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Aftermath of Enron Essay

The aftermath of enron is the topic of this essay. The aftermath refers to what happened after enron filed for bankruptcy. This includes the aftermath in terms of how it affected people, companies, and society in general. It also talks about some solutions that were put in place to help prevent another company from going bankrupt.

Essay 1

The Enron Scandal, which came to light in 2001, was one of the most egregious corporate accounting frauds in history. The deception occurred as a result of accounting lacunae and poor financial reporting, allowing top executives to hide billions of dollars in liabilities from failed deals and projects. The CFO and other senior executives not only deceived the BOD and audit team on risky accounting standards, but also urged Arthur Andersen to overlook them.

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During this time, Arthur Andersen was Enron’s accounting firm. Shareholders lost billions of dollars as a consequence of the Enron scandal, which led to the company’s bankruptcy. Arthur Andersen gladly surrendered its auditing licenses in the United States and sold most of its practices (Healy & Palepu, 2003). The Sarbanes-Oxley Act was one of the most prevalent legislative changes made as a result of the scandal.

Sarbanes–Oxley Act

Sarbanes–Oxley Act of 2002 is a legislation that was passed by Congress in 2002 and often known as the Sarbanes–Oxley Act of 2002. The act set new or improved standards for all American-based public company boards, management, and public accounting and auditing firms (Kuschnik, 2008). Following a series of accounting scandals at major businesses in the United States, including Enron, Tyco International, and WorldCom, this bill was enacted to improve corporate governance. Share prices plummeted as a result of the incidents, costing investors and tax revenue.

The Sarbanes–Oxley Act is a piece of legislation that establishes rules for public companies in the United States. It contains 11 titles ranging from supplementary management board roles to criminal penalties, and it compels the Securities and Exchange Commission (SEC) to follow the bill’s outlines. The following are some of the key aspects of the act: disclosure controls, improper influence on audit behavior, quarterly reports disclosures, evaluation of internal controls, and criminal penalties for violating its provisions (Farrell, 2005).

The Ethics in the Financial Services Act of 2005 (2007) requires officers and directors to disclose material information to the SEC. The signing officers must currently verify that they are “in charge of setting and maintaining internal controls,” and that three months prior to the filing date, they had evaluated the firm’s internal controls’ efficiency (Kuschnik, 2008).

External auditors are required to provide comments on the internal controls’ effectiveness during financial reporting (Kuschnik, 2008). It is illegal for a commissioner (or any other person acting under the commission’s authority) to take part in any activity intended to falsely persuade, force, influence, or mislead an independent public or certified accountant engaged in audit of a company’s financial statements.

The Act requires the disclosure of all material off-balance sheet items under the title “disclosures in quarterly (or periodic) reports” in annual reports. The SEC will be further expected to monitor the use of such instruments and whether accounting laws have been carefully followed when they are utilized.

Finally, management is required to give an “internal control report” that confirms the management’s role in establishing and maintaining a sound internal control structure and accounting procedures (Kuschnik, 2008). The document must also include an assessment of the firm’s internal controls at the end of the most recent financial year. The Sarbanes–Oxley Act has been praised by a number of financial industry experts, who cite enhanced investor confidence and more accurate periodic and fiscal financial reports.

Essay 2

Enron’s fall Enron was formerly one of the world’s major electricity, natural gas, communication, services, and paper firms. It is true that in the previous six years, Enron was one of the most innovative businesses in the United States. Until 2001, it said it had nearly $101 billion in yearly revenues. Enron Corporation declared bankruptcy on December 2nd, 2001. To be candid, it was the biggest bankruptcy in American history. The majority of people believe that Enron’s collapse should be attributed to its gigantic legal ethical concerns.

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The most common reason for a firm’s failure is dishonesty and fraudulent operational practices, so Enron’s positive image in the international markets began to deteriorate. There were several ethical concerns at Enron that harmed and affected its employees’ and continuing operation. The initial ethical issue was when Enron urged its staff to invest in it while the decision-maker knew his company was in poor health and their stock had no value.

The company’s failure was due to the fact that the business practices required to utilize unlawful methods for growth were not in place. Many unusual bookkeeping procedures also caused corporation failure. The executives, however, took advantage of their workers’ confidence in their leadership. Their workers were undoubtedly damaged in the end, and even the company’s future were at stake.

The second ethical problem was that Enron attempted to falsify their financial results. It is true that Enron executives pressured their accountants to fabricate misleading financial statements for the firm. The CEO of Enron permitted his workers to distort the earnings in any way possible in order to make money, and as a result, the stock was worthless when its value started plummeting rapidly. The company could not avoid bankruptcy as its stock price plummeted.

The fraudulent conduct had a negative influence on the firm’s long-term prospects. Because investors and their staff were unable to determine the real situation of Enron, they would have lost a substantial amount of money if they invested in it. In addition, as a consequence of Enron’s failure, more businesses are being required to produce high-quality and accurate accounting financial statements, which is essential for their success.

