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1.0 Introduction

1.1 Background of the Case

Enron based in Houston, Texas emerged as the largest seller of the natural gas and other energy resources in America in 1990s. It was a multinational corporation providing energy, communication services and heavy goods employing approximately twenty thousand staff. Kenneth Lay founded the company in the year 1985 after Houston Natural Gas and InterNorth merged together. The company’s earnings increased when it followed a diversification strategy when it decided to expand its product base from natural gas to other products like coal, steel, paper and pulp, broadband communications etc. The rise of the company was evident from its revenue earnings which amounted to $ 112 billion during the year 2000 and it was rated as the most innovative company by the Fortune magazine during that year (Miceli da Silveris, 2013). The real misfortune of the company began at the end of 2001 when the financial state of affairs of the company was uphold by a deliberate accounting fraud which was renowned as Enron Scandal. The scandal consequently questioned the accounting and auditing practices of the company and the role of accounting professionals in providing such misleading financial statements for the company. Enron broke the trust of their investors, share holders and their employees as the top executives of the company were lured by the positive publicity and worldwide media attention undertook aggressive methods of hiding company’s weak finances.

1.2 Corporate Governance of Enron

The board of directors of the company included Jeffrey Skilling, President and CEO; Mark Frevert, Vice Chairman; Greg Whalley, Chief Operating Officer and Andrew Fastow, Chief Financial Officer. Andersen was responsible for handling the auditing and accounting business of the company. Enron’s rise and fall was due to the activities of the corporate governance which was of elaborated structure. Initially, the company thrived over the market of energy sector as it redefined their business model to energy broker from energy delivery. Deregulation in the energy sector helped Enron to become the first company to be more innovative as limitations often results in creating newer techniques and systems with the help of accelerated experimentation (Weaver, 2004). The company now recognised for its corruption practices was once looked as an ideal model for corporate responsibility and business customs.

1.3 Major Issues and Challenges Revolving the Case

The corporate governance of the company cultivated ethical and cultural views of pushing the limits of their strengths which made their employers more creative as well as aggressive. In addition to the company’s competitive cultural and ethical background, the positive scrutiny from the press and popular financial analysts in the late 1990s added fuel to the exploitative escalation of the company. In order to maintain the reputation the company earned from worldwide business forums it started undertaking unfair means of the preserving their financial status. The executives of Enron knew that negative earnings would lead to fall in their investments and that would result in subsequent decline in their credit ratings of the company’s stocks. Not only this, the ruin of the country’s financial outlook can affect its trading relations also. The loss in the faith of the trading partners in the company would result in fall in cash flows and quality earnings of the company. In the view of maintaining its investment status and avoiding such state of affairs the company adopted accounting methods which were against the norms of accounting practices.  The complex financial reports were unclear to its shareholders and moreover, the company used restrictive accounting methods to manipulate their balance sheet and income statement (McLean and Elkind, 2013).

2.0 Analysis of the Case

2.1 Role of Accounting Professionals in the Downfall of Enron

The role of the accounting professionals in the downfall of Enron cannot be overlooked.  The transactions and accounting issues of Enron especially the SPEs (Special Purpose Entities which Enron used to fund the risks generated from specific assets) became the core of investigations after the case was disclosed. The accounting rules were manoeuvred to their benefits. There were six main accounting issues that were manipulated by Enron’s accounting professional and they are: 1. Policy of not combining SPEs to cover the losses and outstanding debts from the investors. 2. The accounting methods of sales of the merchant investments were kept unconsolidated with SPEs. 3. The company’s fair value accounting system that resulted in the restatements of investments. 4. Accounting of those stocks that were issued to the SPEs. 5. The income reorganization practices under which they recorded sales from the forward contracts in the current period. 6. Enron’s minimum disclosure of their party transactions and their costs to the stakeholders (Healy and Palepu, 2003). In addition to these accounting issues, Enron allowed its key players including Andre Fastow (CFO of Enron) to enter into partnership with SPEs as a result of which these players got profitable amounts when there were transactions between SPEs and Enron. The mark to market accounting which meant that the present value of the future inflows of the long term contracts signed at present will be recognised as current revenues and the present value of expected costs to be regarded as current expenditures. The fact that some of the long term contracts of the company had the term of 20 years, made the practice of mark to market accounting a difficult challenge for the accountants. There were questions regarding the viability of the contract and the cost associated with them. The company’s long time auditor Arthur Andersen was charged with the lawsuits for its dereliction and fraud accounting practices to hide the financial risks of the company.

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