Corporate Scandal of Enron - Free Essay Example

Corporate Scandal of Enron A corporate scandal is a major financial defraument done to a company, a legal entity, by the creations of the law. The scandal in most cases is perpetuated by the insiders of the company, sometimes with the help of outsiders or experts in a specific field. It could be as a result of the an unscrupulous and malicious intentions one of the employees to rob off large amounts of money from the targeted company. Many companies have undergone this unfortunate incident, which in extreme cases leads to the fall of such companies. It is a practice which traces its origin to time antiquity . The chances are however reduces by the introduction of new technology and prudent systems in finance management. Accounting is a crucial aspect when it comes to the management of a company. From the books of records the interested parties are able to follow up on the cash flows and are able to detect and save a situation incase of incidences relating to fraud. The importance of accounting in the management of the funds has also been instrumental in the conduction of fraud. The abuse of prudent accounting practices instituted by the international accounting bodies provides the leeway through which fraud takes place. The practices, when followed, blocks and reduces possibilities of fraud taking place in any organization. As mentioned earlier, the advent of technology is also a blessing in disguise. It could be used to prevent fraud but unfortunately, many have also used it to perpetuate crime and fraud. A company which has suffered fraud lately is Enron Corporation. Enron Corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s inception dates back to 1985 when it was started by Kenneth Lay. Enron dealt in energy, petroleum products and later diversified to other fields such as communication.It had its headquarters in Texas (Miller 2002). Even though the original corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s target was the pipeline sector, the company soon spread its operations to other fields. Soon the company was in other business which enabled it to open its online platform for trade, it soon become an huge business site. For a considerably long time, the company enjoyed huge profits and the value of ità ¢Ã¢â€š ¬Ã¢â€ž ¢s securities stood at a high market value. Until the time of its collapse, the company was a home to at least 20,000 permanent employees. The number of people who depended on the company for livelihood could even be higher considering the other coporate clients. Regardless of the big name the company has and the adorable reputation the company enjoyed over the past, recently the companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s name hit the headlines in media outlets and social platforms due to wrong reasons; that of fraud. The companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s fortunes, however, started dwindling in 2001 when the then CEO Mr. Jeffrey Skilling announced his exit from the company. This was a blow considering that he was the main driving force behind the good fortunes of the company. When his successor took over, the company soon announced a huge loss of 618 million dollars (Miller 2002). This was the beginning of the bankruptcy path started by Enron which later ensured the de facto fall of other client companies. The scandal methodology which was applied to defraud the companies of millions of shillings was a complex chain of top management and the financial officers. Seemingly, the problems had started emerging earlier than expected if the exit of Jeffrey Skilling was anything to go buy. A critical investigation into the matter later revealed a complex web of connection wired towards conducting this crime. Enronà ¢Ã¢â€š ¬Ã¢â€ž ¢s corporation had huge debts which the Chief Financial Officer, Andrew Fastow hid from the management and the shareholders. As a general accounting rule, a companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s financial statements should be made public periodically to enable the shareholders to assess the growth curve of the company and also foll ow the performance of the company. The management, should be able to assess the status of the company if the available records of performances are availed. The Chief Financial Officer at Enron, conspired with the CEO of the corporation to misrepresent the state of affairs of the company to the board. Unfortunately, this web was spread even further to the audit firm which would later collapse due to bankruptcy following the spill over effect of the company. The accounting inappropriaty that was used to commit this fraud is imprudence. The Chief Financial officer did not bother to follow the rules and regulations provided by the Globally Accepted Accounting Principles(GAAP). In these provisions, the finance department should maintain all the records of transactions and the documentations made during the transactions for accountability and auditing purposes. In this case, from the conspiracy, there must have not been documents maintained by the Financial Officer. As a result, the de bts of the company could not be traced and followed up. The debts accumulated with the knowledge of the financial officers with less knowledge of the board of directors. During the quarterly reporting of the performance of the firm, the cracks were already too large to amend. The company had accumulated debts which could not be settled and therefore that meant the fall of the once celebrated and lucrative energy firm. The firm somehow, managed to hide the scandal until it could not be corrected . For a long time, the chief Financial Officer provided misleading financial statements and untrue state of affairs of as company(Miller 2002). This blinded the board of directors and therefore could not address the huge debt which had been incurred by the company. The debts accumulated and the real worth of the company was hidden even further. The initial conspiracy with the audit firm, Arthur Andersen Accounting Firm not to reveal the real state of affairs gave even more room for misappr opriation which later sank the company into a deep ditch. The Chief Executive Director of the company, also must have been part of the conspiracy to hide the real status of the company. The misrepresented financial documents and the forged transactional documents led to the eventual fall of the company. The scandal at the Enronà ¢Ã¢â€š ¬Ã¢â€ž ¢s Corporation affected so many factions both directly and indirectly. As earlier mentioned, the number of employees which ranged from 20,000 to 30,000 were all driven to