Enron Company’s Conditions

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

What are “cookie jar” reserves? Explain how Enron has used this concept

In this era, most managers would not wish to show that they are underperforming their management tasks. The financial statements are usually used to present the performance of a company which directly depicts the performance of its managers.

“Cookie jar” reserves are one of the methods applied by managers to show a positive performance of the company when it is actually underperforming. “Cookie jar” reserves entail transferring money to reserves during high-performance seasons and not reporting the reserves during such sessions. The transfers are later reported during low-performance seasons of the company to show a good performance.

It could also involve off-balance-sheet events that when reported could reflect poor performance. The managers can borrow loans from financial institutions and fail to report them as loans. Such loans are either reported as a transfer from reserves or available cash. This gives a wrong picture of the company’s functioning as it hides the liabilities of the company.

Another way is the movement of liabilities and assets of a company off the balance sheet. This leads to reporting lower debts than the actual debts and hiding the losses born by companies. The managers use this strategy to ensure that the stakeholders always think of the company as a good performing one.

The managers of the Enron Company made use of “cookie jar” reserves in various ways and hence, the company was always thought of as performing well even in its poor performance seasons. Thus, the securities of the company are always traded at high prices. Some of the incidences in which the company employed this concept include the fact that Enron took part in some off-balance sheet transactions. These transactions were supposed to be reported in the financial statements to depict the true performance of the company. However, they were not reported as they could reveal poor performance quality. The transactions are carried out without any disclosure. The auditor who is to act as the watchdog of the various stakeholders also fails to notice such transactions.

The Enron company officials also applied the “cookie jar” reserves concept when they used special entities to move assets and liabilities of the company off the balance sheet. Here the assets and liabilities of the company changed property with no report of such incidences in the balance sheet. The Enron management used this strategy to report lower debts than the actual value of these debts. The losses of the company were also hidden using this act. As a result, the financial statements always depicted a good financial position even when the company was underperforming.

The various entities affected by the acts in the case of Enron Company are discussed below

Employees

A company that is in existence has the power to hire and fire employees but upon winding up the company losses such powers and the current employees are automatically dismissed. In this case, upon discovering the crimes propagated by the company’s officials it is wound up. The current employees lose their jobs as well as their accrued salaries as the company is not in a position to pay all its debts. Some employees can also be imprecated in criminal cases and imprisoned.

Shareholders

Due to the misleading information provided by the company in the financial statements, many people purchase the shares of the Enron Company at high prices. The shares are formed into stocks that perform so well in the capital market but when the various fraudulent acts, that the company engages in, are discovered, the shares lose their value. The shareholders dispose of them at low prices leading to capital losses. The shareholders also do not receive all their dividends upon winding up as the company is declared bankrupt while some fail to sell their shares as the company is wound up.

The government

The executive members of the government are imprecated in the criminal acts propagated by the Enron Company. The image of the government is thus tainted and, as a result of this, the public may lose confidence in it. Later such members can even be imprisoned. The government thus misses the competent hands that initially served.

Suppliers

Some suppliers used to provide goods to the Enron Company on credit. Upon winding up, not all creditors are paid hence some of the suppliers suffer financial losses. The company was also a major market for some suppliers. That is why its closure leads to a lack of a market for some of the suppliers.

The auditor

The auditor is supposed to act as a ‘watchdog’ of the various stakeholders of a company. He/she is expected to examine various financial statements of the company, its accounting books, and all transactions. He/she should then report on the fairness and truthfulness of the information reported in the financial statements. In this case, the auditor fails to play his/her role effectively and he/she could even be imprisoned.

The secretary

The company’s secretary is accused of insider trading. Insider dealing or trading entails sharing or using information that is not available to the general public in deciding whether to invest in or sell the securities of a company. The secretary of the Enron Company is found guilty of this crime and put on probation.

The judiciary

The judiciary is also affected in this case as it spends the time that could be used in handling other cases to handle this case.

Summary of the case

The Enron company’s managers are determined to see the company succeed by all means. This drives them to indulge in criminal activities which include money laundering, insider trading, and “cookie jar” reserves crime. The company is depicted to be performing well for many years by its financial statements. The shares of the company in the capital market are traded at higher prices due to these reports. Although, the various crimes are later discovered, unfortunately, one of the criminals is already dead and cannot be brought to justice.

The other officers of the company who are still alive and were involved in criminal activities are proven guilty and imprisoned. The shares and other securities of the company drop in value in the capital market and, as a result, the shareholders suffer capital losses.

The true financial statements are found to show poor performance as losses are reported. A winding-up petition is filed by one of the stakeholders. The company is found to be bankrupt as it makes big losses and its liabilities exceed the assets. It is then wound up dismissing its employees with some of them going unpaid due to accrued salaries.

Click Here To Order Now!