So while it had succeeded enormously during the stock market run of the late 90s, this vulnerability was exposed when the market turned during the bursting of the dot-com bubble (Investopedia, 2017).
One of the major frauds Enron committed concerned the use of mark-to-market accounting, which is legal for derivative assets, but highly questionable for use in other areas. Investopedia (2017) cites an example where Enron would build a power plant and “immediately claim the projected profit on its books, even though it hadn’t made one dime from it.” This misreporting of revenue constitutes accounting fraud, and created a situation where Enron’s reported earnings were much higher than its actual earnings. While the company was actually losing money – lots of it – this accounting technique led to financial statements that showed the company was actually making money.
Enron’s stock was flying, and the executives were earning substantial sums from equity-based compensation, which is dependent on maintaining high share values, and increasing them. So CFO Fastow set up what became known as special purpose vehicles to hide debt and other toxic assets off the balance sheet. Thus, Enron misrepresented its debt and its bad assets on the balance sheet. It did this by exchanging its stock with the SPV for a note, and the stock would then be used to hedge an asset listed on the balance sheet. Enron guaranteed the SPV’s value. This worked fine as long as Enron’s stock kept rising, which it did during this boom (Investopedia, 2017).
Enron also failed to disclose the apparent conflict of interest that was built into this structure. The mutual guarantees basically meant that if the value of Enron fell, the value of the SPV would fall – there were no downside protections, and the SPVs held all of the debt and bad assets that Enron had.
The auditor, Arthur Andersen, should have red-flagged these accounting practices, for the fact that they misled investors about the financial condition of Enron, and the risk that the company had. It was reporting record profits when it was actually losing money, and hiding its debts in order to cover up this lie. In particular there was insufficient disclosure of the complex hedges that the company had built around its SPVs, and was disclosure that existed was poorly described and difficult even for regulators to parse, let alone casual investors (Thomas, 2002).
When the dot-com bubble burst, a recession was spurred. With this came declining energy prices as demand was reduced. This put an increasing amount of pressure on Enron, as its losses mounted. It was no longer able to hide. Skeptics emerged, believing that Enron’s results were too good to be true, and they were. Investigators from the SEC began probing the company, and its accounting practices were revealed. The stock began to plummet by the summer of 2001. It recorded a loss, and closed one of its SPVs, an act that prevented further devaluation of its stock. The SEC began to investigate and by December the company filed for bankruptcy (Investopedia, 2017). The company had undertaken to shred documents sought by the SEC in an attempt to cover up the crime.
Enron Identify one of the examples of financial reporting misconduct associated with the Enron scandal In the wake of the stratospheric success and subsequent fall of Enron, many were compelled to ask: how could this be possible, namely how could a firm which seemed so successful on the surface be so corrupt at its core? The answer, although not simple, can be boiled down to this: creative financial accounting. While Enron deployed
These acts of corporate rapaciousness make it clear how easily ordinary citizens can be hurt when executives try to make money 'creatively' by moving money rather than producing a product or fulfilling a real service. Enron is often mistakenly called an energy company, but it was really more of a speculative entity. This is another illuminating aspect of the documentary for those viewers who may only know about the
Enron Leadership Enron collapsed very quickly in November 2001, and its failure should have been a warning to serious dysfunctions in the entire corporate and financial system, but this did not happen. Its executives admitted that they had falsified its records going back for at least five years, although in reality they had been doing so since the 1980s. When the company filed Chapter 11 bankruptcy it laid off over 20,000
Enron Case Study Enron was a company that started out small, but through some ethically unsound decisions, grew to control a large percentage of the energy market in America. In order to expand financially, Enron's executives skirted the law, creating several "independent" companies, called "special-purpose entities" (SPEs) into which they were able to hide many bad and devalued assets. In short, the executives used Enron money to create seemingly independent companies
Enron (Movie) analysis The Smartest Guys in the Room-Enron The film is pitched around the America's seventh largest corporation that was in charge of distributing electricity and natural gas. The company was worth over 70 billion dollars in assets built over years with over 22,000 employees, it became bankrupt within 24 days. The employees lost their jobs and medical insurance, 1.2 billion in retirement benefits while the retirees lost 2 billion dollars
If I was a legislator, I will be doing this act and I will not be swayed or affected by friends and lobbyists alike. Response to Ji Woo Chai: Indeed, the Sarbanes-Oxley Act was able to put in place controls and measures to prevent the reoccurrence of the Enron scandal. However, there has to be more done because of what occurred before and during the financial crisis. Thus, there may