The Sarbanes Oxley Act must take on considerable responsibility for auditing and monitoring these organizations, therefore it has created new and stringent standards to prevent future Enron-style catastrophes in the United States. The third ethical problem was that Enron wanted to pay out analysts to boost its ratings so that more people would come work for them. Normally, managers at Enron urged their employees to bribe analysts so they could receive higher ratings for Enron, which allowed them to attract more workers and investors interested in investing in Enron.

The company’s financial records were published in the public, however this hope was destroyed when corporate information was presented. Because there was a large gap between real and anticipated excellent ratings, if all of Enron’s workers and investors relied on these sorts of bribing analysts, they would be unable to avoid catastrophic losses and Enron’s collapse would be unavoidable. The last but not least ethical concern is that Enron attempted to disguise deficits by shuffling organizational components.

Enron preferred to record their profits because they believed that real earnings had been realized, but the only way to make up the difference between anticipated gains and actual money was to hide deficits by shuffling business departments. Enron did not disclose any of their losses on their transactions, and they frequently attempted to shift them over to other partnerships. Enron would be compelled to pay out its cash if financial sector teams, which were its partners, could not hide Enron’s losses.

Essay 3

The Enron Disaster was the worst of the many financial scandals that plagued the globe before 2001. In May 2001, U.S.-based energy trader Enron became the world’s largest energy trader after beginning as a modest Midwestern gas pipeline business in 1985. Its spectacular fall began in July 2001 and concluded with it filing for the largest Chapter 11 bankruptcy in US history in December 2001.1

Causes of the Enron Disaster

Politicians, government agencies, Enron employees and officials, and Arthur Andersen LLP were the four architects behind the Enron calamity. The first two architects aided and abetted the last two, who were the main perpetrators of the failure.

Politicians and Government Agencies

Enron executives shrewdly understood the underlying strong relation between politicians and regulatory government agencies, so they gave heavily to political campaigns.2 Enron executives contributed lavishly to the campaign funds of politicians, recognizing the important underlying connection between politics and regulating government bodies.3 President George W on his own made a personal donation of $ 794,700 to this Party since 1989.4

The California energy crisis was the first and major reason for Enron’s collapse. Enron took advantage of its political acumen to collaborate with Vice President Cheney in drafting the National Energy Policy Act, which was subsequently passed in 1992. Enron created an artificial power scarcity in California by manipulating prices from 3 cents per kilowatt down to 33 cents in a matter of days.

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Enron’s stock value rose 40% every year for five years (1995 to 2000), while its income increased by an incredible 7,000%. Its wealth began to expand at a breakneck speed, and its market capitalization reached the level of $500 billion in 1998. Enron was accused of price manipulation by California politicians in May that year; consumer organizations from the state joined them in accusing Enron in June. California suffered from severe power shortages and rolling blackouts in July 2001, prompting the state’s largest utility company, {Pacific Gas and Electric Company}, to seek bankruptcy protection. Enron copied its example five months later.

The Rise & Fall of Enron: Pbs.org
1-2/AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com.
3.ROTHWELL, J. 2002. Lessons from the Enron Collapse: Infinite Energy Magazine.
4.The Rise & Fall of Enron: Pbs.org
5.ROTHWELL, J. 2002. Lessons from the Enron Collapse: Infinite Energy Magazine.

The Financial Accounting Standards Board (FASB) was the reason for the third. It established the Generally Accepted Accounting Standards (GAAP). Unscrupulous organizations and officials used literal “gaps” in GAAP to conceal their actual financial condition and defraud Americans of millions of dollars. Enron and Arthur Andersen executives made full use of this loophole. According to Joseph Bernardino, Andersen’s CEO, “innocently,” his company had verified Enron’s accounts using GAAP rules.9

The Commodity Futures Trading Commission (CFTC) was the third reason. It allowed Enron to use a unique exemption in 1993 that permitted it to trade in energy derivatives, which was the company’s most lucrative business line. CFTC chair Wendy Graham resigned from her post soon after the decision went against Enron and joined Enron’s Board of Directors six months later.10

6.AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com.
7.ROTHWELL, J. 2002. Lessons from the Enron Collapse: Infinite Energy Magazine.
8.The Rise & Fall of Enron: Pbs.org
9.AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com.
10. Ibid.

The fourth reason was the Securities and Exchange Commission (SEC), which conducted no audits of Enron’s annual accounts for four years (1997 to 2001). 11

Enron and Arthur Andersen

Arthur Andersen and Enron executives collaborated to commit fraudulent accounting practices, which were knowingly manipulated. To begin, $ 20 billion worth of assets and losses of $ 500 million were hidden in almost 4,000 special purpose entities (SPEs) that were established to shield Enron from paying income tax. The SPE’s were nothing more than shell companies with Enron stock as share capital, whose transactions were recorded as earnings.

