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

From the 1980s until now, there pick out been a lot of write up scandals which were widely proclaimed on by media. The result of this website is galore(postnominal) companies were bankruptcy harborion requests, and closing. star of the intimately widely account aspiration of accountancy scandals is Enron Company. Enron Corporation is nonp atomic number 18il of the largest muscularity companies in the world. Enron was founded in Houston, Texas, the States in July 1985 by the consolidation between Houston ingrained Gas and InterNorth of Omaha, Nebraska (Enron and Enderson The story, n. d. ). match to Sridhanran, Dickes & Caines (2002, p. ), Enrons rank issuance is the seventh in the United States by Fortune magazine in April 2002.Their melodic phrasees were deal of nature gas, electricity sector, water, metal, broadband and naturalsprint. Enron has been adapted from the old economy company to the new economy company and focus on HFV (Hypothetical Future foster). The win were grown by bargain foring electric at stable damages from the suppliers and sale the distinguishable prices for customers. When the falsehood of their profits was opened, the investors withdraw the capital. Enron start collapse ( suit study The collapse, n. . , pp. 1-2). Definitions report system scandals argon political and business scandals development iniquitous accounting systems and fraud in the fiscal statements. According to Hanson (2002, p. 1), Enron accounting scandal is the more or less important common failure in the banks during the 1980s in the United States. This studys to changing in business and the law. When Enron was bankrupt, the economy of America was dropped, and umpteen another(prenominal) employees were baffled their jobs. Outline and Limitations The appellation will explain two important reasons and two make of Enron accounting scandal.The concession will conclude with review the Enron accounting scandal and giving the lesson s for an other(a) company. The Causes of Enron Accounting Scandal Business Fraud A business fraud is one of the just about important reasons which made bankruptcy of Enron. Firstly, check alliance companies were opened by chief financial officer Andy Fastow. He apply many partnership companies such(prenominal)(prenominal) as J. P. Mogan Chase and Merill kill to hide their enormous debts and losses from investors. They borrowed the big(p) amounts of notes from financial institutions to buy many assets this led to wrong view nearly Enron condition.It helped the melodic phrase price increase (Enron accounting scandal, 2009). In addition, the financial strategy, the business consultants and the accounting techniques are wrong filling of Enron. They utilize established investment currency to build 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 used falsify companies (SPEs) to move money between different banks and created false financial statements. This led to mistaking of shareholders about the real financial statements.Moreover, Enron predicted the afterlife grocery store of energy price. As a result, the sale prices of Enron feeln as mark-to-market, which get the hang the energy trading business and the reports which they compliments to show. Furthermore, Enron used wrong accounting system. They used mark-to-marked trading which is greatly hard to multifariousness to another system. The reports were shown losses or gains on the memory and security price at the end of the year. Enron was able to use SPE (special subprogram entities) to trade in legal era or banned time so that income could change to correct with investor expectances.Lastly, Enron had a colossal negative dollar cash lean from bank loans. They needed to pay rough two million dollars per day by cash. A Corruption and a overlook of Accounting Tech niques According to Buondonno, David, Pufky and Rollings (n. d. , pp. 18-20), Management train and accounting level were forgotten in Enron situation. Endrew Fastow, the Chief Financial Officer (CFO) of Enron used his fountain to corrupt by using his noesis into the agreements and making the bonuses from the agreements. Endrew and his wife got benefits from Enron to buy Chewco where his wife is owner.He controlled subsidiary companies to buy declension and hid debt for Enron. Enron did not follow the accounting rules. both mistake in accounting needfully to note 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 tried to make increase profits by break the law.Therefore, treachery in the financial stateme nt, 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 people are Enrons workers and shareholders. Many people confused their jobs, their whole pension and all of the shareholders confused their money (Dunder,n. d. ). According to Raver (2006, p4-5), Enron melodys prices were change magnitude nearly double in one year by many shipway such as legal and illegal way.The stock price was increasing so fast, many Enron employees bought Enron stock as thriftiness money, and besides their pension are in Enrons stock too. When Enron was failing, Enrons stock price was decreasing until no drawn-out 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 amicable security funds. The suddenly decrease of the value in Enron stocks inf luenced the retreat 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 effects 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 Market 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 modify retirement 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 Enro n accounting scandal was discovered, the price of Enrons stock fell reduce less than $1 (Enron stock prices, n. d. ). destruction The Enron accounting scandal is one of the biggest problems of cheat in accounting in America.It changed the most American life, and people behold themselves to know the answers of cupidity 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 ways such as the contravene of interest between two roles played, employees protection, changing in business managements, and ethics in business, cautious investment.