Enron Scandal and Accounting Fraud Case
How it works
Accounting fraud is a term that to refers to the manipulation of the financial statements of a business organization with the intention of misleading the public and other stakeholders on the financial status and health of the organization. Accounting fraud can be committed either for the intention of giving investors and potential investors a positive image so that they can invest or give the government a negative image of the financial health of an organization so that the organization can be able to evade. One of the most discussed cases of accounting fraud is the Enron Scandal. This paper evaluates Enron Scandal with a focus on the factors that qualify it as a case of accounting fraud, proof of cooperate governance failure, and the ethical issues that were involved.
Enron Corporation was an American company that specialized in energy and was based in Texas. The Enron Scandal became known to the public in 2001 October. The scandal is believed to have taken place at a time when the company was at its peak. Its shares were worth $90.75. After the scandal, it took the company less than 2 months to be declared bankrupt (Agrawal & Cooper, 2015). At the time the company was being declared bankrupt, their shares were worth $0.26. During the fiscal year that came before the scandal, the company had recorded revenue of almost $101 billion. Before the scandal was reported, the company offered employment to more than 20000 people.
How it works
In less than one year, Enron had changed from being considered one of the most innovative companies in the US to one that was largely associated with corruption. The company gave the public the wrong impression on what the performance of the company was. They exaggerated profits even for businesses that they did not get any income from so that they could dupe investors into buying shares because of the belief that the company has a prospect of great returns. The corporate scandal is basically fraud because it led investors into buying shares of a company that was not doing well financially by giving misleading reports on the performances of the assets owned by the company (Lin, Chiu, Huang & Yen, 2015). Therefore, the company was known to be doing well for years while it was not. Debts were piling up, and the dark details of such endeavors were hidden from the public and investors.
The company was involved in accounting fraud activities that were characterized by the use of mark-to-market accounting. This is a technique that can be used for accounting fraud because it involves measuring the value of security using market value and not the book value. When this technique is used, there are various factors that are hidden from members of the public. A good example of such factors is debts. For instance, when a company acquires an asset using borrowed money, they are likely to earn some revenue from that asset. However, when calculating the profit earned from such assets, it is required that the debts be factored in. Failure to consider the debt that was used in the acquisition of the asset will lead to the perception that the asset is doing extraordinarily well. However, things are likely to become clear when the time for debt paying comes. As far as trading securities were concerned, mark-to-market accounting worked miracles. However, the results were disastrous for the actual business.