The structure of the SPE ensured that its financial statements were not consolidated with those of Enron. As a result, Enron was able to report higher than actual earnings and lower than actual debts by capitalizing its SPEs with Enron stock. Second, whereas Andersen’s consultancy fees were valued at $ 27 million in the Enron accounts, audit fees were only worth $ 25 million.

Thirdly, because of the conflict of interest involved, providing consulting services by an auditor is considered unfavorable to the public interest. Thirdly, in 2001, 29 Enron officials were chosen who received $ 1 billion in proceeds by selling Enron shares. This amount was made up of $ 101 million in income derived by the same manner as Kenneth and Linda Lay. The last cause was Enron’s massive losses incurred as a result of poorly financed investments in fiber-optic industries in the United Kingdom, India, and the United States’ power plant.

The Enron executives, as well as Arthur Andersen auditors, were primarily responsible for the Third Sin (Hyping and Spinning), the Sixth Sin (Minimum Auditing), and secondarily guilty of the First Sin (Underestimating the Capital Markets), while they were simultaneously indirectly responsible for the Fourth Sinsimulation by deceiving investors about future earnings potentials.

11. AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com.
Ibid.
12. ROTHWELL, J. 2002. Lessons from the Enron Collapse: Infinite Energy Magazine.
13. AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com. Consequences of Enron Disaster
14. The consequences were both immediate and long-lasting.

Immediate Consequences

Enron’s collapse has had major financial, legal, and social ramifications. The first was the losses suffered by Enron employees. Not only were 5,000 of them fired, but all those who held accounts in the Enron 401K retirement plan discovered that their assets were worthless on paper. 16 The second consequence was the enormous losses incurred by Enron stockholders as the firm’s formerly stratospheric stock plummets to penny prices. 17

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The third result was that the previous Big Five auditing firms – Price Waterhouse, Coopers, Klynveld Peat Marwick Goerdeler – that audited 80% of organizations in the FTSE 100, the DOW, and other major global markets. After Arthur Andersen LLP, once the darling of the global accounting scene that was most picky in its recruiting and customer selection, was subjected to severe investigation by the US Congress, SEC, and ICA, it fell into disgrace. Its UK operation was acquired by D&T in 2002.

15. MILLER P.B. & BAHNSON P.R. Quality Financial Reporting. Pages 17-21.
16. AUDET, J.R. An Octopus of Greed – The Enron Financial Web of Corruption: Quarterly-report.com.
17. Ibid.
18. The ‘Big Five’ Accountancy Firms: Bbc.co.uk.

Long-term Consequences

The first consequence was that public interest in, and debate about, the precise tasks of auditors and whether their independence can be jeopardized in certain circumstances, skyrocketed since Enron’s chaotic failure; the prominent case not only damaged the reputation of auditing as a profession among the general public, but also eroded investors’ confidence in the reports disseminated.

Because of this, the SEC decided to unleash a new set of rules and regulations for investing exchanges. The first result was that governments worldwide moved swiftly to enact more stringent controls following 2001. In 2002, the Sarbanes-Oxley Act was passed by the US Congress, while EU nations established independent auditor oversight bodies under their existing Eighth Company Law Directive in order to improve standards and be internationally competitive with “very good” (meaning the UK and US) countries.19

In the United States, the SEC began implementing its own version of the EU’s and US’s Market Abuse Regulation in January 2002. On January 29, 2003, the UK enacted a similar set of rules under the Hewitt-Brown revisions that apply to all listed businesses in the country.

Conclusion

On September 10, 2008, a US federal court doled out just compensation to Enron shareholders when it ordered a $ 7.2 billion payout to investors about 1.5 million people and organizations.20 Although other prominent financial catastrophes have occurred since 2001, including the WorldCom collapse in June 2002 and the Lehman Brothers bankruptcy filing in September 2008, none compare to the devastation of the Enron catastrophe.

‘Individual avarice’ on an unprecedented scale, a “shocking readiness” to ignore questionable behaviors by businesses, a “disgraceful decision” to hide evidence, and the ‘enthusiasm of politicians” to accept bribes from an organization that turned out to be a ‘fraud,’ in addition to then U.S Federal Reserve Head Paul Volcker stating after the Enron collapse:

The Big Four’s treatment in the United States has given rise to widespread public fury, which is still growing. By painting an unflattering picture of corporate America, the accountants’ behavior has established a new standard for unethical business conduct. Accounting and auditing in this country are in a state of crisis; it will always be engrained in global public memory. The consequences of a four-to-three scenario would include, among other things, investor confidence plummeting to an unprecedented low that would take years to recover from.

19. KERSNAR, J. Mending Fences: CFO Europe Magazine.

20. Judge Rules Enron Shareholders Can Share in $ 7.2B Settlement: San Jose Business Journal.

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