White Collar Crime-Enron Corporation

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Table of Contents

Introduction
Research Methodology
Findings
Enron’s Business Operations
The Collapse
The Scandal
Analysis and Interpretations
Conclusion
References

Introduction

White-collar crime has been a growing area of interest among numerous scholars. It has been practiced for thousands of years now. It is a crime committed by individuals or organizations of high profile in the course of their occupation. The scandal surrounding the fall of Enron Corporation is an example of a series of white-collar crimes that were committed. The aim of this research paper is to reveal what various secondary sources of data say about how white-collar was evidenced in the Enron Corporation scandal. After the research data collection method, the subsequent parts of the research entail findings, interpretation and analysis, and finally conclusion.

Research Methodology

Data Collection Method

Secondary Data

There has been an ongoing study and research on white-collar crimes by scholars across the globe. Due to this, terabytes of data have been collected and analyzed by several reputable scholars, credible economists, and excellent researchers on the same. Secondary data was therefore the kind of data that was found to be appropriate for this project. The selected secondary data makes use of published data that is already available in books, reports, and publications of several organizations and linked to business and industry, technical and trade journals, and, other sources of published information (Kothari, 2008, p. 111; Sagar, 2002, p. 29). In the process of collection of these data, caution was taken due to the uncertainties that may arise due to the circumstances that surrounded those who compiled the data or because of varying intellectual interpretations.

Therefore, to ensure that sufficient caution was exercised in the entire data collection process, the published secondary data was selected based on the following features:

Dependability of data

To establish that the data to be used in this project was reliable, it was subjected to several tests that entailed some aspects like: who carried out the data collection? From what sources was the data obtained? Were suitable methods applied in the process of data collection? When was the data collected? Was the one compiling data biased in any way? Was there a degree of accuracy that was intended? Was this degree of accuracy attained? (Pride and Ferrell, 2008, p. 135)

Appropriateness of Data

The data that fits a certain enquiry may not necessarily be applicable in another research. In particular, if the data at hand is inappropriate, it cannot be applied by someone else conducting the research. In regard to this, the researcher is supposed to cautiously put under scrutiny the definition of certain terms and tenets of compilation that were applicable in extracting the data from primary sources initially. On the same note, the object, spectrum, and environment of the initial enquiry should also be studied. Incase the researcher encounters disparities in these, the data will remain unfitting for the current research, and it will not therefore be incorporated in the study.

Sufficiency of Data

If the degree of accuracy obtained in the data is found to be inadequate for the use in the current research, they will be termed as insufficient and hence unsuitable to be used by the researcher. Another basis on which data may be regarded as insufficient is when they are suitable to be applied in a study whose scope may be either narrower or wider than the scope of the study involved in the current research. Therefore, due to the risks involved in the use of the available data, the secondary sources used in the current research have been selected based on their suitability, reliability, and sufficiency.

Findings

Meaning of White – Collar Crime

White – collar crime is a tricky social problem. The term has shifted from the circles of science and academia into the public domain. Although the populace has heard about white – collar crime, most of them may not really explain what it is. Rather than attributing it to men in suits who make away with funds and are not prosecuted for it, white – collar crime is a complex concept that raises tricky social, lawful, and theoretical aspects that have imperative societal and criminal implications. White – collar criminals are common in almost each industry and profession (Benson and Simpson, 2009, p. 1). This involves not only conventional professions like law, medicine, and accounting, but also blue-collar professions such as plumbing, auto-mechanics, and real estate business, among others. When one hires the services of a professional, it is because the latter has more time to do the task, can do it better than the one hiring him or the professional is more knowledgeable in it than the one assigning him to do it.

After hiring a professional to accomplish such a task, it is not possible to know that the right thing was done in the right way. A case of the medical profession can be considered here. You are feeling unwell and you approach a medical practitioner for medication. He observes you, asks several questions regarding your symptoms, and then suggests more tests to make a comprehensive diagnosis. At such a point, as a patient, you are not certain as to whether your condition requires more tests. Since getting a second opinion would take more time and the doctor is expected to be an expert, you are likely to heed the doctor’s recommendation and agree to get further tests. However, what may be hidden to the patient is that the doctor knows the exact state of sicknesses, and could only be suggesting more tests for fiscal reasons. Furthermore, he could be a shareholder in the testing company and he is thus directing business in that manner. This fraudulent act is part of white-collar crime.

