Question

Search the internet and find an instance of "Earnings Mismanagement" and "Fraud" in your pathway. In a minimum of 3 paragraphs, tell us:

• The company name (in the subject line of your post).
  
• Why this company interests you.
• When they did it.
• Describe in detail what they did and how they got caught.
  
• Tell us what the consequences were to the individuals responsible.
  
• Cite at least two sources for your information.

Answer 1

ENRON SCANDAL IN 2001

Enron Corporation was an  commodities, and services company based in Houston, Texas. It was founded in 1985 as a merger between Houston Natural Gas and InterNorth, both relatively small regional companies.

Why this company interests you.

The story of Enron Corporation depicts a company that reached dramatic heights only to face a dizzying fall. The fated company's collapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when the firm declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business, at the time one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting.

What they did and how they got caught.

Enron’s balance sheet, did not make sense to analysts. By the late 1990s, Enron had begun shuffling much of its debt obligations into offshore partnerships—many created by Chief Financial Officer Andrew Fastow. At the same time, the company was reporting inaccurate trading revenues. Some of the schemes traders used included serving as a middleman on a contract trade, linking up a buyer and a seller for a future contract, and then booking the entire sale as Enron revenue. Enron was also using its partnerships to sell contracts back and forth to itself and booking revenue each time.

In February 2001 Jeffrey Skilling, the president and chief operating officer, took over as Enron’s chief executive officer, while former CEO Kenneth Lay stayed on as chairman. In August, however, Skilling abruptly resigned, and Lay resumed the CEO role. By this point Lay had received an anonymous memo from Sherron Watkins, an Enron vice president who had become worried about the Fastow partnerships and who warned of possible accounting scandals.

As rumours about Enron’s troubles abounded, the firm shocked investors on October 16 when it announced that it was going to post a $638 million loss for the third quarter and take a $1.2 billion reduction in shareholder equity owing in part to Fastow’s partnerships. At the same time, some officials at Arthur Andersen LLP, Enron’s accountant, began shredding documents related to Enron audits.

By October 22 the Securities and Exchange Commission had begun an inquiry into Enron and the partnerships; a week later the inquiry had become a full investigation. Fastow was forced out, while Lay began calling government officials, including Federal Reserve Chairman Alan Greenspan, Treasury Secretary Paul O’Neill, and Commerce Secretary Donald Evans. In some cases, officials said, Lay was simply informing them of Enron’s troubles, but Lay reportedly asked for Evans to intervene with Moody’s Investors Service, which was considering downgrading Enron bonds to noninvestment-grade status. Evans declined.

On November 8 Enron revised its financial statements for the previous five years, acknowledging that instead of taking profits, it actually had posted $586 million in losses. Its stock value began to crater—it fell below $1 per share by the end of November and was delisted on Jan. 16, 2002.

On Nov. 9, 2001, rival energy trader Dynegy Inc. said it would purchase the company for $8 billion in stock. By the end of the month, however, Dynegy had backed out of the deal, citing Enron’s downgrade to “junk bond” status and continuing financial irregularities—Enron had just disclosed that it was trying to restructure a $690 million obligation, for which it was running the risk of defaulting.

On December 2 Enron, which a year before had been touted as the seventh largest company in the U.S., filed for Chapter 11 bankruptcy protection and sued Dynegy for wrongful termination of the failed acquisition. A month later Lay resigned, and the White House announced that the Department of Justice had begun a criminal investigation of Enron.

By mid-2002 the once-mighty company was in tatters. Enron’s energy-trading business had been sold off to the European bank UBS Warburg in January. Throughout the spring top Enron officials were subpoenaed to testify before congressional hearings. The majority of Enron’s employees were unemployed, and their stock plans had become almost worthless.

What the consequences were to the individuals responsible.

In June Arthur Anderson was convicted in federal court of obstruction of justice, while many other American companies scrambled to reexamine or explain their own accounting practices.

Two sources for your information.

1.Fraud Magazine

2.Wikipedia