The Unethical Financial Collapse of Enron - Accounting Practices - Essay Example

?“The Unethical Financial Collapse of Enron - Accounting Practices” Table of Contents Introduction 3 Case Background 4 Involvement/ Responsibilities of Accounting Practitioners in Enron 5 Arguments in Favor and Against the Accounting Practitioners 7 Conclusion 10 References 11 Introduction Enron Corporation was regarded as an American based company which involved in the business of providing energy and related commodity services to the customers. It was formed in the year 1985 and came up as an energy trader and supplier. During the year 2001, the company faced bankruptcy due to various reasons. It can be affirmed that the company faced bankruptcy due to the conduct of several ethical practices. Moreover, another reason for the company to face bankruptcy was due to the practice of unplanned and wrong accounting techniques. After its establishment, Enron had adopted along with executed certain unethical accounting techniques with the specific objective of hiding its liabilities and other loses during the growth of its stock price. During this time, various experts of the US already provided warning to the company about its increasing debt, but Enron avoided this and moved on to the development of its business by making substantial investments. The financial collapse of Enron was a lesson for the other business houses prevailing in the US1. With this concern, the assignment focused on broadly discussing the unethical accounting practices conducted by Enron that made the company to face bankruptcy. The various responsibilities of the account practitioners in the company have been revealed in order to verify whether they are liable for leading the company towards facing bankruptcy or not. The prime objective of this paper is to determine that the conduct of unethical accounting practices had eventually made financial collapse of Enron. Case Background Enron had made a rapid growth since its formation. By the year 2001, it became the seventh biggest natural gas and electrical company in the entire region of the US. The scandal of Enron can be noticed for the reason of its increased level of earning business reputation and gaining substantial profits. After several years, Jeffery Skilling, the new CEO of the company appointed numerous skilled executives who were capable of hiding outstanding amounts that to be presented in the financial statements by using the methods of poor financial accounting. The company filed for bankruptcy in the year 2001 after experiencing a long-run loss in its business. It has been viewed that an increment in the annual revenue of the company was only US$ 9 to US$ 10 during the period of 1995 to 2000. This represents the loss that suffered by the company while conducting its business. It can also be viewed that the stock price of the company had a drastic fall from $90 per share to $1 from the middle of the year 2000 and lasted up to 2001 which created a great loss for the shareholders. After this incident, Enron checked its financial statement for the last five years and came to realize a total loss of $586 million2. Due to this heavy loss, Enron filled bankruptcy on December 2, 2001. It can be apparently observed that several problems faced by the company and its shareholders after the bankruptcy. In this regard, most of the employees of Enron were accused with charges and had been imprisoned. Enron lost a huge figure of customers due to bankruptcy and also for a case which was running in the US Supreme Court. The court ordered to pay back the customers with partial return. Being unable to overcome all these losses and negative reputation, Enron failed to restore its previous position in the market where it operates. In relation to the case of Enron, it can be affirmed that there were several reasons for which the company had experienced bankruptcy. One of the major causes was the practice of unethical accounting practices that prevailed within the company. In this similar concern, the company adopted certain unplanned measures of financial reporting in order to hide the losses that resulted from the part of their shareholders. Prior to the year 2001, the CEO was deeply involved in expanding the business in other sectors rather than focusing on observing the practice of wrong accounting techniques. It can be stated that a company leading to bankruptcy is a quite usual case in the world of business. The scandal of Enron came into much focus due to the ways that the company responded towards solving the problem of its financial reporting. When the accounting statements were revised, a huge percentage of loss can be apparently observed to be suffered by the company which became the major cause of bankruptcy for Enron1. Involvement/ Responsibilities of Accounting Practitioners in Enron The bankruptcy occurred in Enron was mainly because of the practice of unethical accounting practices. Enron engaged special purpose entities (SPE) in order to cover risky trading transactions and that not to be reflected in the company’s balance sheet. These SPEs eventually applied various techniques without revealing the debts of the organization in its balance sheet. Thus, the engagement of SPEs was the major reason of conducting unsuccessful operations which led towards bankruptcy of the company. The techniques that utilized by the SPEs ultimately made the compiling procedure of the financial statements of Enron much complicated. On October 16, 2001, the company revealed a loss of US$ 638 million and a reduction of US$ 1.2 billion in shareholder equity that weakened its financial configuration by a greater extent3. It was the senior executives of the company who were observed to perform unethical accounting practices that made the company to face bankruptcy. Moreover, they were mainly indulged in investing in various projects relating to power plant and water distribution among others rather than concentrating on upgrading the financial statements of the company. The high level managers of Enron possessed poor decision-making procedure concerning the development of business and raising management capability of the organization. It can be viewed that the financial statements of Enron were not reviewed by the auditors since a long period. There does not lay any sort of distance between the auditors and the clients which resulted in creating conflict of interests. This particular issue can be duly considered as one of the unethical accounting practice which prevailed within Enron. The scandal of Enron had reduced the confidence level amid the general public