id=138147&query=4%20Ethical%20Issues%20with%20Enron

Satyam Scandal: India’s Enron

ABSTRACT

From Enron scandal to Satyam scandal, many ‘false creative accounting practices’ have been created. Corporate frauds are now becoming a center of attention like Tyco, Worldcom, Freedie Mac. According to researchers, these frauds are hindering public confidence by producing fake reports. This report analyzes the India’s major corporate fraud-‘Satyam Scandal’ and what auditing issues arose in that scandal. The Satyam Scandal bought light to the code of ethics when its CEO falsified the accounts and auditors chose to remain silent by monetary measure. The accounting fraud committed by the founders of Satyam in 2009 is a testament to the fact that “the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.” Satyam fraud enabled the government to produce new regulations for public listed companies and imposing heavy penalties on audit firm for any misconduct as auditors are the ones who give public the true picture of the company. This report also examines how these auditing scandals are relevant to Australian auditors and what are the ways to avoid these frauds.

INTRODUCTION

Fraud involves a wide range of illegal practices and misrepresentations which affects the society as a whole. According to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party”.

Fraudulent financial reporting is the misstatements of the financial reports involving alteration and alteration of accounting record, suppression of transactions, not reporting required disclosures and breaching accounting policies. Misstatements is a concern for investors and other stakeholders which ensue serious consequences to the organizations especially in capital markets leading to failure of public confidence. Corporate frauds are now becoming common and apart from the monetary losses, there are losses like goodwill and reputation. “With increasing trend in financial crimes across the globe, investors have lost their confidence, the creditability of financial disclosure is questioned and companies are also facing huge financial loss” (Reunirk, 2016).

Satyam Computer Services Ltd was formed in 1987 by Mr. Ramalinga Raju. The firm advanced promptly as a global business in the Indian IT industry, thus, becoming a ‘rising star’. It was once called the ‘crown jewel’ and the 4th largest company with high-profile customers winning the ‘Golden Peacock Award’ in 2007. But soon it was convicted for the massive accounting fraud which involved fudging the revenue, profits, inflated cash and bank balances and falsifying accounts for more than 5 years. The scandal has been named as “India’s Enron”.

SATYAM SCANDAL

The loss started on January 7, 2009 when Ramalinga Raju wrote a letter resigning and accepting the fraudulent financial reporting to Securities and Exchange Board of India (SEBI) and its board of directors. Number of bank accounts have been created by Mr. Raju which took fraud on the next level. It also involved falsifying the accounts which created balance which did not exist. Generating fake customer identities, making fake employee accounts and producing fake invoices just to show big amount of revenue and boosting up the company’s profile.

He accepted in his letter, “It was like riding a tiger, without knowing how to get off without being eaten”. Mr Raju has breached his duty of care and duty of negligence towards its shareholders. Along with him, many other auditors and directors have been convicted of criminal conspiracy, breach of trust and forgery. Right after that, government quickly appointed new 6 board of directors to bring the firm back in its place.

PriceWaterHouseCoopers (PwC), one of the best auditing firms, was the auditor of Satyam Computers and they failed to detect this fraud. Under the Indian Law, the PwC was responsible for the misstatements and the false representations. They failed to identify the red-flags which were accrued interest, drastic sales growth and the most important was the non-interest-bearing deposits. According to accounting professionals, “any reasonable company would have either invested the money into an interest-bearing account, or returned the excess cash to the shareholders. The large amount of cash thus should have been a ‘red-flag’ for the auditors that further verification and testing was necessary. Furthermore, it appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits”. Compared to other auditing firms, PwC was being paid double for auditing fees. When investment bank Merrill Lynch was appointed, within 10 days they discovered the fraud under its due diligence. PwC auditors were required to act independently on the audits and verify with the banks for fixed deposits which they did not do.

AUDITING ISSUES

According to AASB 101 Presentation of Financial Statements, financial reports should provide true and fair view of balance sheet and income statement at the end of every fiscal year. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in a financial report that achieves a fair presentation (AASB 101).

