Enron and Arthur Andersen
The beginning of the Enron Company story can be considered as highly successful. The company presented itself as a good business with a perfect reputation. It created a trading market, along with online trading. Highly qualified people were employed by the company, and the employees had a good reputation in society and in the energy sector. However, despite the fact that smart people worked for Enron, it is also necessary for a company to have the proper inducements. The story of Enron is about how the inducements were designed. The purpose of the paper is to study the story of Enron and the role of Arthur Andersen in it.
Enron was considered one of the biggest and the most successful energy corporations in the whole world. At that time, it was the seventh by market capitalization in the United States. Enron was considered the most innovative corporation from all the existing ones. In the late 90’s, the majority of Americans perceived Enron as a model of the American new business (Markham, 2015). Deregulation has created new opportunities, and the corporation benefited from them significantly. The company demonstrated the benefits of deregulation and showed how innovative firms of America could contribute to more productive economy. Enron was a role model in many ways. The corporation played an active role in public policy that strengthened the American position, while, at the same time, strengthening its balance sheet.
Nevertheless, everything finished rather quickly. If to look at Enron’s stock prices, practically a year passed from the spike when the stocks of the corporation cost more than $80 to the collapse of Enron (Markham, 2015). The company that was initially extremely expensive vanished virtually in just a flash. The story of Enron is the story of falsification and additions of statements. Managers of the company have systematically overstated the performance of the company and, thus, its stocks cost more. The corporation used a great number of accounting gimmicks that quickly turned into its usual practice. Enron learned to use clever financial income transfer technologies in order to reduce its liability for tax payments. Later, the company began to use these techniques with the same vigor and tenacity for the purpose of embellishment of the cash flows and the balance sheet. Throughout the 90’s, the company’s managers did so to inflate the shares of the corporation (Markham, 2015). It was performed with the purpose to sell the existing options more expensive. In such a way, the company conducted the double-entry bookkeeping. For the state, bankers, and shareholders, as well as managers provided one set of accounting documents, while the company used the other set of the documents to understand the real situation in Enron. Shareholders received large sums of money from the company before the fraud was discovered.
In general, there were four major people involved in the fraud. Many experts consider Kenneth Lay to be the main initiator of the situation (Markham, 2015). This person was a chairman and a founder of the company. She was also the chief advisor to the United States President George. W. Bush regarding energy issues. Other people include Andy Fastow, Jeffrey Skilling, and Lou Pai (Markham, 2015). All these people were involved in machinations with the accounting documents.
The bankruptcy of Enron showed certain essential shortcomings in the requirements for financial statements and the organization of the American financial market. The existence of these flaws ensured the possibility to abuse the positions by top management of the company and to extract large revenues, along with great financial institutions by deceiving the country and shareholders respecting the existing legislation, at the same time. The company was involved in different kinds of operations, a great number of which are still not properly investigated. More than 3500 companies were specially created (Markham, 2015). These companies occupy a particular position in the fraudulent affairs of the corporation. The majority of these organizations were operated in the form of partnerships. Andy Fastow has governed all of them (Markham, 2015). The operations of these companies were shown on the off-balance sheet accounts of Enron. Moreover, these operations did not influence the state of its profits. Partnerships were used as structures to hide the corporation’s debt and gain profit from its financial operations. When the financial situation of Enron got worse, partnerships were used for the transfer of disadvantageous assets of the company’s balance sheet. Therefore, Enron applied a gap in the accounting standards of FASB, which allows not taking into account on the balance sheet of the company, engaging in partnerships, where the external investor has a share of more than 3% (Markham, 2015). The result of the abuse became the collapse of the corporation. This fact became a detonator for the revelation of the several sponsored companies. When in 2001, Enron went to the court, the number of assets submitted by the company for its protection was about $25 billion and the amount of officially declared liabilities was approximately $13 billion (Markham, 2015). One year before the crash, market capitalization of Enron exceeded $90 billion and two months before the bankruptcy, the assets of the company were estimated at $38 billion (Markham, 2015). In such a way, it is obvious that the scheme was extremely complex but despite all the efforts of the company to hide this fraud, the truth still came out.
In addition, audit also played a significant role in the fate of the company. The auditing company Arthur Andersen was the auditor of Enron. On the eve of its failure, Arthur Andersen was the most charismatic and influential American audit firm. An impeccable reputation of the company was based on the principles of impartiality and honesty. These qualities turned Arthur Andersen into the main auditor company of the United States. Nevertheless, it soon turned out that a famous audit company led some unfair activities.
After the discovery of the fraud, Arthur Andersen ceased its existence. Nonetheless, some experts believe that the auditing company stopped existing all for nothing, as its managers were not aware of the real activity of Enron. Nevertheless, the majority of people still believe that Arthur Andersen was also a participant in the fraud. It was done advisedly. In the book Rush to Judgement, it is written that “the objective of an audit is to produce files that meticulously document all conclusions reached (including those superseded by subsequent events or analyses), each signed and dated to carefully delineate responsibility” (Morrison, 2004, p. 347). However, partners of the office distorted the information that was written in the audit report. After discovering the scam, executives of Arthur Andersen quickly began to destroy the documents about Enron’s audit. In the book A Financial History of Modern U.S. Corporate Scandals, it is noted that “in the midst of the controversy over its role in auditing Enron, Arthur Andersen announced that its Houston office had destroyed large amounts of Enron documents and deleted computer files and e-mails” (Markham, 2015, p. 206). In addition, offices located in other cities and even countries also destroyed all the documents associated with Enron. It was the moment
when the company collapsed and, thus, it was completely fair when Arthur Andersen’s firms around the world were forced to close as well.
The scandal associated with Enron and Arthur Andersen is considered one of the most well-known scandals in the business world. It was believed that these two corporations were the leaders in their spheres. People thought that they had a perfect reputation and could be totally trusted. However, it was not true. Enron became the participant of the fraud, involving the creation of special companies and overstating the assets. In turn, Arthur Andersen was the auditor of Enron, and it is believed that it was totally aware of the company’s fraud activity.