Enron Accounting Scandals

Accounting Scandals

1. Enron

Enron is a company of the merger between InterNorth (distributor of natural gas) with Houston Natural Gas and Enron is named as America’s most innovative company for six consecutive years by Fortune. The two companies merged in 1985. The core business of Enron is in the energy industry, but Enron also did a very broad diversification even in areas that have nothing to do with the energy industry. Enron Scandal began to unfold in December 2001 and continued to roll in 2002 was very broad implications of the global financial markets were marked by declining stock prices drastically various stock exchanges around the world, from America, Europe, to Asia. After the scandal, Enron went bankrupt with debts left nearly US $ 31.2 billion. (Nick Beams 2001).

It is all started in October 2001; Enron announced the imposition of $ 1M after taxes to third-quarter profit and a decrease in equity of $ 1.2m. The next month, Enron announced its intention to present the annual report in 1997-2000 and recorded an additional burden of $ 569 million. The losses result in decreased investor confidence resulting the collapse of Enron. (Robert K. Herdman 2001).

Enron used financial engineering Special Purpose Entities (SPE) to cover the debts of hundreds of millions of dollars from investors. Enron is a company that misused the SPE. Enron also formed company with low capitalization and use it to buy assets at a high price, so that Enron could increase profits. Enron used for hedging SPE in order to protect their investment portfolio. SPE also give warranty to Enron in order to protect the investment of impairment. Basically, Enron is essentially insuring himself, because SPE is thinly capitalized and the executives of Enron manage it. In its annual report, Enron SPE treated as an independent company, which is not consolidated with Enron, so Enron could hide the unrealized losses of investors.

In the case of Enron, it is good if Enron formed Board of Directors and the Audit Committee, the purpose with the formation of the Board of Directors and Audit Committee is it can improve corporate accountability, and ensure the company has operated in the best way for the benefits of shareholders, and also to the audit committee is expected to be a link between the auditors and management. Hence, with the establishment of the audit committee is to strengthen the independence of auditors.

After Enron scandal, the US government published the Sarbanes-Oxley Act (SOX) to protect investors by improving the accuracy and reliability of public company disclosure undertaken. (William McLucas 2012)

References:

Robert K. Herdman (December 12, 2001)

https://www.sec.gov/news/testimony/121201tsrkh.htm

Nick