with respect to reporting practice and corporate accounting method of large organizations. It is quite often that The Board of Directors generally selects the team of auditors in a specific company. But in Enron, the similar role had been performed by a single person. Due to the conduct of ineffective performances by the employees, it can be stated that the personnel including the top level executives were responsible by a certain degree for making Enron to face bankruptcy 1. Arguments in Favor and Against the Accounting Practitioners From the above study of the accounting practices existed in Enron, it can be stated that the accountants were not the sole responsible for generating such an event i.e. bankruptcy. There were certain other causes of bankruptcy other than the roles performed by the accountants. The accounting practitioners engaged with the company were responsible for the generation of the event by a certain degree but cannot be quoted as fully responsible. In this regard, it can be affirmed that they adopted an unethical accounting technique in order to hide certain transactions in balance sheet having consent from the top officials belonging to the company. Specially mentioning, the accountants were instructed to use unplanned techniques by the top level managers of the company. Apart from the illegal practices performed by the accounting practitioners, the other major causes of bankruptcy in Enron were mainly comprised unusual investments made in various projects with the intention of expanding its business. It can be viewed in this regard that Enron invested in the projects like power plant and fiber optics network among other in order to earn more profits. The main focus of the top officials belonging to Enron remained only in making business expansion rather than concentrating on recovering the losses that rose while conducting its business. The other reason can be the growing competition in the market where the company operates. In the 1990s, Enron was facing a tough competition with certain other energy deliverance companies. Due to gaining momentum of business market competition, Enron started practicing ineffective accounting methods to hide the losses of the company1. It can be affirmed that instead of adopting this method, Enron could have made much deliberate efforts towards the improvement of the existing financial reporting of the company. It is worth mentioning that in the year 2001, the US government introduced price caps for the energy companies for the purpose of restricting them to fix process at their own. In this regard, Enron faced certain problems due to the introduction of the aforesaid policy by the government. After this incident, Enron declared its loss which was the sign of falling into bankruptcy. Most vitally, the accountants of the company adopted the wrong process of cost accounting with the intimation received from the top level hierarchy. The auditor of the company hired a team of accountants who were able to prepare the balance sheet of the company in such a manner that no losses could be revealed. This can be regarded as one of the crucial accounting practices that performed by the accountants leading Enron towards experiencing financial collapse. The most important role played in Enron’s bankruptcy was the auditor i.e. Andersen who used to handle all the responsibilities of an internal along with external auditor and also a tax consultant of the company. In this regard, a single person playing numerous roles made the operational procedure of the company much complex which can be regarded as one of the major reasons of Enron’s bankruptcy. Besides, the Chief Financial Officer (CFO) of Enron named Andy Fastow engaged SPEs for the purpose of developing the business position of the company and attaining significant profits. SPE denotes having partnerships with other party which assists the companies in developing business through the conduct of unethical practices4. Enron had realized about the risks involved in the SPEs, but the higher authorities unrevealed the same from its shareholders and consumers. In order to put out of sight about the debts and losses of the company along with raising profit margins, Enron applied unlawful techniques of financial reporting1. Therefore, the above study reveals that the unethical accounting practices that performed by the accounting professionals of Enron along with other various reasons ultimately led the company towards facing bankruptcy and financial collapse by a considerable level. Conclusion From the above study, it can be affirmed that the conduct of unethical accounting practices by the accounting professionals were one of the main reasons for financial collapse of Enron and also for its bankruptcy. A comprehensive idea about the causes and the roles played by the auditors and the accounting professionals in the collapse of the company can be viewed. It can be apparently observed that the company remained much focused upon expanding its business without providing much attention towards the improvement of its financial reporting. Owing to several crucial factors, the company faced such a huge loss that it could not recover the situation and ultimately filed for bankruptcy. The decisions made by the top level hierarchy were not efficient enough to uplift the company. There existed poor management capacity amid the members of the higher authority belonging to the company. It can be stated that the growing business market competition amid the energy providing companies at that time forced Enron to conduct such illicit practices. It can be viewed both the company along with its employees faced numerous difficulties along with complexities due to the bankruptcy experienced by Enron. Thus, it can be concluded it can be said that if Enron would have focused on the improvement of cost accounting method instead of emphasizing business expansion and increased profit, it would not have faced such radical problem i.e. insolvency in its business. References Edelman, Daniel, and Nicholson, Ashley. n.d. “Arthur Anderson Auditors and Enron: What happened to their Texas CPA licenses?” Journal of Finance and Accountancy: 1-9. Jickling, Mark. 2002. “The Enron Collapse: An Overview of Financial Issues”. Congressional Research Service The Library of Congress CRS Report for Congress: 1-5. Li, Yuhao. 2010. “The Case Analysis of the Scandal of Enron”. International Journal of Business and Management 5 (10): 37-41. Sridharan, Uma. V, Dickes, Lori, and Caines, W. Royce. 2006. “The Social Impact of Business Failure: Enron.” American Journal of Business 17 (2). Read More