Enron Situation Related to the Accounting, Essay Example

Enron situation related to the accounting is the most dramatic case of a business failure in the US. The management at Enron made intricate financial statements to confuse the shareholders and analysts alike. Enron also adopted a complex model of business as well as some unethical practices that necessitated for the application of accounting limitations with the objective of misrepresenting their earnings as well as modification to their balance sheet to reflect positive performance of their business. These were the factors that acted in unison leading to the collapse of the company and bankruptcy. The chairman and executives of the company focused on achieving the expectations of Wall Street through the use of mark-to-market type of accounting. This is a type of accounting that focuses on the market value although in the case of Enron, it was extremely inflated. This situation compelled the executives at Enron to conceal the debts of the company. The company executives at Enron attempted to hide the truth designing off-balance sheet, complex structures of financing as well as bewildering deals that were so intricate for common people to understand (Fox, 2003).

By the end of 2000, Enron had taken a route of crumbling as a result of poor accounting standards. Jeffrey Skilling was the company CEO at this time and tried to use all possible means to conceal financial losses that were associated with the business operations and trade in the company using the mark-to-market type of accounting. This type of accounting is applicable in trading with securities through the determination of the true value of a security at one particular time. This accounting procedure is properly functional with securities but has disastrous effects to businesses. In the scenario of Enron, the executives of the company built assets, an example being a power plant. They then claimed some projected profits based on the plant which was indicated in books although the plant had made no profit at all. In the instance that the revenue generated by the power plant fell short of the amount that they projected, they declined absorbing the loss but this deficit in form of assets was transferred to off-the-book Corporation and the loss was not documented (Fox, 2003). The resultant attitude from these accounting procedures was that the company was not operating to gain profits. The application of mark-to-market type of accounting allowed the company executives to write off the losses of the company without any injury to the bottom line of the organization.

Enron scandal analysis and the consequences of the scandal

The ultimate collapse of Enron can be attributed to conflicting interests of the editor and consultant of the organization and the absence of attention of board of directors to off-books financial entities that were used to run the business at Enron. The management also lacked truthfulness about the operations of the business and the well being of the company. The corporate culture at Enron also contributed significantly to the collapse of the business. Enron senior executives perceived the company as the best performer in all aspects and they strived to uphold their compensations and reputations because they placed themselves in the class of most successful company executives across US. The trading and business ventures at Enron encountered poor performance after some time, and instead of correcting the mistakes, they opted for a cover up to the failures.

Members of board of directors also contributed significantly to the collapse of the company due to their inattentiveness to off-book entities and their failure of monitoring the entities before they approved them. Little attention was given to employees by the board because majority of company directors across US ignore this core responsibility but are mostly interested in satisfying the shareholders. Additionally, the use of mark-to-market type of accounting facilitated for the emergency of schemes of concealing losses made by the company and gave the company a face value of a profit making company. Efforts of coping with escalating losses made the company CFO to implement devious plans to improve the shape of the company although majority of the company subsidiaries were operating at a great loss. The company CFO made use of special purpose entities, SPE, to achieve the objectives of the scheme (Bogle, 2005). The role of SPE was to conceal the assets that resulted to losses in business ventures and money thus making the failed assets as well as books in the company. In return, Enron issued SPEs and common stock shares to investors as a means of compensating the losses that investors encountered. This however was only a short term game which hardly went beyond 2001 when analysts started to raise aspersions concerning the transparency in financial performance in the company.

The company was however able to perform at almost the same level with other best performing Street wall organizations and therefore, it was able to persist for a relatively long period of time with its shady business. Enron could comfortably attract graduates from the best performing business schools and offered them attractive corporate benefits together with luxuries. The Sarbanes-Oxley Act of 2002 was created out of the lessons learnt at Enron leading to the tightening of disclosure as well as increasing penalties against financial manipulations (Bogle, 2005). This was shortly followed by Financial Accounting Standards Board, FASB that helped in enhancing ethical conduct in organizations. The board members were given more independence in monitoring the processes of audit in the company thus replacing the poor managers. These were however only reactive measures although they facilitated in the closing of loopholes used in organization to evade accountability.

Personal opinion

Enron collapse was one of the most unfortunate incidences but it plays a very significant role as a lesson for future business management. The case of Enron is a good indicator of what a company and its leaders can do while obsessed with wealth creation at all cost. The company actually incurred immense losses in their business operations which were attributed to arrogance, foolishness as well as greed of the top brass in their management. Most of the losses incurred in the company initiated business collapse that could otherwise be avoided if anybody came forward to offer the needed foresight. The scenario at Enron shall persist in the minds of people for a long time as the perfect example of greed. Enron scandal manifested itself as the most focal corporate collapse across the US in 1980’s. The scandal however serves as a warning to companies to embrace reforms in their accounting practices as well as corporate governance in running business.

Works cited

Bogle, John C. The Battle For the Soul of Capitalism. New Haven: Yale University Press, 2005.

Fox, Loren. Enron: The Rise and Fall. Hoboken, NJ: John Wiley and Sons, 2003.