The auditing issues found in Satyam Scandal are as follows:

Ethics – Ethics are the principles and expectations which govern the behavior of auditors. According to ASA 200, the auditors are required to meet the ethical standards which comprises of:

• Integrity- Auditors should be honest and perform their work with diligence and responsibility. Also, they are obliged to make appropriate disclosures.
• Objectivity – Auditors should not indulge in any unbiased assessment and is obliged to disclose all material facts.
• Confidentiality – In course of their duties, auditors are enforced are protect the client’s information and must not disclose it.
• Professional competence and due care – They should continuously apply their knowledge, skills and experiences to perform the audit
• Professional behavior – Auditors should adhere to relevant law and regulations.

The SFIO report stated that the auditors in PwC compromised with the auditing standards by using the firm’s investigative tool instead of independent testing mechanism. PwC chose to remain silent even after discovering the fraud and certified the company. PwC auditors failed to do their duties, neither they did match any invoices or debtors nor they independently verified the cash and bank accounts, which stated that the internal system was not in place. The statutory auditors did not check the assets physically nor the fixed deposits which were non-existent amounted to Rs. 5040 Crores. SFIO findings also indicates that company did not make true disclosures to the stock exchanges and public which lead to the loss of public confidence. EPS being the major factor riding the share prices was also false i.e actual was 1.93 per share but they reported 9.77 per share.

Role of Audit committee – The audit committee is set up by board of directors as a sub-committee which focuses on problems related to financial reporting and promoting audit quality. ASX Listing Rule 12.7 stated that all entities listed under S&P 500 must have an audit committee. The objectives of audit committee are :

• Reporting financial information to financial report users and providing true and fair view
• Complying with accounting policies, laws and regulation
• Risk management system
• Maintenance of independence of external auditor

Under Satyam Scandal, the audit committee failed to comply with the rules and regulation and adherence to its objectives. As per the SFIO findings, when one of the senior executive of the company discovered this fraud and e-mailed it to the independent directors of the company who then forwarded it to the chairman of audit committee. This acted as an whistle blower and could help in saving the company but instead they chose to remain silent. No one reported it to higher authorities and regulatory authorities.

Abnormal audit fees – Section 331 states that the company is obliged to pay auditor’s fees and expenses. The auditing fee is set by the company’s independent director and the audit committee and they need to ensure that it meets the requirements so that the audit quality is not negotiated. Also, taking into account the economic conditions.

PwC, who was the auditor of Satyam computers received an annual fee which is twice of other firms like Infosys. Over the period of 4 years, 2004-2008 the increase in Satyam’s income was only 2.7 times whereas the PwC received auditing fees of 5.7 times which increased year after year. To hide the cooked and fabricated financial statements, Satyam used the monetary incentive for auditors and auditors did not act independently, hence dismissing from their duties.

IMPORTANCE OF SCANDALS TO AUSTRALIAN AUDITORS

As audit has been a statutory requirement and after looking at the scandals happening, the main role of audit is being compromised. Enron, America’s fifth largest company, got bankrupt and caused dissolution of Arthur Anderson, one of the biggest auditing firms. They started relying on false accounting practices, the operations of the companies were transferred to SPEs. On 2nd December 2001, the Enron became bankrupt which gave rise to new rules and regulations for financial reporting. The main problem was the failure of board members to follow the regulation and auditors can improve this by focusing on areas:

• Leadership – Chairman of audit committee should be leader having proper experience so that they can take proper decisions.
• Independence – The audit committee and auditor should be independent and need to follow the ethical and objective approach to audit process.
• Rotation of auditors – Auditors should be rotated every few years to prevent collusion with the client and improve auditor independence.
• Professionalism – Every few years, audit review should be done by some other audit firm so that audits are done with independence and professionalism.
• The audit committee should ensure that information disclosed is appropriate and meeting the accounting standards with required disclosures.
• Audit fees – After these scandals, on the basis of insurance hypothesis, auditors increased their fees depending on risk the client has.
• Audit firm need to focus on audit instead giving them their clients advisory services as this increase’s independence and creditability.
• Audit report – the most important responsibility of auditor is to provide audit report to every member at AGM. The report should provide a true and fair view of the financial reports. If the company is not keeping books in order, they need to notify the company.
• All inaccuracies should be investigated be it small or big.

Auditor’s responsibility is to give opinion on the reports to forming the reports. They are entitled to collect proper evidence that the report is free from any material misstatement and gives faithful representation to obtain reasonable assurance. If the regulations and legislation are strict enough and auditors adhere to their duties then their will not be any scandals like this anymore.

