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“Enron, a Houston-based energy firm founded by Kenneth Lay, transformed itself over its sixteen years lifespan from an obscure gas pipeline concern to the world’s largest energy-trading company (both off and online). Enron has become an interstate and intrastate natural gas pipeline company with approximately 37,000 miles of pipe. Enron was largely credited by creating market trading in energy, allowing energy to be traded in the same way as other commodities such as oil.” (Kandemir, C., & Kandemir, S., 2012, p.86)
“The US Securities and Exchange Commission didn’t file more cases for accounting and disclosure fraud in fiscal year 2012. In fact, the Commission filed less.
Only 79 accounting fraud and disclosure cases were filed, 11% less than in 2011 when there were 89.
Eighty-nine SEC enforcement cases for accounting fraud and disclosure violations in 2011 was the lowest number in ten years.” (McKenna, 2012)
As seen above, US Securities and Exchange Commission statistics, accounting frauds are decreasing year after year. Current business and regulatory environment have been affecting avoid from accounting fraud.
Before Enron scandal, organization was not allow to control relation between company and account firm. Arthur Andersen, is an accounting firm, winked at Enron accounting fraud. Thus the biggest accounting fraud was accrued in the history. (Kandemir, C., & Kandemir, S., 2012, p.106)
Because of Enron fraud loss, according report of Association of Certified Fraud Examiners (ACFE), gross profit of Enron was almost equal to the USA’s internal revenue. Enron fraud caused distrustfulness on investors that was earlier premonitory for economic crisis which was accrued in 2008. (Kandemir, C., & Kandemir, S., 2012, p.104)
“While Enron boasted about the value of products that it bought and sold online around $880 billion in just two years, the company remained silent about whether these trading operations were actually making any money.” (Kandemir, C., & Kandemir, S., 2012, p.106) “It is believed that Enron began to use sophisticated accounting techniques to keep its share price high, raise investment against its own assets and stock and maintain the impression of a highly successful company. These techniques are referred to as aggressive earnings management techniques.” (Kandemir, C., & Kandemir, S., 2012, p.91) So company was developed day by day and stock prices was increased. That growth was not overlooked by investor.
They invested their money to the Enron stock thus they helped out to develop the Enron. That was all Enron’s managers want from the market. Before the fraud 13 % of Enron stocks was Enron’s management team. Enron was one of the 100 biggest companies according to Fortune in America in 2000. (Kandemir, C., & Kandemir, S., 2012, p.97) “Enron also set up independent partnerships whereby it could also legally remove losses from its books if it passed these “assets” to these partnerships.” (Kandemir, C., & Kandemir, S., 2012, p.101) Enron’s managers envisaged the company is going to be fall soon. And they sold their stocks and company’s stock prices started to decrease. (Kandemir, C., & Kandemir, S., 2012, p.106)
Most of the big companies which Credit rating agencies like Moody’s, Standard & Poor’s and Fitch IBCA, accounting firm Arthur Andersen, investment banks like Credit Suisse First Boston (CSFB) and JP Morgan Chase are affected because of the crash of Enron. Beside losing million dollars they lost investors’ trust. (Kandemir, C., & Kandemir, S., 2012, p.95)
In short, on 2 December 2001, Enron’s total global investment exposure to major financial institutions amounted to at least $4 billion. (Yuhao, 2010)
Because of Enron scandal, new accounting regulations were came into force which is called as Sarbanes-Oxley Act (SOA) at 2002. (Kandemir, C., & Kandemir, S., 2012, p.89) “The Sarbanes-Oxley Act of 2002 is legislation The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise.” (Rouse, 2007)
Instead of authorizing to a private account firm for to inspect accounting records. Government should inspect records of the companies. That was the biggest lesson earned from Enron scandal.
Enron scandal has both positive and negative effects. Positive effects of scandal, new regulations are came into force to protect companies and investors’ rights, earthly possible frauds are prevented. Negative sides of scandal, it caused an economic crisis which is accrued in 2008, companies and investors lost million dollars. Also Enron scandal gave a score to European Union. (Cernusca, 2011)
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