Place comments regarding the Enron collapse here
One major result of Enron’s fraud and collapse was the passing of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act is designed to make the top management of a company accountable for the accuracy of any financial information that the company presents. One key feature of the act is Title IX. Title IX requires that any financial statements filed with the SEC must contain a statement signed by the CEO and CFO, ensuring that all of the information is presented fairly and in compliance with SEC regulations. The act of willfully signing off on fraudulent financial information is punishable by up to $5,000,000 in fines and/or 20 years imprisonment. The act also limits the amount of non-audit services that auditors can provide (Title II), ensuring that they remain independent and unbiased. In addition, the act specifies stricter requirements for financial reporting and internal control (Title IV).
Which of the following is not a feature of the Sarbanes-Oxley Act?
A. Stricter requirements for financial reporting
B. Requires the use of ERP systems to avoid fraud
C. Requires top executives to review and sign financial statements
D. Limits the non-audit services that an auditor can provide
Speaking of Enron Company, its very obvious that how Enron’s action was horrible, because the company is greedy and evil. Not only that, they want to rated as a 3rd party, so they would get caught. But in the end, they are automatically watch out because the evidences had been found and the company is no more.
I think that “evil” is a bit of a stretch here. Greedy? Certainly. Deceptive? Absolutely. Illegal? No question. But evil? Were they truly doing evil deeds such as developing doomsday devices, stealing candy from babies, and the like? Just something to think about…
I think it’s evil for a company like Enron to do something like this…They and Madoff have affected and maybe even ruined the lives of countless individuals…that’s pretty evil…
I personally feel that the idea was brilliant, but I must condemn them as a result of the fact that completely innocent people who had no idea what was going on were victimized. But I still feel that in order to come up with an idea of such gravity took a genius.
I agree with Ed. Although Enron scandal resulted in many people losing a lot of money it took a genius to pull it off. The person or people behind Enron hid large sums of debts from the entire world, and made the financial world think it was one of the most profitable companies in the world.
While it is true that it took a lot to pull off a scheme like Enron did, I would be hesitant to label the people who were responsible as “geniuses.” I believe that, at the time, the concept of fiduciary responsibility was not nearly as prevalent as it is these days with the Sarbanes-Oxley Act forcing much more financial transparency. The people who did this simply took advantage of the situation – when the cat is away, the mice will play.
yeah i completely agree… here’s just a small part of how they ended up doing what they did. Enron had created offshore entities, units which may be used for planning and avoidance of taxes, raising the profitability of a business. This provided ownership and management with full freedom of currency movement and the anonymity that allowed the company to hide losses. These entities made Enron look more profitable than it actually was, and created a dangerous spiral in which each quarter, corporate officers would have to perform more and more contorted financial deception to create the illusion of billions in profits while the company was actually losing money. This practice drove up their stock price to new levels, at which point the executives began to work on insider information and trade millions of dollars worth of Enron stock.
Enron’s collapse brought about a change to large businesses across the U.S. With the passing of the Sarbanes-Oxley Act, businesses are held to a greater accountability with the CEO and CFO being required to sign for the validity of financial statements. With strict consequences for tampering with these forms and requiring independent and unbiased accounting reports on the company, fraud hopefully will be harder to perform. With the SAP system we worked with, it was almost impossible to undo transactions in order to prevent fraud, why can’t a system be used to help prevent misrepresentation of a company’s assets? I feel like with the current technology we have, a system should be able to prevent this for most people.
I suppose ERP systems help ensure accuracy, but is there anything built into them that allows 3rd parties to constantly monitor transactions or updates to financial records?
I recently watched the Enron movie “smartest guys in the room” in my Ethics class. While i’m sure the Sarbanes-Oxley Act has had some impact on the amount of fraud, I really feel that if someone or some company wants to do so badly enough they will figure out a way to go around the rule or find a loophole.