CONCLUSION

After Raju confessed of the fraud, the only question arises is “how did this continue for 5 years?” The Satyam Scandal is perfect example of fraudulent reporting where auditors chose to remain silent as well. After the Enron’s case, Sarbanes-Oxley Act,2002 came into action who objective is to protect public confidence by preventing frauds. Such kind of acts are required to keep organization under control and prevent any fraudulent activities. The actions which can be taken to strengthen the regulations are:

• Rotation of auditors
• Code of ethics for all listed companies
• Auditor and audit committee should be acting independent
• Formation of new audit standards
• Criminal and civil charges should be strict
• Whistleblower system is must
• Corporate social responsibility should be mandatory
• Conducting risk assessment before taking new client

We can say that auditors are the gatekeepers of the company who provide public with the true and fair representation of the financial statements, hence, keeping the public confidence as they do have a duty of care towards the clients and the public. But we have seen in the above cases, some audit firms and audit do collude with their clients resulting in fraud. To ensure greater accountability and less chances of collusion, shareholders can assist the work of auditors. So, Satyam Scandal tells us the importance of ethics, fraudulent reporting and how it is relevant to public and auditors. Therefore, auditors should their responsibilities by adhering to their role, finding out material misstatements, fraud etc.

REFERNCES

1. https://en.wikipedia.org/wiki/Satyam_scandal
2. https://pcaobus.org/Standards/Auditing/Pages/AS2401.aspx
3. https://www.academia.edu/29708409/Fraudulent_Reporting_Practices_The_Inside_Story_of_Indias_Enron?email_work_card=view-paper
4. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
5. https://poseidon01.ssrn.com/delivery.php?ID=807021021065097088080079111025120107041027049084057009028001121104121019113009107011001021016037024036049108081068079067068031039060090021004110067091124002069092034087071069089117126002013002000025024121101098102091069110107125087100070015072083086&EXT=pdf
6. http://file.scirp.org/Html/2-2670015_30220.htm
7. https://eds-b-ebscohost-com.ezproxy.uow.edu.au/eds/pdfviewer/pdfviewer?vid=3&sid=60b8ca8e-c6d1-46eb-88ac-920f41df485b%40sessionmgr103
8. https://journals.sagepub.com/doi/pdf/10.1177/0256090920090106
9. https://www.outlookindia.com/newswire/story/sfio-submits-satyam-fraud-report/658186

The Prerequisites, Reasons And Consequences For Enron Scandal

Overview

Energy corporation Enron was one of the largest players in corporate America. The company grew at a rapid state and was highly favoured by analysts and investors. Although Enron’s forecasts and financial reports for the late 1990s and early 2000s guaranteed stakeholders of continuous growth, this was not the case and it eventually played out to be the biggest accounting scandal in corporate America.

Recent changes in the company’s management have brought on a slew of accounting practices that deviated far from normal. Extremely complex transactions were created wherein other company executives and employees found it difficult to understand. The company’s executive team lacked leadership skills and competence to comprehend accounting principles. Conspiracy of Fools depicted Enron’s executives as power-hungry and thirsty for financial success. Many, including the CEO and president, were terribly fearful of incurring losses, disappointing stakeholders and not being an industry leader, that they were blindsided by all of the questionable transactions and practices transpiring within the organization. Kurt Eichenwald’s Conspiracy of Fools provides an in-depth description of how and why the largest scandal in corporate America materialized.

The Scandal

The book begins with a fraud which occurred prior to the big scandal that caused Enron’s bankruptcy. Executives Louis Borget and Thomas Mastroeni colluded to steal money from the company and redirect it to an offshore account. Reflecting on this event, then chief executive officer Ken Lay pledged that Enron will no longer engage in risks without understanding potential consequences. He assured employees that Enron’s credibility will not be questioned again. A similar instance to what caused Enron’s downfall, this event set the tone of the book.

The beginning of Jeffrey Skilling’s career at Enron also marked the start of the company’s downturn. Within a few weeks, Skilling had reorganized the company, reduced the number of executives, and changed seniority-based compensation to performance-based. This presented a motivation for employees to improve their performance by maximizing short-term earnings rather than long-term goals. Additionally, his desire for aggressive accounting and implementing mark-to-market allowed the company to recognize profits instantly, with any change in value recorded as a profit or loss. The use for mark-to-market was later stretched in order to meet the projections of financial analysts.

