Malaluan, Sheila May Ocan

Enron Scandal Reflection

The movie of the Enron the smartest guys in the room records the business scandal of Enron. Enron
Scandal was a movie that illustrates a company that was an accounting scandal. It shows how the greed
of Enron's leaders brought down the seventh-largest firm in the United States. In addition, corporate
governance, financial governance, and culture all had a significant impact on Enron's bankruptcy. It
reveals how intelligent executive of one company brought down everything and become the reason why
the company, being the 7th biggest company in the US faced bankruptcy in less than a month. Based on
the video that I've watched, Enron executive was involved in a couple unscrupulous activities including
Kenneth Lay, the founder, found out that the two of his traders were involved with questionable trades
that are putting the company in great risk. Instead of making the right decision to disciplining them he
encouraged them to continue what they are doing as long as it makes more money for the company.

Enron was a large energy, commodities, and services company based in Houston, Texas. Its collapse
affected over 20,000 employees and shook Wall Street. The Enron scandal was an accounting scandal
involving Enron Corporation, an American energy company based in Houston, Texas. When news of
widespread fraud within the company became public in October 2001, the company filed for bankruptcy
and its accounting firm, Arthur Andersen then one of the five largest audit and accountancy partnerships
in the world was effectively dissolved. In addition to being the largest bankruptcy reorganization in U.S.
history at that time, Enron was cited as the biggest audit failure.

Enron's executives employed accounting practices that falsely inflated the company's revenues and, for
a time, made it the seventh-largest corporation in the United States. Once the fraud came to light, the
company quickly unraveled. Lay quickly rebranded Enron into an energy trader and supplier.
Deregulation of the energy markets allowed companies to place bets on future prices. In 1990, Lay
created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey &
Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the
youngest partners at McKinsey. Before coming to light, Enron was internally fabricating financial records
and falsifying the success of its company. Though the entity did achieve operational success during the
1990s, the company's misdeeds were finally exposed in 2001.

Enron went to great lengths to enhance its financial statements, hide its fraudulent activity, and report
complex organizational structures to both confuse investors and conceal facts. The causes of the Enron
scandal include but are not limited to the factors below. Enron devised a complex organizational
structure leveraging special purpose vehicles. These entities would "transact" with Enron, allowing
Enron to borrow money without disclosing the funds as debt on their balance sheet. The primary issue
with Enron was the lack of transparency surrounding the use of Special Purpose Vehicle. The company
would transfer its own stock to the SPV in exchange for cash or a note receivable. The SPV would then
use the stock to hedge an asset against Enron's balance sheet. Once the company's stock started losing
its value, it no longer provided sufficient collateral that could be exploited by being carried by an SPV.
SPVs provide a legitimate strategy that allows companies to temporarily shield a primary company by
having a sponsoring company possess assets. Then, the sponsor company can theoretically secure
cheaper debt than the primary company (assuming the primary company may have credit issues). There
are also legal protection and taxation benefits to this structure. Enron inaccurately depicted many
contracts or relationships with customers. By collaborating with external parties such as its auditing firm,
it was able to record transactions incorrectly, not only in accordance with GAAP but also not in accord
with agreed-upon contracts .For example, Enron recorded one-time sales as recurring revenue. In
addition, the company would intentionally maintain an expired deal or contract through a specific
period to avoid recording a write-off during a given period.

One additional cause of the Enron collapse was mark-to-market accounting. Mark-to-market accounting
is a method of evaluating a long-term contract using fair market value. At any point, the long-term
contract or asset could fluctuate in value; in this case, the reporting company would simply "mark" its
financial records up or down to reflect the prevailing market value. There are two conceptual issues with
mark-to-market accounting, both of which Enron took advantage of. First, mark-to-market accounting
relies very heavily on management estimation. Consider long-term, complex contracts requiring the
international distribution of several forms of energy. Because these contracts were not standardized, it
was easy for Enron to artificially inflate the value of the contract because it was difficult to determine
the market value appropriately. Second, mark-to-market accounting requires companies to periodically
evaluate the value and likelihood that revenue will be collected. Should companies fail to continually
evaluate the value of the contract, it may easily overstate the expected revenue to be collected.
In order to influence the market, they also move electricity beyond the state to boost demand and then
return it when the price is too high. The Enron accounting company promptly started destroying a large
amount of material after learning of the fraud, but it was too late. As specialists began to examine
Enron's publicly accessible financial data in the middle of 2001, the gravity of the problem began to
emerge. For Enron, mark-to-market accounting allowed the firm to recognize its multi-year contracts
upfront and report 100% of income in the year the agreement was signed, not when the service would
be provided or cash collected. This form of accounting allowed Enron to report unrealized gains that
inflated its income statement, allowing the company to appear much more profitable than it was. At the
time, Enron's collapse was the biggest corporate bankruptcy ever to hit the financial world (since then,
the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it). The Enron
scandal drew attention to accounting and corporate fraud. Its shareholders lost tens of billions of dollars
in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits.
Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's
magnitude.

The Investor Responsibility Research Center (IRRC) claims that incidents like the Enron affair affected the
amount of money that businesses paid auditors in 2001 and the first part of 2002. The percentage of
audit and non-audit fees has clearly changed, and the auditors' revenue has decreased since the
incident. Internal auditing has changed as a result of the Enron accounting disasters. These changes
include longer sessions with the audit committee, higher internal audit budgets, and greater staffing
levels. Following the incident, principles-based accounting standards have been added to rules-based
accounting standards. No secret will remain hidden forever, in fact. Its poor accounting methods were
the reason behind Enron's demise. Because there are no regulations governing the accounting and
auditing profession, Enron exploited this weakness. To maintain the flow of funds, the corporation used
shortcuts. The pressure from society's expectations causes managers to act unethically. The organization
lacks corporate governance; regulations exist, but they are willfully disregarded. Internal whistleblowers
are humiliated as a result of the company culture's messiness, which weakens internal control.
The auditing firm, which also serves as a consultant, lacks independence because it was hired by Enron,
creating a conflict of interest since the auditor has an incentive to avoid writing a negative report on the
corporation that is paying them. Strong corporate governance is necessary for every organization to
survive and prosper, as demonstrated by the enduring emblem of Enron as a corporate fraud.
Businesses that use dishonest accounting techniques may prosper at first, but they will eventually fail.
I learned a lot from the Enron scandal movie, particularly about how crucial a company's management
choices are. One of the key takeaways from Enron’s bankruptcy is not to invest in any company whose
business model is too complicated. Do not invest in a company that is overly ambitious in earning profits
and relies heavily on risky investments to make money. Be cautious when investing in company that has
excessive debt. Assessing counterparty risk is very important for investors to reduce the chances of
losses. Always consider management integrity.
Enron Corporation was once one of the largest companies in the United States but bad management
decisions that led to its bankruptcy, which caused losses in billions of dollars. It is also important to be
cautious when investing in companies that have high debt levels and the management acts shady when
providing information. Additional lesson we can learned about Enron scandal was the absolute power
corrupts absolutely, but the Enron scandal goes far beyond just the faults and flaws of a powerful
corporation. It extends also into the personalities of those running that corporation, the bullying, the
lack of moral compass, the lack of ethical leadership, the emphasis on profits above all else.