Financial Statement Fraud Report - Enron Financial Essay

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Financial Statement Fraud Report - Enron

Financial Statement Fraud Report: Enron

The Enron case made the news when investors and employees realized that the company's accounting practices were not in line with what the company was actually telling them. Eventually, the dishonest accounting practices led to the bankruptcy of the Enron corporation and the dissolution of their accounting firm, Arthur Andersen (Foerstel, 2002). That accounting firm was among the five largest in the world, but its auditing of Enron and the deceit in which it was involved became their downfall. In order to clearly understand how this happened, it is necessary to describe the case. Also looked at here are the factors that led to the fraud, what specific fraud actually occurred, and what effects it had on specific groups of individuals who were affected - both directly and indirectly - by Enron's demise. It was not just the employees or the investors who ended up damaged by the deceit.

Enron was formed in 1985 by Kenneth Lay. Several years after that, Jeffrey Skilling was hired by the company and he developed a strong staff of high-powered and highly-paid executives (Feinberg, 2002). Those executives focused on loopholes in the accounting regulations, and they had poor financial reporting. Special purpose entities were also created to hide billions of dollars in debt from failed projects and deals. Andrew Fastow, the Chief Financial Officer, as well as some of the other executives, misled the Board of Directors of Enron. They also misled the audit committee on the high-risk issues they were focused on in their accounting practices and put pressure on Arthur Andersen in order to get the accounting firm to ignore the issues that they were seeing (Feinberg, 2002). Of course, Arthur Andersen did not have to go along with the high-pressure tactics, but the accounting firm chose to play along and there were many financial perks involved with doing that.

There were various factors that led to the fraud at the Enron company, but the main factor was greed. When Jeffrey Skilling and Andrew Fastow realized that they could manipulate the system and hide deceptive practices from the Board of Directors and others with which they were involved, they took full advantage of that. They focused on hiding millions of dollars of debt, and they found every loophole they could locate in order to make sure that the Board of Directors and others who could have spotted the fraud did not notice it (Borger & Teather, 2002). When it was finally discovered, it took down both Enron and Arthur Andersen. Enron's stock became virtually worthless overnight, and the collapse of the accounting firm meant that it could never recover, even once it was eventually cleared. Too many customers had been lost by that time, and the trust was broken. Once a person loses trust in a company that is managing its money, it is very hard for that person to get that trust back (Anderson, 1999), and the scandal was on the news so much that everyone knew the names Enron and Arthur Andersen.

Another factor that lead to the fraud was that it was so easy to perpetrate (Feinberg, 2002). No one caught on for a long period of time, and Arthur Andersen was going along with the con, as well. There was a lot of speculation when the problem was finally discovered as to whether Arthur Andersen actually knew about the fraud or whether it, too, had been duped. Overall, it was determined that the accountants who were actively working with Enron knew what was taking place, but that other people in the firm - and the firm as a whole - did not know what was happening. That was what led to the firm eventually being cleared of charges, but the scandal was so bad that being cleared did not matter. The accounting firm was still forced to close its doors simply due to a lack of a customer based anymore. Because Enron's executives had so much control over the company and were all in on the issue together, it made it very easy for them to falsify documents and information.

Specifically, the fraud that occurred was the falsification of documents and other information so as to show that the company was making a profit when, in fact, it was so far in debt that it was on the verge of a collapse. On paper, the company looked strong, but that did not mean much in the real world. However, the CFO and others could make it mean something in the real world by adjusting the documents, so that the company could get credit lines and so that investors would keep putting money into the company. No one wants to invest in something that is clearly sinking (Keller, 2002), and in order for Enron to keep attracting big investors it was necessary for the company to look as though it did not really need them. It is much easier to get people to give money to a company that does not look like it needs the money (Keller, 2002). That was not the only kind of fraud that occurred, however, because people in the company who realized that they were about to be exposed decided to sell all of their Enron stock before the price plummeted. They were guilty of fraud because they used insider information to make a huge profit on their stock right before Enron's problems came to light.

Selling so much stock often raises red flags in the minds of many people, because there would be no reason to sell off all of that stock if the company was still performing well and growing in the way it seemed to be. Defrauding of the employees and others who had put their trust into Enron was a serious issue, and one that was difficult to deal with on many levels because it was highly frustrating and upsetting for people who had put their entire life into the company and suddenly realized that they now had nothing to show for all of that time, effort, and investment. Those who defrauded investors and others did not get away with it from a legal standpoint, but that did not bring back everything that the people had lost in many cases, so those who had been wronged were left with anger and bad memories, and not much else to show for their time at Enron.

The effects of the Enron scandal were far-reaching, and they touched investors and creditors, company employees, the individuals that perpetrated the fraud, and the investment and regulatory markets. Creditors and investors had extended many loans and other types of credit to Enron, and investors had provided billions of dollars to the company over the course of its lifetime. Many people held Enron stock, because they believed that the company was growing well and that it had nowhere to go but up. With that being the case, there were some very angry people and some very financially-damaged companies left in the wake of the Enron debacle. One of the worst things about the scandal was that no one outside of a very small circle of people - those who were in on it and knew that they were about to be discovered - had any idea that there was even the slightest bit of a problem with Enron. Investors and creditors were on the hook for a huge amount of money that they would not be able to get back, because Enron had no money and had not had any for a long time (Borger & Teather, 2002; Feinberg, 2002).

The employees of the company, as a group, were perhaps the hardest hit of all (Foerstel, 2002). Quite a few of them had worked for Enron for a number of years, and they were planning on retiring from the company. They knew that they had a secure pension, and they were going to spend their retirement years comfortably because they had done the right thing for a very long period of time. They had been practical and they have set up their 401k and other savings plans with the company. What they had saved for retirement kept growing, making them very happy with what they had and where they would be when their time at the company was completed. Then, the scandal broke. Company employees were out of a job overnight, which was bad enough - and it was about to get worse. It was not long before the company employees discovered that all of their retirement funds were in Enron stock, which was worthless after the scandal. Everything that they had worked for all their lives and everything they had invested in order to have a secure retirement was lost. The problems with the company employees extended to their families, as well, because many of them were counting on the retirement money (and the current paychecks) that Enron offered. It is very difficult to assume…

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