Essay Title - Accounting Practices - Enron Corp
In the early days of this century, Enron Corp. found itself in the middle of one the biggest corporate scandals in American history. Enron had become one of the largest and most successful companies this century before corruption and mismanagement toppled it. The company’s spectacular collapse resulted from the disclosure that it had reported false profits, using accounting methods that failed to follow generally accepted procedures.
Based in Houston, Texas, Enron was formed in 1985 as the merger of two gas companies, Houston Natural Gas and Internorth. Under chairman and CEO Kenneth Lay, Enron rose as high as number seven on Fortune magazine's list of the top 500 U.S. companies. From its pipeline sector, Enron began branching into other markets. In 1999, the company started its broadband website for trading commodities, which soon became the largest business site in the world.
Enron was forced to disclose that its bookkeeping had been too creative. The company began to use “off the books” partners to hide losses. And due to failure to properly record charges, its soaring profits were suddenly wiped out by losses. As investors lost confidence in the company, its stock values crashed. Enron found itself in a huge credit crunch. It was revealed that many Enron executives had sold tens of millions of dollars of their stock in insider trading deals. Enron executives had authorized a change in the company's pension plan that froze workers' retirement funds in Enron stock as the price nose-dived. While executives profited from selling stocks, the average workers were left with a pension plan that was worthless.
Efforts have been made by the Government post-Enron, to tighten regulation on securities. The Public Company Accounting Reform and Investor Protection Act of 2002, was proposed in direct response to the millions of retirement benefit dollars lost in the Enron collapse. The Bill was designed to improve quality and transparency in financial reporting and independent audits and accounting services for public companies. The new law also created the Public Company Accounting Oversight Board under the SEC’s supervision. The board was given the power to set accounting standards, investigate whether companies and certified public accounting (CPA) firms are conforming to the standards, to fine certified public accountants (CPAs) and their firms for violations, suspend CPAs and their firms, and recommend criminal investigations by the Justice Department. The new law also required CPA firms to separate their consulting and auditing services in order to avoid conflicts of interest like those in the Enron scandal.
Business Week, in its Aug 19-26, 2002, cover story, said: "In the post-Enron world, there is a yearning for corporate values that reach higher than the size of the chief executive's paycheck or even the latest stock price. Trust, integrity, and fairness do matter and they are crucial to the bottom line. The corporate leaders and entrepreneurs (and all of us) are now paying the price in a downward market roiled by a loss of investor confidence.... But the first task of the post-Enron corporation is to acknowledge that a company's viability now depends less on making the numbers at any cost and more on the integrity and trustworthiness of its practices. In the future, leadership that preaches this new ethos and reinforces it through value-driven cultures will be far more likely to reap the rewards of a changing marketplace." Companies today must adhere to customary accounting practices to avoid being subject to intense ethical auditing. Decisions in company policy and growth must be made by management that is willing to weigh ethical and moral responsibilities with the bottom line.
Small investors, understandably, are frightened when a giant, well-regarded company collapses overnight. The obvious lesson: don't keep too many eggs in one investment basket, especially in the company you work for. Utilities deregulation has suffered a severe blow: if a huge company like Enron can disappear overnight, how can you trust new market players to provide you with essentials like electricity, gas and water?
The Enron fallout promises to be severe and far-reaching. With a criminal investigation underway, some of the Enron players face the prospect of spending time in the big house. The only question about Arthur Andersen is how much the partners will have to pay to settle this mess, and whether the company can survive as an independent entity. The accounting profession is wishing it were once again faceless and colorless, instead of being in the harsh spotlight. Financial conglomerates like JP Morgan Chase and Citigroup are going to be scrutinized over their multiple and often conflicting roles at Enron: lenders, trading partners, investors, advisers, investment bankers.
Former Enron employees can't stop shaking their heads over the sorry saga. The bottom line: Enron wanted to change the world. It did. But not quite the way that it had in mind.
USA Today (Society for the Advancement of Education), Nov, 2002 by John W. Zimmerman
Enron files for bankruptcy, December 2, 2001,
http://www.history.com/this-day-in-history.do?action=VideoArticle&id=52282
News Week, Who Killed Enron, January 21, 2002,
http://www.newsweek.com/id/63622?tid=relatedcl