And Joe, I think that implementing a system that allowed a 3rd party to monitor a company’s behavior would be a good idea and definitely curb the amount of fraud.
Many companies are already in the practice of doing this. In the highly regulated world of insurance, for example, there are many examples of third-party accounting firms acting as external auditors for different insurance carriers. I was able to view this firsthand while working for ACE USA in its internal audit department.
Enron’s collapse can most likely be contributed to the fact that they became too big for their own good. They became a big player in the energy trading game and eventually even scheduled blackouts to control prices. The three key players in the rise of Enron were CEO Jeffrey Skilling, Chief Financial Officer Andrew Fastow, and CEO Kenneth Lay. Enron top officials continually encouraged employees invest in the company and place their 401k’s into the company’s program even when they knew the company was heading towards downfall. Fastow used very sketchy accounting practices and took advantage of the mark-to-market method to improve numbers. He also used partnerships (some of which that were faked) to transfer debt off the books of Enron to the other companies so that Enron could continue to show increasing profits. In addition to all of this, the accounting firm Arthur Anderson signed off on all their accounting records and ended up shredding all of their documents related to Enron at the height of the collapse.
Which of the following did not contribute to Enron’s collapse?
A. Unethical business practices
B. Fastow’s deceiving accounting methods
C. Workers began to quit
D. Arthur Anderson went along with the practices.
I am not clear as to why Enron incurred so much debt in the first place. The book talks about how Enron turned into such a big company, and how it entered different industries through partnerships and such, but did not really mention the reasons as to why the company initially failed. Is it really just because it became too large?
I agree that the size of Enron contributes to the ability of its managers to hide a lot of important information. I think transparency is the key factor when it comes to financial reports. The size of the company, the complicated in transactions and the continuously-changing of financial techniques make it extremely difficult for auditing. One more problem is that the auditing agency is hired and paid by the company itself. This can lead to bias in the field in which there should not be any.
I can definitely agree with your deduction from the matter since it seems that Enrons fraudulent actions were able to be slid under the table for so long because of the gret size of the company, and you speak of bias but that bias can be good in the sense of preventing this sort of things from happening in the future.
Enron was an energy brokerage company, which means that it bought and sold energy products, mainly oil, natural gas, and electricity, in a similar way that a stock brokerage buys and sells stock. It began as an oil pipeline company in 1985, but quickly took advantage of the deregulation of electricity markets that took place only a few years later. Enron would make money by buying electricity from suppliers and selling it to distribution companies. It ensured profits by negotiating seperate contracts with the seller and buyer and keeping its books private, so only Enron knew both prices.
Enron used some creative accounting practices to hide its debt. Mainly, it would purchase a number of subsidiaries but would not own more than 50% of the voting stock in each, which meant that Enron could keep the subsidiaries’ debt off its own books. This enabled Enron to secure lower interest rates than would otherwise be appropriate. Some partnerships were even faked for the sole purpose of hiding debt. Eventually the SEC called Enron on this practice and Enron filed for bankruptcy shortly after that.
Which of these actions performed by Enron was illegal?
A. Buying electricity and selling it at a profit.
B. Creating partnerships for the sole purpose of hiding debt.
C. Purposefully owning not greater than 50% of its subsidiaries.
D. All of these actions are illegal.
I never knew that a company could keep a subsidiaries debt off of their own books if they owned less than 50% of the voting stock. Interesting.
It seems that this could lead to a lot of “debt hiding.”
What still confuses me, and I suppose I’d have to do more research on it, is how they hid debt in a subsidiary (though that really isn’t the right word since they owned less than 50%). Who all owned the other half and was fine with this? I understand if they made up the partnerships, then it wasn’t an issue, but they only did that in some cases. Anyway, your post explains the whole situation pretty well. And I like your question, because one is illegal, while the other two are possibly just unethical, or misleading.
This was a good summary on the Enron collapse. I did not know much about the issue when it happened, and doing research about it gives too much technical details. Thanks for providing a brief, clear summary.
