Question

Enron accounting fraud, involving Arthur Andersen.

1. How did it affect society?

2. Did something good come out of the situation?

3. Can it be prevented? How?

Answer 1

1. One of the most famous financial scandals that happened in the world is the Enron financial scandal, which happened in the year 2001.

Enron Corp. was considered as America’s most innovative company since its integration in 1985. Enron was placed as the energy trader and supplier. At that time, there was deregulation in the energy market, which gave permission to the companies to bet on the future prices. Enron took advantage of this opportunity. This regulatory industry environment helped Enron to flourish.

With the commencement of dot-com bubble in 1990s, Enron also decided to participate in the market trend. Enron created Enron online i.e. EOL in 1999. This was an electronic trading website which had its focus on commodities. The conditional transactions through EOL had Enron, either as the buyer or the seller. Enron used to give credit to the participating companies to encourage trading. It was considered as America’s most innovative company for 6 years.

When recession hit USA in 2000, Enron resorted to mark-to market accounting., which helped the company to write off unprofitable activities without affecting the bottom line of the company. This led to introduction of pseudo schemes which hid the company’s losses and made company look profitable in the market. So, though the company was making losses, people were investing in it owing to the profitable mask dawned by the company in the market.

This was a clear case of fraud. The investors and the market was bluffed to consider that Enron Corp. was a very profitable company while in reality, it was struggling for mere existence.

Several of Enron’s executives were roped in for the fraud. The fraudulent activities included insider trading, conspiracy and securities fraud. Enron’s

founder was also convicted. He was convicted for 24 year sentence along with a hefty money penalty.

The impact of the fraud led to Enron’s downfall. Shareholders and employees, all were in losses. There was panic situation in trading market as a whole.

2. There was total unrest in the society due to this financial fraud. The people went in panic mode. This led the government to form the Sarbanes-Oxley Act. This Act elevated the consequences for destroying, altering or fabricating financial statements of the company.

3. The above mechanism could have been avoided if the following existed in the system:

• Stringent punitive measures to be taken against the defendant
• Random accounting audits conducted to check the sanctity of the financial books of business