Other examples of white-collar crime include flouting of environmental rules, fraudulent accounting behaviors, employee exploitation, and anti-trust violations, among others (Benson and Simpson, 2009, p. 3). Unlike other kinds of crime, these ones do not call for a detached interaction between the wrongdoer and the victim. Although there are plausible grounds to justify the existence of white-collar crimes in the modern times than in the past, it will be inaccurate to conclude that white-collar crimes have newly been invented by criminals (Weisburd and Waring, 2001, p. 155). Actually, criminals have been practicing it for numerous years now. Edwin S. Sutherland, a former criminologist was the first person to coin white-collar crime. He is a respected author who has been quoted by many on the subject, especially in defining the term. He defines the term white-collar crime from an offender-based standpoint as “a crime committed by a person of high respect and high social status in the course of his occupation” (Sutherland, 1983 cited in Benson and Simpson, 2009, p. 5; Friedrichs, 2009, p. 2-3).

From the offense-based perspective, white-collar crime can be defined based on the means through which it has been conducted-particularly non-physical approach that may entail disguise or guile. A white-collar crime is therefore any illegal activity or a series of such that meets these prescribed requirements. Looked at this way, white-collar crimes can be categorized into four groups. First, personal crimes are those involving individuals who engage in them for personal benefits in a non-business situation. For example personal income tax violations and crimes involving credit cards. Second, there is abuse of trust, which affects those who work in businesses, the government, and other sectors. They commit the crime through flouting their duty of loyalty or faithfulness to either their customers or employers. Kickbacks, embezzlement, and commercial bribery are examples. The third group is business crimes. They are white-collar crimes that purport to be an extension of the main business transactions when they are in essence different from the main business transactions. A good example of this is food and drug violations. Fourth, con games are white-collar crimes that could be a business in themselves or may be the main activity of the business. Advance fee swindles is appropriate example (Benson and Simpson, 2009, p. 10).

Enron’s Business Operations

Enron Corporation was a large business enterprise headquartered at Texas, Houston (Gledhill, 2004, p. 11). Enron Corporation was ranked as the seventh largest companies in the United States in the year 2001. It is also during this year that a scandal ensued. The Corporation had employed at least twenty thousand workers globally and had managed to garner revenue amounting to over one hundred billion dollars in the previous year. Formerly, Enron was involved in supplying energy, a transaction that entailed running pipelines and power plants. However, after some years, the company transformed its way of conducting business. Apart from being involved in Broadband Information Technology, the company also began a trading business that dealt with delivery agreements for products such as oil, gas, and electricity. These agreements were traded by the company like either securities or commodity futures. Minimizing the uncertainty of the risks encountered through fluctuating gas prices was the goal of this business. In a bid to meet this aim, Enron created gas bank that was meant to act as a link between producers and consumers of natural gas. Both producers and clients endorsed long-term agreements with Enron. The difference between the selling price of natural gas to consumers and its buying price from producers is how Enron made its revenue.

Although this way of conducting business was regarded as one of the best, Enron began experiencing hurdles right from the onset. During the times, the natural gas prices were low. The company had managed to convince consumers to sign a long-term deal for the supply of the natural gas. However, it was difficult to convince the producers to accent to the same contract since the latter had hoped for the prices to shoot. Thus, they declined to sign a long-term contract with Enron for supplying oil at low prices. This compelled Enron to purchase gas from the sport market at higher prices to fulfill their contractual commitments. Enron then decided to prepay the oil producers to motivate them to endorse long-term agreements. Mark-to -market accounting was another important factor to Echelon. It was very different from the conventional historical cost accounting that was exercised by other companies. The main distinction between the two was that as soon as the deal was sealed, Enron was entitled to booking of the entire value of the contract. This caused Enron’s business figures to improve just the way they had anticipated. Both investors and analysts were duped by this. Revealing future cash flows instantly showed increased cash flows for the corporation. Analysts and investors then fell for Enron stocks and elevated Enron’s stock market rally irrespective of when Enron was going to receive the revealed earnings.