I agree the summary provided here was much better than many of the patchy stories I have heard and seen in the past, thanks.
Enron was one of the world’s largest electricity and natural gas traders in the later twentieth century that reportedly, had been growing very rapidly. But on October 16th, 2001, the company unexpectedly reported a $618 million third-quarter lost and a $1.2 billion reduction in shareholder’s equity. When the U.S. Securities and Exchange Commission (SEC) asked Enron for information regarding the loss, information regarding Enron’s deceptive bookkeeping surfaced. Many of the partnerships with other companies that its former Chief Financial Officer (CFO) Andrew Fastow had engineered were false, made to mask billions of dollars of debt that the company had incurred, allowing managers to shift debt of Enron’s accounting ledgers. This, along with the false financial statements issued by Enron’s auditor Arthur Andersen created the biggest corporate scandal ever to hit America. These corrupt work ethics lead to fraud and the abuse of America’s trust.
What crime were the executives of Enron not charged with?
b) Money Laundering
c) Insider Trading
I was too young to care about the Enron scandal when it initally happened, and never really read much into it. I think this post was good as a general overview, by providing enough detail that I knew what happened without getting hung up on details.
i might not be correct, but i dont beleive false financial statmenets were involved. the issue with Arthur Andersen was that as an outside auditor, he failed to correct the manipulation with the statements that Enron’s people were taking part of.
Well, technically the financial statements were false because they had the wrong debt amount on them. Had the true debt amount been on the financial statements, this would not have happened.
Enron was one the biggest traders of energy and had the potential to become even bigger. However, the CEO decided to play around with the accounting rules and divvied up Enron’s debt among its many real and imaginary subsidiaries. As a result, Enron was able to have a better credit score as it had little to no debt on its books, causing many people to pour money into the company. However, in the third quarter of 2001 Enron reported a loss of 614 million dollars, which the SEC decided to investigate. It turned out that Enron actually had a great deal of debt and was just fooling its investors. What made it worse, however, that Enron’s auditors, Anderson, knew of the illegal activities within Enron and chose not to divulge the information. In fact, they shredded all of the evidence of the crimes. All of this could have been avoided if an ERP had been in place, then Enron’s employees would have had a much harder time defrauding the company.
Enron was able to have a better(blank blank)as it had little to no debt on its books
A. standard cost
B. expected credit
C. credit score
D. standard score
I agree, Enron’s leader’s actions were horrible abuses of power which left many stockholders and employees in a bad situation. This is an excellent reason why ERP’s should be adopted by more companies. Maybe if Enron had an ERP this would not have happened.
I agree that an ERP would have helped the situation, but couldn’t the scandal still have occurred? It just would have been a little more difficult.
Personally I believe that the scandal would of still occurred. An ERP system doesn’t allow a company to erase files within it being recorded in the system. So it is the auditor’s job to figure out if the deleted files play a role in fraud as well as the auditor’s job to detect any fraud like activities. Being that they used Arthur Andersen to verify their financial claims, who is to say that they wouldn’t just sign off on the ERP system as well. The only difference is that Arthur Andersen couldn’t destroy the files once the SEC investigated.
I agree, I think that an effective ERP system that was manipulated properly could have even aided in the process of conducting the scam that they did.
Enron first went wrong when they encouraged investors (and mostly their own employees) to invest in Enron. They then reported a $618 million loss, which then caused the SEC to become suspicious and to get involved. The way the Enron was able to keep their shady dealings a secret was because they acted as the middle man; they had separate contracts with sellers and buyers and were able to regulate the price and keep the difference as revenue. Enron’s CFO, Fastow, had entered into fake partnerships with several companies to cover up the fact that Enron wasn’t able to provide what they had promised their customers. The scheme was premeditated because they intentionally kept the debt in the voting stock in check. Arthur Andersen was Enron’s accounting firm and acted in a suspicious manner by destroying Enron documents once the SEC became involved. The outcome of the situation resulted in Enron’s many investors (which was mainly their employees) to lose not only their jobs, but their life savings as well. The Enron scandal resulted in the Sarbanes-Oxley Act.