Skilling then hired Andrew Fastow, whom he became good friends with. Like Skilling, Fastow also had a liking for aggressive accounting. Using mark-to-market, Fastow became motivated to increase profitability in unconventional ways. This prompted him, along with Michael Kopper, to create special-purpose entities (SPE) with the intent of purchasing assets from Enron. These shell corporations essentially used Enron’s money to hide the company’s debts off its balance sheet, thus avoiding recording losses. Also, Fastow and Kopper found a loophole to avoid creating related-party transactions. They found outside investors that would provide 3% of the SPE capital, with the remaining 97% coming from the company. Fastow was able to create various SPEs but mostly focused on LJM and LJM2, which were named after his wife and two children. The employees, investors and other stakeholders were led to believe that the SPEs hedged the risks but in reality, they were using Enron’s money to finance the hedges. The two entities provided Fastow and his accomplices a steady cash flow, amounting to millions of dollars that were essentially stolen from Enron. On the books, Enron was shown to be making money off these transactions, which analysts and investors liked.

As the company grew, the superficial SPE transactions became bigger as well. Investors and analysts were pleased of the company’s financial state while the SPEs were keeping their debts off-the-books. However, not everyone was pleased. Finance journalist Bethany McLean was skeptical of Enron’s financials and wrote an article about the accuracy of the company’s stock price. Later in the book, whistleblower Sherron Watkins exposed the truth about the special-purpose entities to the company executives. She wrote a letter to Ken Lay describing how the SPEs did not make economic sense and her concerns about the viability of the company. However, it was not until months later that her concerns became public triggering an investigation by the Securities Exchange Commission (SEC).

Improper accounting eventually caused Enron to lose its credibility. The company’s stock price declined dramatically, their rating was downgraded, and no one wanted to engage in any form of transaction with them. In the end, Enron was filed for bankruptcy and its employees lost not only their jobs but also their retirement funds.

Key Players

Andrew Fastow

Fastow created a name for himself by creating special purpose entities as investment vehicles for Enron. He introduced the idea of Chewco as a way to increase investment value for the CALPERS. With the success of his SPE ideas, Fastow easily made his way up the corporate ladder into the position of the Chief Financial Officer. His newfound success in the company proved to be the cause of his downfall. His desire to rise to the top while secretly siphoning off millions of dollars made him a greedy yet smart man. He was, in fact, the reason why Enron was able to meet profit projections by investment analysts.

Throughout the book, Fastow created multiple SPEs, all intertwined with one another in some way. This was his genius idea to allow Enron to recognize revenues far ahead of the performance of obligations. Although Eichenwald did not directly state if Fastow was competent enough to perform his duties and responsibilities as the chief financial officer, it was alluded throughout the text that he was not very knowledgeable in the accounting field. This was exemplified when Fastow stated that he does not have any interest rate exposure, where in actuality, the net present value of Enron’s projections extremely dependent of interest rates. Additionally, those who did understand his complex SPE transactions knew that these were irregular accounting practices. Many believed that he was not qualified for the job as he lacked expertise, but Jeffrey Skilling seemed to have been blindsided by the deals that Fastow was establishing. Enron’s board of directors was also blindsided by Fastow’s skills, as proven by the fact that he was allowed to be managing partner of LJM2 whilst still acting as Enron’s chief financial officer. Every transaction designed by Fastow seemed to have been littered with unrealistic rationalizations. He normalized aggressive accounting, providing him the opportunity to stand out against everyone else due to the returns that resulted from this. This resulted in his colleagues praising him and his contributions to the company’s bottom line. Perhaps it is safe to allude that Fastow’s actions were not solely driven by financial gain, but also by increased popularity amongst his peers. This was proven on numerous occasions by the mere fact that Jeffrey Skilling approved the SPEs with very little analysis due to the fact that he had put so much trust in Fastow’s ability.

