Question

Search the internet, find and discuss 1 examples of accounting scandal/fraud related to earnings management;

Answer 1

•Enron (earlier known as Huston Natural Gas) had a humble beginning in the production and distribution of natural gas on June 7, 1984.

•In 1986, the company changed its name to Enron and moved its headquarters to Huston, Texas.

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•Towards later years of 1990s, Enron entered into energy trading and derivatives and to facilitate that, it launched Enron On Line in 1999.

•On October 22, 2001 Securities and Exchange Commission announced inquiry into Enron Corporation’s related party transactions.

•Finally on December 2, 2001 Enron filed for bankruptcy

FACTORS BEHIND THE FRAUD

1. ENRON CREATED VIRTUAL PROFITS!!!

• Enron bolstered profits by booking income immediately on contracts that would take up to 10 years to complete.

2. The main culprit behind the fraud is – SPECIAL PURPOSE ENTITIES (SPEs)!!!

• These SPEs were created to transfer and hide its debt and business loses from investors, creditors and regulators, and for hedging purposes
• SPEs borrowed heavily on the basis of Enron’s guaranties and thus, it is what is called – ‘off- balance sheet financing.

3. Winning the trust of markets!!!

• Enron used to give huge fees to banks, investment banks and investment analysts. Also, sometimes some of them made a stakeholders of the Enron’s SPEs

4. Unethical Corporate Practices

• Enron used to contribute large political donations to both Democrats and Republicans. And, Enron’s chairman Kenneth Lay and many of his associates enjoyed favourable relations with the political parties at high level

5.The Role of Auditors … Arthur Anderson

• Arthur Anderson was heavily involved with Enron both as an auditor and as a consultant

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