What was the purpose of the fake partnerships created by Fastow:
a. to make more friends
b. to make more money
c. to make an ally
d. to mask financial situation
When Enron reported a $618 million third quarter, it marked the beginning of the end for one of America’s most successful companies. The company would become a poster boy for fraud, conspiracy and money laundering in the corporate world. Before the collapse, Enron was one of the largest electricity and natural gas traders in the world. However, as the company became a giant in its industry its debts were continuously increasing. In order to make the company look more profitable, the company used creative accounting to hide the debt. CFO Magazine foretold problems Enron would run into by pointing out changing rules would affect Enron’s creative accounting. Enron wanted to hide debt so they can borrow money at a lower price. Enron’s auditing firm which was supposed to provide an unbiased look at the books were also at fault for giving validity of Enron’s books.
The gravest result of the scandal was the innocent workers who were encouraged by Enron to invest their savings in the company. These people were betrayed by a company that they believed in enough to invest their life saving in. These bystanders lost their jobs and their saving due to the actions of Enron.
Why did Enron want to hide its debt?
A. To borrow money at a lower price
B. To make itself look more profitable than it actually was
C. So they didn’t have to pay the debts
D. A & B
Answer is D
It is bad that the more recent events in the American business world have made the Enron scandal look like little more then a small corporate cover up. While Enron was for a time the “poster boy” for corporate fraud their crimes have been dwarfed by those of companies like Goldman Sachs. Their bankruptcy which was at the time the largest in history now ranks 6th.
The gigantic Enron fiasco of 2001 left a trail of destruction in its path. To begin with, it was determined that Enron’s 20,000 creditors would only receive a pathetic 20% of the $63 billion that was owed to them. The shareholders got something even worse – absolutely nothing. For many former Enron employees who had invested much of their savings in company stock through 401(k) retirement plans, all that money went down the drain. Accounting firm Arthur Andersen was dismantled, and the total count of individuals that have been or will be on trial sits at 31. The one positive thing that came out of this whole mess was the Sarbanes-Oxley Act, which significantly tightened fiduciary regulation and promoted accounting transparency.
How much of their investments in Enron were former company employees entitled to after the settlement?
D. 0% (CORRECT)
The fact that these people were entitled to nothing after this collapse has instilled such fear in the financial system. People do not realize they can loose all of their investment in the matter of days, especially if illegal activity is taking place behind closed doors. The Enron collapse has instilled fear in the lives of many people and cause people to be much more cautious in the future.
Enron was a major energy and natural gas trader based out of Huston. They made a fortune by buying energy from suppliers and selling to other parties and a higher price. On October 16, 2001 they reported shocking loses of 618 million. Their stock prices plummeted and an SEC inquiry was launched and on December 2nd of the same year Enron filed for what was then the largest bankruptcy in history. An SEC investigation revealed that Enron was taking large, but less then 50% stakes, in small companies that allowed them to transfer dept to these other companies with out showing it on their own books. The accounting company Arthur Anderson allowed these creative accounting techniques to take place but never went public with their concerns.
Who is responsible for the Enron scandal?
B. Arthur Anderson
C. Accounting laws that allow for creative accounting
D. All of the above
I agree that all 3 were responsible. It is obvious why Enron was responsible. Arthur Anderson suspected something and did not do anything about it and then went on to destroy documents. It is the the wording of c., the accounting laws, that I slightly disagree with. I don’t believe there were laws that allowed for their creative accounting, I believe that Enron did things that there weren’t laws against yet. They took advantage of the fact that they technically weren’t doing anything illegal because at the time there were no laws preventing them from mark to market accounting, etc.
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