Next, Fastow was not suitable for a leadership position due to his constant desire to stay in power. A good leader will help employees develop their skills and promote those who are well-deserving. Andrew Fastow did the exact opposite. He rewards employees who naïvely helped him steal copious amounts of money from the company by endorsing them to the Performance Review Committee (PRC). Those who tried to go against him by telling him the flaws of his ideas were punished in various ways such as by being transferred, by not being given their deserved compensation, and more. Additionally, he pressured banks such as Merrill-Lynch to provide funding to Enron by threatening them to take their business elsewhere. Fastow knew he had the upper hand in negotiation due to the company’s current high ranking in the corporate world.

Jeffrey Skilling

Jeffrey Skilling’s character as portrayed in Conspiracy of Fools was rather interesting. Since his early days at the broadcasting station, Skilling found that he liked having control and being in charge. He was a bright consultant at McKinsey & Company, eventually becoming the youngest partner. Eichenwald’s iteration of Skilling’s early life before Enron paints a picture of his conceit. His need to be in command gave him the drive, which paved the way for his corporate success. However, this also proved to be his weakness as he was unable to accept shortcomings and negative outcomes.

Throughout the novel, Skilling’s character started off as strong and confident. He knew what he wanted and made sure that he reaped the benefits. Due to his intelligence, he also had a fondness for complicated and creative deals, specifically Fastow’s transactions. It seemed like Skilling only liked the savviness of the transactions but actually did not understand the accounting that were presented. He even fought with their consultants at Arthur Andersen & Co. regarding the proper accounting treatment, arguing for their way to increase the bottom line. His argument along with lack of comprehension of the accounting displays how he as the president, failed his duty to lead the company with integrity and professionalism, and also discredited his own reliability as a leader and as a representative of Enron.

Moreover, Skilling was very focused on constantly improving profits and neglected other traits that would have made him an effective leader. For instance, he appointed Rebecca Mark head of Azurix but did not attempt to be involved, or at least informed, about its operations and negative profits until it was too late. He essentially let billions of dollars slip through the company’s hands due to lack of oversight. Next, he trusted Andrew Fastow too much. Even if the two were good friends, there should have been a boundary between their casual, friendly relationship and their professional relationship. By putting too much trust in Fastow, Skilling again lacked oversight in the SPE transactions. He believed that Fastow was competent and trustworthy enough to manage interrelated companies, namely Enron and the LJM funds. He also signed his name on deals which he barely analyzed, just because his colleagues have signed it. As the company’s president, it is his duty to ensure that Enron is engaging in transactions that are not only beneficial to the company but also conform to accounting frameworks and government regulations. By not reviewing the details of the transactions carefully, Skilling ignored his due diligence which one could argue was his crime in the scandal that soon unfolded.

As the fraud started to reveal itself, Enron’s state as a company began to spiral down. Simultaneously, Skilling’s physical and mental well-being also began to decline. Eichenwald brilliantly interconnected the two, which emphasized the effects of the events. It is a vivid imagery of Skilling’s lost sense of control.

Michael Kopper

Michael Kopper served as Andrew Fastow’s right-hand man in the Chewco and LJM ordeals. As head of special projects, he proved to everyone that he has the creativity and the ability to create structured deals that would yield great returns. His character, as written by Eichenwald, was always trying to impress. He worked very closely with Fastow and ensured his constant satisfaction. This resulted in his assignment to manage the LJM funds.

Conspiracy of Fools illustrated Kopper’s unethical behaviour consistently throughout the text. For instance, he was able to disguise the related party transactions as arm’s length using his domestic partner’s name to secure the controlling stake of LJM thus resulting in Enron’s ability to book income. The book actually had very little description of the work that Kopper performed and only emphasized on the way he manipulated the books to yield steady earnings, as well as keep track of his and Fastow’s off-the-record cash flow. Through this, one can infer that Eichenwald wanted to show that even though Kopper is smart and qualified, his greed and inability to act ethically proved to be his downfall. In addition to that, his character seems to go against a recurring theme of power struggle. It was pointed out that Kenneth Lay, Enron’s CEO at the time, did not know who Kopper was, even after working with Fastow for several years and improving Enron’s financials. This was surprising since as a CEO, why would one not know who is contributing to the bottom line in such a profound way? His anonymity and willingness to let Fastow take all the credit shows his contentment of being on the sidelines, which perhaps is one of the reasons Fastow was drawn to work with him.

