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The Enron scandal

2019-05-20 来源: 51due教员组 类别: Essay范文

下面为大家整理一篇优秀的essay代写范文- The Enron scandal,供大家参考学习,这篇论文讨论了安然丑闻。安然丑闻是历史上最著名的会计丑闻之一,该公司此前的运营堪称奇迹,并在当时成为美国历史上最大的破产公司。由于高管们塑造的公司文化,会计师和高管们欺骗了投资者,在虚假的基础上确认收入,按市值计价,夸大收入,创建SPE来隐藏债务,缺乏适当的公司治理,以及贿赂审计人员。投资者和雇员都因为安然而受到影响,最后投资者赔了钱,雇员也失业了。

Enron,安然丑闻,essay代写,作业代写,代写

Section 1 Background about Enron

Enron was one of the largest energy firm in the US founded by Kenneth Lay in 1985 from two energy firms Northern Natural Gas and Houston Natural Gas. Before the scandal, the president was Jeffrey Skilling and the CFO was Andrew Fastow. Traded on the NYSE with the stock ticker ENE, it used to show a very strong financial book with high revenue growth, little debt and high equity, and a fast-growing stock price. From 1996 to 2001, the firm has been awarded “America’s most innovative company” title by Fortune for fix years in a role.

Enron’s revenue growth is illustrated in the following chart:

Enron’s debt and equity, capital structure make up is illustrated in the following chart:

Enron’s stock price chart:

With a stock price of around $20 in 1998, the firm conducted various accounting techniques to boost the performance of the stock, resulting in a stock price peak of around $80 by the end of 2000.

However, from this chart, since the beginning of 2001, the stock price started to decrease as the accounting scandal unfolded.

Section 2 The scandal unfolded

During 2001, the company’s stock price went straight downhills. For the first quarter, the firm reported profits of $536 million. On August 14, Skilling suddenly resigned and did not tell the public anything about the financial status of the firm. A week later, Lay was also selling his shares of Enron and told the employees to also sell the shares. Panic arose but nobody knew what exactly happened. In September, the company’s executives were still telling the public that their stock was a good choice and that they have been preparing the accounting books by complying with all of the rules and regulations. However, the third quarter reports showed that the firm lost $618 million. Shortly after this, the SEC investigated in Enron and it declared bankruptcy near the end of 2001. This section will talk about some of the accounting techniques that they used to wrongly present their earnings.

2.1 Revenue recognition

First, Enron was more than just an energy firm and had many other business operations that are hard to classify, for instance, its risk management services. According to the GAAP back then, when merchants sell a good to its clients, the merchant can recognize the revenue when the risk is transferred over to the client. An agent providing risk management services is different from a merchant and can recognize a portion of the transaction value as revenue, instead of the full transaction value. However, regardless of whether Enron served as the merchant or the agent in their sales, they always treated themselves as merchants and recognized the full amount of the transaction as their revenue. As a result, the revenue presented in section 1 showed that Enron’s revenue increased by 750% over the five-year period between 1996 to 2000.

2.2 Mark-to-market accounting

According to the accounting rules, for energy firms, the accounting books should show the actual costs of supplies and actual costs of revenues. However, Skilling changed the firm’s rules and let the accountants show the market value of the goods that they serviced, claiming that this method is closer to the true economic value. Under the rules, mark-to-market accounting recognizes income as the present value of net future cash flow. Due to the nature of its business, many of the long-term contracts for Enron was hard to estimate a future value and there could be a large discrepancy between estimates, large enough to be counted as misleading accounting reports. Even if the actual income from this long-term contract is not received yet, Enron could recognize this amount of revenue to their accounting books.

To cite a specific example, in 2000, Enron signed a 20-year contract with Blockbuster and estimated that the value generated from this contract would be $100 million. Blockbuster was confident that their contract would be profitable with the advanced technological updates in the Dotcom bubble around that time. However, Blockbuster’s technology did not work out at the end and they terminated the contract early. As for Enron, who has already recognized more than $100 million revenue, did not make any reversals for this failed contract. What is more, they found that this is a way to boost revenue, so they copied this revenue recognition method to many other contracts. This method allowed them to put anything they projected, or anything they wanted, into the revenue column.

2.3 SPE

A special purpose entity is a firm created for specific purposes as learned in class. In this case, the SPE existed primarily for Enron to put all of their debt. Recall that the debt to equity chart presented in the graph in section 1 showed little debt and a huge amount of equity for their revenue growth level. Normally we would have assumed that a firm growing at such a rate would be very highly leveraged to support its growth. However, the truth was that the debt was all hidden under a different name, an SPE, instead of under Enron. Among hundreds of their SPEs, some of the names included JEDI and Chewco, Whitewing, LJM and Raptors. As a result, the debt still existed but it was not on their own accounting books to fool the investors. Enron successfully lowered their leverage ratios to fool credit rating agencies such as Moody’s.

