Enron The Smartest Guys In The Room Accounting Essay

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Enron Organization was a Texas based business organized by Kenneth Lay. It essentially worked in the energy and force field which had been divided into several: Enron wholesale utility, energy utilities and, worldwide possessions. Enron was basically known in 1985 unavoidably combining with Northern natural Gas company. Following the gas costs were de-controlled to sink consistent with the market, Enron rose as the 7th greatest business in U.S right away. An advancing magazine called FORTUNE, had named Enron 'Americas for the most part inventive company' for 6 continuous years. In 1999, Enron had participated in an online based market called Enron Connected (EOL) which earned them a income of $ 335 billion, through the subsequent years, the business was closed down because of pointless misfortunes. In 2000, it had added up to $101 billion as capital and about 22,000 representatives in more than 40 nations, which lead them to be the foremost industry in the market. With a share price of $90.56 the company's stock holdings were at the top of the charts in august 2000.Then again, alterations had been made once we had gained closure in 2001, when a lot of people began inquiring regarding the sudden destruction of the stock market. Later inner losses were discovered among executives who in order to minimize their risk had sold out their stock to the general public and the Enron investors.

There were different variables similar to increasing the price of electricity in California and a considerable measure of concerns regarding Enron's performance had been raised.


The Enron scandal unethically destroyed people's jobs and people who lost their whole retirement fund. Major outcomes were on the shareholders who's money had gone astray in the stock market. The ex- CEO of Enron Jeffery skilling had executed its operations of the firm philosophy to motivate its employees by providing financial bonuses to complete the targets given which is very well known as mark to market rule. Hence it was initiated as an act of inspiration however a negative approach was taken towards execution. He ranked each and every one on the scale of 1-5 and those who came in the top five would be asked to leave the company. Due to the creation of unhealthy competition this lead to a collapse of the firm. If proper skills would have been applied there would have been a possibility to avoid confusion. Hence they would have suffered a few losses but Enron would continue to exist even after bankruptcy. Managing own employee pension is one of the major reasons for Enron to suffer losses which further lead to exploit the employees life saving for the company's benefit and make use of pension. Most companies like Enron have their own rules and regulations based on ethics portraying that the managers and exhibiters are forbidden to come under any means of partnership agreement with another business entity that does business with their own company. Hence in order to minimize the risk of loss of the employee's life savings, the code that was removed after the scandal allows the managers and exhibitors to invest in diverse markets to have a safe future. Considering the best interest of the share holders and the company all this should be done. Thus for long-term time skilling should have worked in the favour of the shareholders which did not happen at all because of this Enron had a great fall. As the employees were working and making profits for the business at that time the head of the company did not concentrate in what the employees where doing, this was the second drawback for Enron and because of this employees were encouraged to take all the likely easy ways out to be on the good books of the CEO.


There were various auditing standards that were used by the Enron prior to the bankruptcy occurring. These standards included the GAAP also known as the Generally Accepted Accounting principles, the GAAS which is the generally accepted auditing standards, the SAS also known as the Statement on Auditing Standards and lastly the professional ethics. Although there were various standards that were taken into consideration, the company continued to face many problems over the years as there were various issues that went undetected. One of the major problems that was faced by the company, was when the GAAP and GAAS auditing standards worked in collision in order to commit the fraud.

Due to the bankruptcy that was faced by Enron, the Congress created and placed a new auditing standard known as the Sarbanes-Oxley Act in the year of 2001. This act was extremely important as it focused on restoring the confidence within the financial markets and this would be beneficial as it would increase accountability and also strengthen corporate governance of the audit procedures. In addition to that, if a security fraud were to be committed then there would be severe penalties put into place. The penalty would cause the auditors to not be biased towards the act and also to provide a fair result. Under the Sarbanes-Oxley act, a board was created which was known as the Public Company Accounting Oversight Board. The board focused on regulating auditors and it also ensures that the relationship that lies between an auditor and a client would not affect the financial reports. Various changes were made and different auditing standards were added. One such auditing standard was the SAS 96. This auditing standard made the auditors document the significant decisions and judgments that were made. Furthermore, another auditing standard that was added was the SAS 98. This auditing standard focused making changes in the GAAS and it also added quality control standards. Finally, the last auditing standard that was added was the SAS 99. This standard was essential as it outlined the definition of what a fraud was and it helped auditors to gather all the information that was necessary in order to carry out this act. One of the main changes that were made to this auditing standard was that the auditing and consulting services were separated.

Various changes were also made in the financial report and these changes will be further discussed in the next section of this essay.


Enron had completed the budgetary reporting measures inquiry themselves regarding what happened? Enron had utilized the unique purpose Entities (SPE's) for representing the financial statements. This encouraged the business to invest in big projects worldwide like the gas line project etc. To account a fake profit of over $ 1 billion and to hide poor performing assets and bad investments Enron had used the SPE'S to outline the lawful documentation of SPE's laws of firms paid a large amount from Enron.

They created and used the artificial let out rule which helped them to make the balance sheets as they wished to make and when they wished to make. There were three main acclaimed rating industries named moody's, standard and poor's and Fitch/IBCA which use to receive large amount of fee. Three agencies gave investing rating to Enron which was helping them to trade their stocks even though the share rates went down to $3 per share.

After taking all the proposed measures, Enron faced bankrupts for the reason that every individuals included did not prefer to feel that was excessively exceptional to be correct, the risks taken were high, there were pointless administration rewards given based upon the targets met, there were extreme benefit to get together with the boost in stock price.

The adaptations which were done were that every financial report was compulsory to submit at the yearend moreover they were to be re-checked by both the internal and external auditors.


Corporation loans should be forbidden to the corporation executives: The rules such as loans to executives even though it allows an exception for residence if prepared on situation that are no more promising than those who present to the general public.


In the conclusion I would say that the main reason for such failure was due to Greed. All what Kenneth Lay wanted was to have as much as profits as possible, which ended with an awful impact on the auditing as well as the accounting state. Did Lay take the correct step? The corporation would still be seen in the market. The bookkeeping section has been taken correct actions wholly all around the world so that it can help to stop such failure happening again. Due to this, places such as Canada, it had developed a Canadian Public Accountability Board to reassure all the accounting reports of each and every firm, and also suggested that the changeable units should be involved in the financial reports.

Even after changing many things, it's not essential that an Enron humiliation cannot happen again in future. After the Enron Scandal, there have been many restrictions taking place with all the companies. Some of the companies that has Arthur Andersen as its accountant, they made their accounts for rechecking.

The Enron's scandals also have effects outside US as well. Most of the people predicted that even Canada can have chances in facing such disaster. But as the company's board of directors takes appropriate actions, Canada cannot have such a disaster.  Therefore all the countries have a orderly auditing report with no frauds, the market would be a good place to put in for the investors and other small budget people. This would help in making companies Goodwill more strong for the long run.


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