Jeffrey McMahon

Jeffrey McMahon was Enron’s treasurer, thus he reported to Andrew Fastow. His character is a juxtaposition of his superior’s. Soon after learning about LJM and the other SPEs, McMahon quickly figured out his views and ensured that his voice was heard. Presented with a dilemma, he decided to confront Fastow about the transactions he was creating and when this failed, he went to Jeffrey Skilling. However, as an inferior who was not involved in generating substantial superficial cash flows, McMahon’s voice remained unheard.

McMahon’s opposition against LJM shows his courage and integrity, thus making him a key character in the novel. He was one of the few characters who were not blinded by money, greed and power. Consequently, he was also one of the few employees who saw Fastow’s tactics in closing deals between Enron and LJM. McMahon understood the wrongfulness of Fastow having control of the traders’ compensation and promotions while not being independent from LJM. He took a great risk to expose the underlying issues of the transactions and although it did not pay off in the end, he was still able to stand by his values which is admirable. Additionally, McMahon proved his leadership skills when he was endorsing his employees to the PRC. Unlike Fastow, he recognized the work and effort his employees exert, and made recommendations based on merit. He fought for equal treatment for his employees at the PRC meeting, which speaks volumes as to what type of leader he is—fair and principled.

Sherron Watkins

Sherron Watkins who formerly managed JEDI, became the Vice President of Corporate Development at Enron. Similar to Jeffrey McMahon, Watkins also found the accounting irregularities in relation to the SPEs. A strong-gutted accountant, she became Enron’s whistleblower who exposed the misconducts occurring behind-the-scenes.

While going through Enron’s assets, Watkins was bewildered by the Raptors, another SPE used for hedging. This prompted her to dig deeper and learn more about the transactions. The accounting irregularities and SPE transactions which lacked economic substance left her feeling troubled. This urged her to write a memo to Kenneth Lay outlining her concerns. Upon meeting with the CEO, she was assured that there will be further investigation done to address the issues brought up. Her letter also triggered the SEC investigation against Enron. Overall, Sherron Watkins did what no one else in the company wanted to do—expose the wrongfulness of the SPEs—thus making her an important character in the novel.

Shortcomings of Key Players, Regulatory Agencies and Auditors

Key Players

The fraud at Enron occurred due to lack of proper checks and balances of the executive team. As such, the key players were abusive of the power that came with their job titles. In particular, Andrew Fastow took advantage of the fact that his colleagues and superiors saw him as a trustworthy individual. By not complying with securities regulations and accounting frameworks, he caused immeasurable damages to Enron. Specifically, the transactions he created made Enron appear financially sound, even though it was not. As a result, investors and analysts were misled and faithful representation of the financial statements was not met. This also resulted in credit rating agencies publishing an undeserved high credit rating for Enron. Additionally, Fastow used his power to threaten banks if they did not provide financing for Enron and LJM. This provided Enron with additional liquid assets that superficially improved their financials. In the end, Andrew Fastow’s actions seemed to have pushed the company more towards bankruptcy.

Next, Jeffrey Skilling’s actions also contributed to the fall of Enron. When he first started at Enron, he pushed for mark-to-market accounting which allowed them to realize profits prior to performing their obligation. This also provided Fastow with the idea of aggressive accounting. Stemming from this were the LJM deals spearheaded by Fastow. Skilling’s faulty actions were approving the deals without properly analyzing them, as well as disregarding the conflict of interest between Fastow’s roles in both companies, which he had noted early on. Moreover, he failed his duty as an executive by not confronting the secrecy surrounding the SPEs. He made minimal inquiries regarding these entities and only saw the end result of each transaction: Enron booking profits. In addition, he also failed his duty as the Chief Financial Officer by emphasizing stocks and ignoring current assets. In particular, no one at the company tracked the cash balance. Everyone focused on maintaining the high stock price, which undeniably was a factor in the turmoil. All in all, Jeffrey Skilling’s actions as the CFO seemed to have contributed to Enron’s deterioration.

Third, Ken Lay proved to also have been a factor in the scandal. At the beginning of the novel, Lay promised that Enron’s integrity will never be questioned again after the Borget-Mastroeni scandal. However, future events showed that Lay failed to keep this promise. When Fastow proposed to head up LJM to transact with Enron, there was a lack of probing on Lay’s end. Instead, he quickly supported it and took it to the board of directors for approval. Furthermore, similar to Skilling, he also did not confront the secrecy surrounding the SPEs. He was a supporter of these entities and their transactions with Enron, which consequently allowed the board to have confidence in them. Lay, just like the other executives, focused too much on profitability. All things considered, Ken Lay was not able to ensure as the CEO that he was steering the company in the right direction.

