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Enron Scandal Essay

2766 words - 12 pages

Overview of the Corporation
Enron is a global energy corporation that was formed in 1895 in Omaha, Nebraska when Inter North acquired Houston Natural Gas (Lee, 2014). Although Enron was founded in Nebraska, the corporation decided to relocate its headquarters in Houston, Texas. Kenneth Lay who was Chief Executive Officer (CEO) of the Houston Natural Gas corporation was chosen as the CEO of the Enron Corporation and Jeffery Skilling was selected as CEO subsequent to Lay’s retirement (Enron, 2013). Enron also employed 21,000 workers in more than 40 countries (Enron scandal at-a-glance, 2002). Based on Lee (2014), the corporation produced natural gasses as the main products and it branched ...view middle of the document...

Scandal Methodology
Enron fraud case is the most well-known type of accounting scandal that is happened in 2001 (Lee, 2014). Accounting scandal or accounting fraud means a planned misrepresentation of accounting records such as sales, revenues, expenses and other factors for a profit motive include corporation stock values, gaining more favorable money or avoiding debt obligations (Accounting fraud, 2014). Lee (2014) found that Enron fraud case started in 1992, when Jeffery Skilling, the president of Enron Corporation, persuaded the federal regulators to permit Enron using an accounting method which was “mark to market”. Using the mark to market accounting, a corporation was able to record the price or value of securities daily to calculate the profit or loss of a corporation. This method was previously used by brokerage and trading companies. Therefore, using this mark to market accounting allowed Enron to count projected earnings from long-term energy contracts as current income money that may not be collected for many years. In fact that Jeffery Skilling had planned the method to inflate revenue numbers by manipulating projections for future revenue.
According to Li (2010), Enron were forced to forecast high future cash flows and low discount rate in order to create a dependable and rational profiting situation that would appeal investors in investing in the long term contract with Enron. As a result, the number of the stock prices remained high while the number of tax is relatively low which was difficult to see how Enron made money (Lee, 2014). Furthermore, there was a difference between the calculated net present value and the original value paid was regarded as the profit of Enron. The net present value that was reported by Enron may not happen during the future years of the long term contract (Li, 2010).
The other method that used in Enron fraud case was Special Purpose Entity (SPE). Special Purpose Entity is a business structure of corporation to run smaller business operations without bothering a large financial risk (Special Purpose Entity, 2014). Based on accounting rule, a corporation is allowed to remove a SPE from its own financial statements when an independent party has control of the SPE and owns at least 3 percent of the SPE. In this case, Andrew Fastow, the Chief Financial Officer (CFO), used Enron’s stock that was under SPE to borrow huge amounts of money. The usage of this money was to balance the overvalued contracts of Enron. Hence, this SPE allowed Enron to convert loans and assets burdened with debt obligations into income. Moreover, by taking over the SPE made Enron transferred more stock to SPE. On the other hand, the abundant amount of debts and assets purchased by the SPE were not reported on Enron’s financial report. It caused shareholders were misled that debt was not increasing and the revenue was even increasing (Li, 2010). These SPEs were also established to keep Enron's credit rating high, which was very...

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