What You Learned About Accounting And Finance: Enron’s Bankruptcy

Enron Company was formed in 1985 as an interstate pipeline company, it merged with other Energy companies and in 1999, it instigated Enron Online Company which became the company’s website for trading merchandise; it became the leading online site in the world. Enron Company grew rapidly, and in 2000, its revenue had reached a hundred billion dollar. It was categorized as the seventh largest company, and the sixth largest energy company in the world. Nonetheless, in 2001started to experience some changes (Hamilton, 2006).  The power behind Enron Company Jeffery Skilling, proclaimed his exit, and Lay recommenced as the CEO of the company. Henceforth, the company started reporting loss this resulted in bankruptcy.

What specific actions (or lack of) led to Enron’s bankruptcy?

In ethics, explanations of Enron’s bankruptcy fall into three groups: organizational, personal, and universal. Organizational reasons occurred because of group influence; how things are done in a group, and the shared beliefs of the group (Hamilton, 2006). The personal reasons, describe declare that, Enron company became bankrupt, because of greed, and leaders being vicious. Enron Company sustained remarkable financial losses as result of pride, greed, and foolishness from its leaders. The collapse of the company began with the financial losses that could have been avoided, if someone had the bravery and the prudence to a put a stop to it. People will always remember Enron as a typical paradigm of ravenousness gone wrong and of the feat that was taken to assist prevent it from.

What types of fundamental accounting and auditing practices eventually contributed to the fraud performed by Enron?

The statements we learn in accounting are the fundamental tools through which we converse a corporation’s financial position. Enron was the 7th largest company in the world at the time, but could not supply investors with basic financial statements (Imhoff, 2003).The company implemented a new structure of accounting known as mark to market; it was urbanized by traders in 1980. The new structure of accounting permitted for a fair value of an asset to be based on an existing price, on the flip side, the figures were not acquired through any other accounting process. Consequently, accountants valued assets and liabilities at any value they would think of, since the accounting system was a new and popular idea and so was the idea of trading natural gas as a commodity.  Enron’s accounting firm and the Securities and Exchange Commission signed off on approval for the company to implement Mark to Market Accounting. Despite the consequences of how much revenue Enron was earning, it hypothesized natural gas futures and documented them on their books as earned revenues.  The Enron administration paid themselves bonuses based on unwarranted revenue, this event was both the beginning, and the end of Enron.

Briefly describe the ethical environment that led to the fraud.

Enron’s customs and beliefs added much to the ethic scandal. It was insensitive and patronizing company, that only accentuated competition and financial goals (Finn, Chonko, & Hunt, 1988). For instance, it had a rating system that rated 20 percent of its employees, as below average, for employees to sustain their jobs they adopted a lifestyle of deception. In addition, the aggressive environments added to the covering of the errors and deceitful as employees were disobliging and rarely conversed with each other. Finally, this environment highlighted too much on the financial goals.  The employees, who could attain the budget numbers, became the idol of the company.  Mutually the administration and most of employees focused on making profits for themselves through making good financial numbers instead of a real increase of the company’s economic value.

How did Enron’s bankruptcy impact the financial markets for Enron’s competitors?

Other energy companies suffered losses in the hundreds of millions of dollars because of their associations to Enron, through contracts or loans. Major Banks has recognized losses in the hundreds of millions and the potential for billions of dollars more. Enron’s downfall added to the cost of capital for the energy industry, and its competitors (Imhoff, 2003). It has also hindered other energy companies to diversify as the high costs affects manufactures of natural gas. For example, Entergy Corp, which is based in New Orleans that supplies electricity throughout the central United States and to Latin America, Europe and Australia, postponed its power plant ventures in Ohio and Illinois.

Briefly describe what you learned about the importance of the auditing process.

Auditing is an official assessment of accounting books, documents and vouchers of a business concern in order to authenticate the profit and loss and the financial position of a business; in addition, auditing ensures the accurateness of records, and recognition and prevention of errors. Therefore, audit, is a valuable tool for a Business Management, as internal audit is carried out so as to ensure the guidelines are being followed. It facilitates in making important suggestions to improve, and to devise future policies of a business (Strathern,1997).Consequently, auditing involves a detailed verification of accounting records, as it helps discover errors, faults, and fraud. On the flip side, it promotes an ethical check on workers during which their competence is checked, and determined; embezzlement of commodities and mishandling of records can be recognized.

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