Lastly, Sherron Watkins was labelled as Enron’s whistleblower and praised for her courage. However, one can criticize that she still had shortcomings in her role as the one who blew the whistle. Upon first learning about the SPE transactions, Watkins knew something was wrong and she decided to write Ken Lay a letter. When the letter became known and she was told that the issue was being investigated, she did not follow up. It also took a long time for the letter to become public which triggered the SEC investigation. Thus, one may ask why she did not file a report with the SEC sooner or why she had not contacted the government. In addition, when Jeffrey McMahon replaced Fastow, the first thing she did was email him about what she wanted—new job title and better compensation. This leads one to believe that she ultimately had a personal motive which was self-promotion. Therefore, even the whistleblower, Sherron Watkins, had shortcomings in the Enron scandal.

Regulatory Agencies

In Conspiracy of Fools, the main regulatory agency at play was the SEC. Although they were not a big part of the novel, they still played a role in the scandal. Firstly, the SEC approved Jeffrey Skilling’s mark-to-market accounting. As the main regulatory body, the SEC should have known the risks of being able to manipulate financial statements using mark-to-market. Particularly, mark-to-market in the energy industry was abnormal which meant a lack of available data for comparability. Even though this was the case, the SEC never followed up on Enron to check if they were reporting accurately. Eichenwald seemed to not have information regarding the SEC’s actions post approval which leads one to believe that the SEC did nothing. Furthermore, during the multi-year financial statement manipulations, Enron was able to greatly inflate its profits. They were also able to do this without any inquiry or examination from the SEC. It is important to note that the SEC gets information about problems and irregularities from investors and analysts via market signalling . However, when analysts were starting to become skeptical about Enron’s financial statements, such as the conference call between Skilling and analysts, the SEC was unable to pick up on the clues. This resulted in a delay in the commencement of investigation, which occurred after the whistleblower letter was publicized.

Auditors

Another party that displayed shortcomings was Enron’s auditors, Arthur Andersen & Co. Their main fault as portrayed throughout the novel is overlooking the errors brought upon by creative accounting. Essentially, they were unable to sustain their duty of care as Enron’s auditors and consultants by failing to comply with the Generally Accepted Accounting Principles (GAAP) and the respective standards for auditing and consulting. This was seen when Arthur Andersen & Co. approved the related-party transactions between Enron and the SPEs. Another failure was when Arthur Andersen partner David Duncan ordered the shredding on Enron documents amidst the SEC investigation. This resulted in the destruction of potential evidence that the regulators could have used against Enron. Thirdly, Arthur Andersen still signed off on non-arm’s length deals even after concerns were brought up. Sherron Watkins expressed her concerns about the economic substance of the SPEs. After Enron executives consulted with their lawyers at Vinson & Elkins (V&E), they were provided with a conclusion that indicated no further investigation was necessary. Arthur Andersen’s fault was not verifying the appropriateness of V&E’s statement prior to signing off. Lastly, David Duncan failed to properly warn Enron of fraud. The risk-management executives at Arthur Andersen ran FIDO, a fraud detection program, on Enron’s financials and discovered a red alert which meant a fraud warning. Duncan and his superiors were alerted yet this issue was not addressed. Overall, Arthur Andersen & Co. breached its duty of care to Enron which contributed to its downfall.

Steps to Avoid Recurrence

The fall of Enron can be attributed to the various people listed in the prior section. Due to the enormity of the scandal, it is important to determine measures that will prevent the next Enron. These can be categorized into Regulatory Agency, Sarbanes-Oxley Act (SOX), Management & Board of Directors, and Auditors.

