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Lessons learned from Enron’s fall.

Enron’s fall: lessons learned, and its effect on accounting.

by

David Diaz

For

Proffessor colin bowen

In partial fulfillment of the requirements for

Accounting 102

Milenia Atlantic University

December 08, 2008

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 Enron’s fall: lessons learned, and its effect on accounting

Despite not being natural persons, corporations are recognized by the law to

have rights and responsibilities like actual people, but this doesn’t meant that

they behave the same way people does. Corporations only exist to make profits

and their limits are the regulations. One of the most important cases that

demonstrates how institutions such as corporations may work as a malicious

organization on they way to gain profits is Enron.

Enron was “an American energy company based in Houston, Texas. Before its

bankruptcy in late 2001, Enron employed approximately 22,000 (McLean &

Elkind, 2003) and was one of the world's leading electricity, natural gas, pulp and

paper, and communications companies, with claimed revenues of nearly $101

billion in 2000.[1]Fortune named Enron "America's Most Innovative Company" for

six consecutive years. At the end of 2001 it was revealed that its reported

financial condition was sustained substantially by institutionalized, systematic,

and creatively planned accounting fraud”(wikipedia.com).

The company was a highly innovative enterprise for more of the 90s, and

changed from an old-line operator of pipelines into a trading company. But

someway along the line the

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company’s various and great innovations, that backed great investments and

capitals failed to create real economic value for its shareholders.

But why didn’t it stop there, it is common sense that of a business is not doing

good it must start to create profit or go bankrupt, but this was not the case of

Enron while their successful strategy developed for natural gas failed to work in

other fields, the books reflected marvelous earns.

Accountants are people too and the same way other people may get into illegal

activities they do to, in the specific case of Enron the profits were add to the book

before they were earned affecting the accounting structure of the company. While

the corporation continued to growth base on investment on the stock market;

investment that was bias by bad bookkeeping, and analyst that due to bad

judgment and Enron’s pressure recommended it.

Enron growth so much so fast that banks became little, many of them where

pressure to help Enron do their deals and transfer their assets from one company

to another and hide their assets from the public, all this to keep it at float

because Enron was the chicken of the golden eggs for banks and if it felt is was

going to hit them hard.

In March 5, 2001 a good question appears on the map, how exactly Enron makes

its profit. At that time the company was almost impenetrable to outsiders, this

created doubt amount people and investors, legal investigations started and in

few days it was a chaos, it was the beginning of the end for Enron.

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As soon as the fraud was discovered the responsible for this enormous financial

catastrophe were call to court, some of them went to jail and others got away. But

the real situation is how did it happens, and how can we stop this from happening

ageing.

The solution to this was call The Sarbanes-Oxley Act of 2002 (Pub.L. 107-204,

116 Stat. 745, enacted July 30, 2002), The Act “establishes a new quasi-public

agency, the Public Company Accounting Oversight Board, or PCAOB, which is

charged with overseeing, regulating, inspecting, and disciplining accounting firms

in their roles as auditors of public companies. The Act also covers issues such as

auditor independence, corporate governance, internal control assessment, and

enhanced financial disclosure”(wikipedia.com). As well as it states that managers

are responsible for the company accounting, and not knowing it’s not an excuse

in case anything happens, with this two mesures

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References

Salter, Malcolm S. (2008). Innovation corrupted: the origins and legacy of Enron’s collapse

(pp. 19-58). US: Harvard university press.

Bing, S. (2002, February 18). Lessons From The Abyss. Fortune, 145(4), 49-50. Retrieved

December 8, 2008, from Academic Search Premier database

Ex-CEO Found Guilty In Fraud Case. (2008, November). Wall Street Journal - Eastern

Edition, Retrieved December 8, 2008, from Business Source Premier database

A tough lesson learned. (2005, August 15). Canadian Business, Retrieved December 8, 2008,

from Academic Search Premier database

Daniel Scotto "American Financial Analyst: The First Analyst to recommend the selling of

Enron Stock" http://www.enron.com/

http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act

http://en.wikipedia.org/wiki/Enron