The Collapse

During early 2001, Arthur Andersen’s auditors had met and deliberated on the Enron’s transactions as they raised concerns over not only the Corporation’s accounting practices, but also the soundness of its Special Purpose Entities (SPE). They maintained that there was supposed to be a separation between the company and its Special purpose Entities so as to be regarded as off-balance-sheet entities. However, Arthur Andersen finally disclosed that this did not apply to every SPE given that Enron managers managed some of them. The resignation of the Chief Executive Officer, Jeff Skilling later on in 2001 triggered panic among most investors regarding the possibilities of Enron having key problems (Bauer, 2009, p. 2). Jeff Skilling was then punished with a 24-year jail term while the CEO and Chairman, Kenneth Lee died prior to being sentenced. Consequently, Enron’s auditing firm did not only lose most of its customers, but also laid off most of its employees. Besides, the firm destroyed audit documents that could have aided in investigation and it was thus found guilty.

The Scandal

Enron Corporation was involved in a financial scandal that included the company and its accounting counterpart, Arthur Andersen. The scandal came to the limelight in 2001, having begun almost a decade earlier and revolved around fraudulent accounting practices that left the bank on the threshold of one of the largest bankruptcies in the history of the United States. An attempted bailout by a similar, smaller energy company- Dynergy were far from feasible, making the company file for bankruptcy during the end of 2001 (Chopra, 2009, p. 315). A revelation of the Enron scandal was followed by a major decline in its shares

The company’s collapse after it had been indicated that most of its revenue and gains was a product of carrying out transactions with limited partnerships that it was in control of. The outcome was that most of the losses and debts that Enron had incurred were not reflected in its financial statements. Moreover, the scandal led to the dissolution of Arthur Andersen, which was featuring as one the global top accounting institutions at that time (Chopra, 2009, p. 315). Both the Chairman and the Chief Executive officer faced trial after indictment that covered a wide range of fiscal crimes such as “bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, money laundering conspiracy and insider trading” (Berrenson and Oppel, 2001; Parker, 2008, p. 67). The United States Congressional Record documents similar information regarding the unfolding of the Enron Corporation. It echoes the fact that the collapse of the firm was rooted in its accounting fraud.

The Special Purpose Entities and the partnerships run by the Company’s Chief Financial Officer were for the first time realized by investors to be entities that had caused the firm’s fiscal situation look better (Congress, 2002, p. 20209). A loss in both the company’s equity and shareholder equity was reported by the press in the year 2001 when the white-collar crimes were at their peak in Enron Corporation. Within a short time, the company’s reputation of a well operated firm and viable to invest in had been eroded and instead replaced with bankruptcy including colossus amounts of dollars in owing debt. The unfolding of Enron’s unethical business deals led to a great loss to many people (Lim, 2003, p. 211). For instance, employees lost both their occupations and pensions as its stockholders no longer had their shirts. Both credibility and ability to work as an auditor were lost by its accounting firm – Arthur Andersen. Despite the company’s fall, some directors managed to make away with millions of dollars (Congress, 2002, p. 20209).

Analysis and Interpretations

The Enron Corporation scandal is indeed one of the largest in the business world. Succinctly put, it is an epitome of white-collar crimes. First, the company’s mark-to-market accounting strategy deceived investors, analysts, and the general public that Enron was really making gains. This is because, whenever a deal was sealed, Enron was subject to booking the benefits that were associated with it. Secondly, Enron Corporation was involved in elite deviance. Elite deviance here has a meaning of affluent and powerful persons and organizations being involved in wrongdoing (Andersen and Taylor 2006, p. 158). This includes corporate scandals that deceive the public while at the same time enriching the executives within the organization. For example in the Enron case, there were great deceptive accounting methods that ended up leading to the loss of jobs by numerous workers and loss of other pension benefits (Andersen and Taylor 2006, p. 158).