Regulatory Agency

The Securities and Exchange Commission’s main responsibilities include ensuring market efficiency and protecting investors from corporations . With the Enron scandal, the SEC’s reputation was undeniably damaged. This is mostly attributable to its failure to detect Enron’s dishonest accounting practices. In order to avoid recurrence, the SEC should be more proactive when it comes to fraud-detection. This means having less reliance on analysts and investors to detect potential instances of fraud, and instead providing a closer monitoring of all registered companies. Essentially, the SEC needs to have an increased oversight on companies and the financial reports they are publishing. Next, more focus should be placed on larger corporations. In particular, corporations who lack clarity in terms of their creative and irregular accounting treatments, and financial statement disclosures. The SEC should also implement constant review of published financial reports of corporations in order to ensure that there is no accounting manipulation. In the case of Enron, the Commission should have followed up after approving mark-to-market, especially since there is a greater risk for earnings management. Overall, changes in the regulatory bodies are essential to prevent future accounting scandals.

Sarbanes-Oxley Act, 2002

Enron along with other infamous accounting scandals of the early 2000s initiated a refinement of accounting regulations. Prior to the Sarbanes-Oxley Act of 2002 (SOX), a weak regulatory environment existed in accounting. This contributed to constant abuse of accounting regulations by professionals, eventually resulting in numerous scandals. Subsequently, SOX was implemented and is enforced by the Securities Exchange Commission to improve the weak regulations and legal environment, as well as to minimize the risk of potential frauds. SOX has many components for compliance with the most relevant to the Enron scandal being: Corporate Responsibility for Financial Reports (Section 302 and 906), Attempts and Conspiracies to Commit Fraud Offenses (Section 902), and Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud (Section 806).

Section 302 and 906 allowed for increased accountability and financial literacy of executives. This means that executives can be held liable for material errors in financial statements, especially if it caused investors to lose money. Additionally, they could face up to 20 years of incarceration, fined up to $5 million, or a combination of both. Likewise, those who attempt or conspire to commit fraud could also face the same penalty under Section 902. Lastly, per Section 806, SOX offers whistleblower protection to employees that report fraud. This addition is to ensure that employees will no longer have to fear speaking up about unethical actions as their jobs are legally protected under this Act. With the implementation of SOX, public companies have less incentives to commit fraud due to the stricter regulations and increased punishment. Thus, they have more incentive to remain compliant and ethical.

Management & Board of Directors

Enron’s management played a big role in its demise. In order to prevent the next Enron, it is important to increase board oversight, minimizing financial incentives, and implementing appropriate checks and balances.

Also, management needs to implement better and more representative accounting practices. For instance, mark-to-market was mot the most appropriate accounting method in the energy sector, yet Enron forced its use. It is important for management to choose the method that would accurately represent its financials, not which method would inaccurately boost profits. Additionally, there is also a need for a stronger, more competent audit committee. Conversely, the implementation of SOX ensured independence of the audit committee from management. This allows them to implement a stronger control environment, thus reducing the risk of fraud. Next, it is important that management understands the function of a corporation is not to generously compensate them. It is their responsibility to ensure profitability. If they believe that the company’s bottom line is a direct reflection of their compensation, then there is an increased incentive to inflate earnings. With Enron’s PRC, they are sending a signal emphasizing that employees should only be compensated for contributing to profits, not for their hard work protecting the company. Incentive systems should be in place to reward accomplishments other than financial performance, but also penalize employees for increased accountability. Lastly, it is also important to instill ethical discipline throughout the business organization via proper checks and balances. Management should have oversight over their employees and should be more involved in transactions that a contributing greatly to their bottom line. Similarly, the board of directors should also have oversight over management. All in all, strengthening an Enron-like management is essential to avoid future frauds.

Auditors

Arthur Andersen could have prevented the fraud if they had done their work correctly. However, they had the issue of always wanting to keep clients, in this case Enron, happy and this proved to be their downfall. To prevent recurrence, auditors have to enforce independence more strictly. This will minimize threats such as familiarity and self-interest. Also, it is important to ensure that auditors do not perform consulting services. This prevents self-review threat from occurring. It is important to note that SOX addresses these issues however, auditors must still take the extra step to ensure proper compliance with the regulations.

Conclusion

Overall, Kurt Eichenwald’s Conspiracy of Fools paints a very detailed picture of the events that brought Enron down. Many lessons can be learned from this scandal such as having increased company oversight, auditor independence and more truthful accounting. The Securities and Exchange Commission also played a role in the scandal and consequently instituted a reform to tighten accounting regulations. With the SEC’s effectiveness dependent on analysts, auditors and company personnel, each one of them must contribute in ensuring measures are taken to prevent the next Enron.