2.4 Corporate governance

Apart from accounting problems, there are also other problems in corporate governance that led to the misstatements of the accounting books. For example, many of the employees were awarded stock options and the employed had the incentive to work towards the best interest of the stock price of the firm instead of creating real value of the firm. They were pressurized to do everything they can to increase the stock price of the firm. As a result, executives and employees alike focused solely on earnings to rise the stock price, regardless of the rules and regulations.

Second, according to Bethany and Elkind in the book “the Smartest guys in the room”, one of the accountants from Enron said “We tried to aggressively use the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to where we did because we exploited that weakness”. So, the overall culture at Enron was also unethical and people were actually tried to find ways to get over the rules.

Third, the firm’s internal audit team was also discovered to be irresponsible and lacked sufficient knowledge to question the firm executives or Arthur Anderson. In addition, the internal audit team was not meeting frequently enough to discuss all of the complicated accounting books in details and the meetings were thought to be too short.

Section 3 The overall business environment

The overall business environment also speeds up the scandal because when one leading firm was growing at a tremendous rate, the other firms in this industry would wonder why and follow suit so that they can catch up with the industry average. For instance, when Enron adopted the unique revenue recognition methodology as stated in section 2.1, other firms such as Duke Energy, Reliant Energy, and Dynergy all adopted this revenue recognition method. Subsequently, their ranking in the Fortune 500 also went up since this method boosted their revenue tremendously.

Section 4 Impact of the scandal

4.1 The people

The key people involved were arrested and many were sentenced to jail for various years. Skilling was sentenced 24 years and 4 months in jail and was later agreed by the US Department of Justice to cut ten years of his sentence. Lay was sentenced to a maximum of 45 years but died before he was put into jail. Fastow was sentenced to ten years and his wife Lea was sentenced to one year since she has helped her husband to cover up the truth. Arthur Andersen surrendered its CPA charter and the reputation was hurt. Not only it was kicked out from the Big Five accounting firms, but also it was nearly dead with no business nowadays even though it has not formally filed for bankruptcy.

4.2 Accounting rule changes

The Sarbanes-Oxley Act of 2002 was mainly created as a result of two accounting scandals, including Enron. The new rules made it clear that the CEO and CFO have to certify the accounting books so that they could not deny and simply say that they did not know about any accounting shenanigans happening in the firm. After this scandal, the rules were much stricter, and the auditors worked with much more detailed checks.

The NYSE also announced new governance proposals as an aftermath of the scandal, including requiring that the firm to have a majority of independent directors, sufficient technical auditing and accounting knowledge for those members that are on the audit committee, independent directors shall be chosen for the compensation committee, nominating committee, and the audit committee.

Section 5 Conclusion

In short, the Enron scandal was one of the most famous accounting scandals in history, with the firm previously operating as a miracle, and failing as the largest bankruptcy firm back then in US history. Due to the company culture that the executives shaped, accountants and executives fooled the investors by recognizing revenue on a false basis, marking to market and overstating the revenue, creating SPE to hide their debt, the lack of proper corporate governance, and the bribery of auditors. Investors and employees alike suffered from their investment in Enron since investors lost their money and the employees lost their jobs. Almost twenty years has past and the accounting industry has grown more mature over the past years to prevent similar scandals from happening. People really needs to learn from history to conduct accounting in an honest manner.

Reference

Chhaochharia, Vidhi, and Yaniv Grinstein. “Corporate Governance and Firm Value: the Impact of the 2002 Governance Rules.” SSRN Electronic Journal, 2007, doi:10.2139/ssrn.556990.

Deakin, Simon F., and Suzanne J. Konzelmann. “Learning from Enron.” SSRN Electronic Journal, 2003, doi:10.2139/ssrn.1930867.

Enron. 1998 Annual Report, 1998. Web. 1 December 2017

Enron. 2000 Annual Report, 2000. Web. 1 December 2017

HAYS, KRISTEN. “Lay, Skilling Convicted in Enron Collapse.” The Washington Post, WP Company, 26 May 2006, www.washingtonpost.com/wp-dyn/content/article/2006/05/25/AR2006052500857.html.

Linder, Douglas. “Enron Stock Price Chart and Data.” Famous Trials, www.famous-trials.com/enron/1791-stockchart.

Man, Company, director. Enron: What Exactly Happened? YouTube, 23 Aug. 2017, www.youtube.com/watch?v=hwollZoVmUc.

McLean, Bethany, and Peter Elkind. The Smartest Guys in the Room: the Amazing Rise and Scandalous Fall of Enron. Portfolio/Penguin, 2013. Johnson, Carrie.

The Washington Post, WP Company, 24 Oct. 2006, www.washingtonpost.com/wp-dyn/content/article/2006/10/23/AR2006102300287_pf.html.

THOMAS , WILLIAM. “The Rise and Fall of Enron.” Journal of Accountancy, 1 Apr. 2002,www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html.

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