Thirdly, there was conspiracy. Various conspiracy charges were leveled against several executives within the Enron Corporation (Siegel, 2008, p. 378). A financial officer, Lawrence Lawyer faced charges of filing a false income tax return. There was a facilitation of a deal between Enron Corporation, Nigerian power barges, and Merrill Lynch by Boyle. Boyle was also reported to have been involved in falsifying account records apart from committing wire fraud (Bryce, 2004, p. 374). The CEO of Enron Broadband Services (Kenneth Rice) was also reported to have been involved in wire and security fraud, insider trade and money laundering. Additionally, other conspiracy charges were leveled against Rex Shelby who was then the Vice President of the Company’s Broadband Services. He was accused to have committed money laundering, security and wire fraud. He was also accused for allegedly having sold Enron stocks at inflated costs (Bryce, 2004, p. 374).

Fourthly, Enron was involved in abuse of trust with its employees, stockholders and other investors. Contrary to the agreement that the Corporation had engaged itself with these parties, Enron engaged into crimes that saw most of its employees lose both their jobs and pension benefits. Those who had invested in the firm’s stock also did not live to see their investments mature to profit them. Through these actions, Enron committed both employee violation and abuse of trust. Moreover, Enron was also involved in business crimes. Money laundering and selling the Corporation’s Stock at inflated prices will have appeared to be part of the company’s main business activity on the surface, but was in essence, far from it.

Conclusion

White-collar crimes have been practiced for a longtime now. They are as rampant in the white-collar professions such as law, accounting, and medicine as they are in blue-collar professions such as auto-mechanics, plumbing, and real estate business. White-collar crimes can be grouped into four. The four categories are personal crimes, business crimes, abuse of trust, and con crimes. Enron was a large business enterprise in the United States that was headquartered at Texas, Houston.

Initially, Enron was involved in supplying energy before changing its business activities to Broadband Information Technology and delivery of contracts involving natural gas, oil, and electricity between customers and industries. It is in the course of running the new transactions that challenges started showing up. One of them was lack of agreement between Enron and supplying industries regarding signing long-term contracts. In a bid to deal with this, the company resorted to mark-to-market accounting strategy rather than the traditional historical cost accounting. This accounting strategy made the Corporation to book benefits from transactions it had sealed with the supplying industries. This made Enron to appear to generate more revenue, a move that attracted many investors and analysts. However, problems arose when the auditors of its auditing firm-Arthur Andersen asserted that there ought to have been revenue a separation between Enron and the Special Purpose Entities. Further investigations revealed that the company’s executives had been involved in myriad white-collar crimes such as money laundering, security transfer, wire transfer, accounting fraud, conspiracy, and insider trading. This saw not only the collapse of Enron Corporation, but also the prosecution of most of its senior executives that were found guilty of having been involved in the mentioned white-collar crimes.

References

Andersen, M.L. and Taylor, H.T (2006). Sociology: The Essentials. Belmont: Thomson Wadsworth.
Bauer, A. (2009). The Enron Scandal and the Sarbanes-Oxley-Act. New York: GRIN Verlag.
Berrenson, A. and Oppel, R. (2001). New York Times: Once Mighty Enron Strains under Scrutiny. Web.
Bryce, R. (2004). Pipe Dreams: Greek, Ego, and the Death of Enron. New York: Public Affairs.
Chopra, P. (2009). Masters of the Game. Tennessee: Brook of Life Press.
Congress. (2002). Congressional Record, V. 148, Pt. 15. New York: Government Printing Office.
Friedrichs, D.O. (2009). Trusted Criminals: White Collar Crime in Contemporary Society. Belmont: Cengage Learning.
Gledhill, J. (2004). Corporate scandal: global corporatism against society. Ontario: Berghahn Books.
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Lim, P. (2003). Money Mistakes you cannot afford to make. New York: McGraw Hill Companies.
Parker, P. (2008). Webster’s Quotations, Facts, and Phrases. San Diego: Icon Group International.
Pride, W.M. and Ferrell, O.C. (2008). Marketing. New York: Cengage Learning.
Sagar, R. (2002). Together with Economics. Delhi: Rachna Sagar:
Siegel, L.J. (2008). Criminology. Belmont: Thomson Wadsworth.
Weisburd, D. and Waring, E.J. (2001). White-collar Crime and Criminal Careers. Cambridge: Cambridge University Press.

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