joblessness (Miller 2002). This act of rendering a huge number of employees jobless had a ripple effect to the lives of many people. Families which depended on the income from the company for survival were pushed to anguish and the social benefits which they used to receive such as the medical cover were all relinguished. Since the company collapsed due to the debts, it was not able to pay for the pension or even the compensation fee. The same effect was felt by the sha reholders. They had no single idea that the company was falling apart. As a result, they never sold their securities and thence were caught up in the whole loss. They went at huge losses running into millions due to the value of the stocks which had depreciated to less than a dollar per share. The shareholders of the company bore the brunt of misappropriation and corruption. On the same note, the fall of the company had devastating effects on the society at large. In one way or another, a good number of people depended on the company for survival. The suppliers of different products to the company which were used for transactional purposes had their jobs and contracts cut short by the utter misappropriation of funds. In addition, the companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s fall had caused a lot of nominal losses outside the firm since the services which were once enjoyed by the consumers would now be terminated. This extended to the social responsibility which were provided by the company. The effects of the scandal went far and wide. It is the same reason which lead to dissolution of the Arthur Andersen, the accounting firm which audited the accounts of the firm at the time. The fall of this accounting fim, though not precedented, it had also conspired with the section of management of the management to cause all the mischief. On a wider scale, the fall of the company was a draw back to the economy of United State of America. The company had claimed a substancial section of the market through the essential services provided and the tax revenue remitted to the government. The tax revenue which would be foregone would be a great loss and set back to government policies and plans. In terms of integrity, it injured the perception of American companies in the intertional front. The investors from other parts of the world were therefore scared from investing in the America due to the possibility of such mega deals impacting on the shareholders (Fox 2002). It also em erged that the company structures were weak and prone to malicious intentions of some people who would think of infiltrating into the investments of the shareholders. The emergence of these weak structures injured the integrity of accounting in an international platform (Eichenwald 2005). The conspiracy between the practicing firm and sections of the management of Enronà ¢Ã¢â€š ¬Ã¢â€ž ¢s to commit this inhumane act was a show of weak integrity and loss of trust. From the period thenceforth, it emerged that the accounting firms which are mandated to check and oversee the operations of the companies in the light of proper record keeping and accurate representation of financial records. This noble duty was marred with stains of corruption painting the whole name of the practicing firms red. Globally, it exposed the flaws in the American company laws. To this end, there established more stringent rules and laws embedded in the Sarbanes-Oxley Act of 2002 to redeem the international i mage and bring the sanity back in the management of the shareholderà ¢Ã¢â€š ¬Ã¢â€ž ¢s funds in any publicly traded company. To avoid the reoccurrence of such mega scandal, there are a number of ideas which should be taken into consideration. Firstly, the government have the powers to curb all these by enacting stringent laws governing the management of the companies and the consequesnces for non adherence. This particular factor was taken into consideration in the enactment of the Sarbanes à ¢Ã¢â€š ¬Ã¢â‚¬Å"Oxley Act 2002 (Eichenwald 2005). In such enactions, the government should incorporate the extent to which different accounting firms should engage in the affairs of the a company. It should also address the issue of segregation of duties in the company management to prevent overlapping of duties. The board of directors should also be mandated to be more of insiders than decision makers only. Apart from the stringent laws enacted by the relevant authorities, there should a lso be the company structures and frameworks to prevent and curb any acts of fraud which might be conceived. The presence of such strong structures will curb and increase accountability in the workers. On the same note, the conspiracy between the Chief Financial Officer and the Chief Executive Officer brings to light the oversight structures which are instituted by the company. It is sad that the decision of two people can bring the whole company down without the knowledge of others. It is therefore recommended that the leadership of the company and the spread of power and duties should be wide enough to accommodate the efforts of at least a good number of people and not only few individuals who could decide to defraud the company of millions. The accounting firms should also up their game to endeavour to produce personnel with more integrity. The nature of the job is tricky and tempting, therefore, the integrity part should be inculcated by the trainers themselves so that much c onspiracy is reduced and not many incidences of fraud are reported (Fox 2002). In conclusion, the scandals facing companies have been around for a little longer time. It does not segregate, it affects companies in both developed and developing countries. Once it occurs, the effects are felt far and wide. The effects could be inform of money or loss of values. To prevent its occurrence, there is need to be stringent structures and rules governing the corporate governance. The tragic act which occurred at the Enronà ¢Ã¢â€š ¬Ã¢â€ž ¢s Corporation should be averted forthwith. References Eichenwald, K. (2005). Conspiracy of fools: A true story. New York: Random House Large Print. Fox, L. (2002). Enron: The Rise and Fall. Hoboken: John Wiley Sons. Human Rights Watch (Organization). (1999). The Enron Corporation: Corporate complicity in human rights violations. New York: Human Rights Watch. Miller, R. L. R., Jentz, G. A. (2008). Business law today: The essentials : text summarized casese-commerce, legal, ethical, and international environment. Australia: Thomson/South Western West. United States. (2003). Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, etc., Volume I: Report, February 2003. S.l: s.n.