An Explanation of the Causes and Effects of the Enron Accounting Scandals

From the mid-eighties until now, there relieve oneself been a lot of explanation grimes which were widely announce on by media. The result of this situation is legion(predicate) companies were failure testimonial requests, and closing. One of the most widely reported emulation of account scandals is Enron Company. Enron great deal is one of the largest get-up-and-go companies in the world. Enron was founded in Houston, Texas, America in July 1985 by the consolidation between Houston Natural Gas and InterNorth of Omaha, Nebraska (Enron and Enderson The story, n. d. ). concord to Sridhanran, Dickes & Caines (2002, p. ), Enrons rank number is the seventh in the United States by Fortune magazine in April 2002.Their businesses were sale of nature gas, electricity sector, water, metal, broadband and newsprint. Enron has been altered from the old economy alliance to the new economy company and focus on HFV (Hypothetical Future value). The internet were grown by purchase elect ric at st equal to(p) expenses from the suppliers and sale the different values for customers. When the falsehood of their profits was opened, the investors withdraw the capital. Enron start collapse (Case study The collapse, n. . , pp. 1-2). Definitions accounting system scandals atomic number 18 political and business scandals using illegal accounting systems and maneuver in the financial statements. According to Hanson (2002, p. 1), Enron accounting scandal is the most pregnant common failure in the banks during the 1980s in the United States. This threesomes to ever- changing in business and the law. When Enron was bankrupt, the economy of America was dropped, and many employees were lost their jobs. muster in and Limitations The assignment will explain two main reasons and two cause of Enron accounting scandal.The assignment will conclude with review the Enron accounting scandal and giving the lessons for another company. The Causes of Enron Accounting Scandal Busines s Fraud A business fraud is one of the most important reasons which made bankruptcy of Enron. Firstly, limited partnership companies were opened by CFO Andy Fastow. He use many partnership companies much(prenominal)(prenominal) as J. P. Mogan Chase and Merill Lynch to hold back their enormous debts and losses from investors. They borrowed the great amounts of money from financial institutions to buy many assets this light-emitting diode to wrong view about Enron condition.It helped the stock(a) price change magnitude (Enron accounting scandal, 2009). In addition, the financial strategy, the business consultants and the accounting techniques are wrong choice of Enron. They utilize established investment money to variant securitization abilities. According to Buondonno, David, Pufky and Rollings (n. d. , pp. 11-12), Enron has distorted the financial statements using the complex methods. They utilise pretended companies (SPEs) to move money between different banks and created f alse financial statements. This led to misunderstanding of shareholders about the real financial statements.Moreover, Enron predicted the future market of nada price. As a result, the sale prices of Enron known as mark-to-market, which control the energy trading business and the reports which they want to show. Furthermore, Enron used wrong accounting system. They used mark-to-marked trading which is greatly hard to change to another system. The reports were shown losses or gains on the stock and security price at the end of the year. Enron was able to use SPE (special purpose entities) to trade in legal time or illegal time so that income could change to correct with investor expectances.Lastly, Enron had a extensive negative dollar cash flow from bank loans. They needed to gestate around two million dollars per day by cash. A decomposition and a Lack of Accounting Techniques According to Buondonno, David, Pufky and Rollings (n. d. , pp. 18-20), Management level and accounting level were forgotten in Enron situation. Endrew Fastow, the Chief Financial Officer (CFO) of Enron used his power to corrupt by using his knowledge into the agreements and making the bonuses from the agreements. Endrew and his married woman got benefits from Enron to buy Chewco where his wife is owner.He controlled subsidiary companies to buy stock and hid debt for Enron. Enron did not detect the accounting rules. Every mistake in accounting needs to tone of voice and describes for shareholders know, and writes on the financial statements. In 2001, Accountants cannot combine Chewco into the Enrons financial statement. This lead to misunderstanding report which show the financial statement of Enron such as a decrease Enron income and an increase Enrons reported debt. In addition, Enron act to make maximize profits by break the law.Therefore, dishonesty in the financial statement, corruption and a lack of knowledge and skills of accountants are the causes of the Enrons bankruptcy. The Effects of Enron Accounting Scandal on Employees and shareholders When Enron was bankrupt, the most affected the great unwashed are Enrons workers and shareholders. Many people lost their jobs, their whole gift off and all of the shareholders lost their money (Dunder,n. d. ). According to Raver (2006, p4-5), Enron stocks prices were increased intimately double in one year by many shipway such as legal and illegal way.The stock price was change magnitude so fast, many Enron employees bought Enron stock as saving money, and withal their pension are in Enrons stock too. When Enron was failing, Enrons stock price was decreasing until no longer value, many Enron workers lost all their money, their jobs and also their pension lost too. For this reason, they almost have nothing they only have social security funds. The suddenly decrease of the value in Enron stocks influenced the back out savings of thousands Americans who are not Enron employees. Many Americans saved their money in the index funds.Enrons stock was formed by the different sources of investment, such as the state pension plans, university and other non-profit foundations (Sridharan, Dickes & Caines, 2002, p. 4). Therefore, when Enron scandal was happened, this entailed many effectuate on workers, shareholders and Americans who are not Enron employees. They lost their money, their jobs and their future. The United States and the Stock mart Enron accounting scandal helped American improve their knowledge of business and accounting. This leads to changing in the U. S. aw to protect people from the business fraud (Raver, n. d. , p. 4). They fortified seclusion security of American, and limited on selling stocks for employees (Sridharan, Dickes & Caines, 2002, p. 8). Moreover, the stock market was affects by the Enron accounting scandal, Enrons stock was $80 per share. When the Enron accounting scandal was discovered, the price of Enrons stock fell down less than $1 (Enron stock prices, n. d. ) . Conclusion The Enron accounting scandal is one of the biggest problems of cheating in accounting in America.It changed the most American life, and people behold themselves to know the answers of covetousness and break the law in business. The Enron accounting scandal has many reasons such as business cheating, the corrupt of the power person and inexperience of accountants. For this reasons, Enron bankruptcy had many effects on Americans social such as workers, shareholders, the American economy and the law. The lesson from Enron accounting scandal were found by many ship canal such as the conflict of interest between two roles played, employees protection, changing in business managements, and ethics in business, cautious investment.