Enron Scandal

Enron Scandal

                Jeff Skilling, the president of Enron’s trading operations, convinced federal regulator to permit Enron to use an accounting method known as “mark to market”. It is a method where price or value of a security is recorded on a daily basis to calculate profits and losses. Using this method allowed Enron to count projected earnings from long-term energy contracts as current income. This was money that might not be collected for many years. It is thought that this technique was used to inflate revenue numbers by manipulating projections for future revenue.

Enron had been buying any new venture that looked promising as a new profit center. Their acquisitions were growing exponentially. Enron had also been forming off balance sheet entities to move debt off of the balance sheet and transfer risk for their other business ventures. These SPEs were also established to keep Enron's credit rating high, which was very important in their fields of business.

When the telecom industry suffered its first downturn, Enron suffered as well. Business analysts began trying to unravel the source of Enron's money. The Raptors would collapse if Enron stock fell below a certain point, because they were ultimately backed only by Enron stock. Accounting rules required an independent investor in order for a hedge to work, but Enron used one of their SPEs.

Reason behind this scandal:

• ·         A substantial fraction of Enron’s reported profits over a 4 year period (1996-2000) had been the result of accounting manipulations.
• ·         Unable to spot bad accounting practices and company’s overstatement of profits.
• ·         The multiple conflicting roles of auditor.
• ·         Automatic renewal of auditing contracts.
• ·         Although a professor of accounting and a dean for monitoring the company, but they all fail in their profession.
• ·         Disastrous loss in employees’ retirement fund, but the ex-CEO has cashed his own stock much earlier.
• ·         Managers tend to build up their own empires and scarify the profits of the organization.
• ·         Enron’s board of directors fails to control and oversee the management.
• ·         The board had been benefited in various relationships with the company.