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?The Biggest Fraud in the Recent History-The Collapse of Enron

Enron collapse protests
Enron collapse protests

Accounting Fraud; Enron Case

What is Fraud?

Accounting fraud as Richard, Barry, and Smith (59) define is the intentional manipulation of the financial statements to portray a different picture on a companyís financial health as opposed to their position. Usually, fraud is done to convince investors or the shareholders that the company is performing well while in essence, the company could be collapsing. There are different types of fraud; however, the underlying practice involves either overstating of revenue especially on assets, failing to record the expenses or understating the liabilities.

There are 3Mís to financial reporting fraud. These are manipulation, misrepresentation, and misapplication. Manipulation focuses on the alteration and falsification of financial records and data, misrepresentation is conducted whenever the companyís management opts to omit some information or data that is likely to influence their decision.

Lastly, misapplication addresses the wrong application or use of accounting doctrines in such a way that the company officials can make decisions based on their understanding of the law. Usually, their perception is guided by what they feel the practice will help them address as the Enron case in this review will show.

The Biggest Fraud in the Recent History

The collapse of Enron in 2001 has been referred to be the greatest fall in this 21st century. Enron; a company previously operating in the energy sector lost more than $74 billion of shareholders income through fictitious investments and corruption.

[blur] Despite being a publicly traded institution, which meant the top officials were required by law to present all the necessary information to the investors and shareholders for their review, the company managed to mask more than $1Billion debt under shell companies that allowed it to still present its statement as healthy. [/blur]

How Fraud Happened

  [blur] In executing the fraud, at Enron Kenneth Lay, and Jeffrey Skilling concocted a scheme known as the mark to market pricing which allowed the company to recognize future revenues in their current statements. The mark to market pricing was done in such a way that upon signing of contracts, the future inflows of the company would be considered as present revenue while the outflows would be viewed as expenses. [/blur]

[blur] With this practice, the companyís top executive would keep all the huge debts of the balance sheet. As an element of fraud, Enron top officials relied on the fraudulent representation form of fraud to allow them to create the special purpose entities (LGM) or shell companies that would mask of their debts (Nedelchev 37). The LGM entities were such that the banking would facilitate the companyís operations and in return, they would be assured of business in their dealings. [/blur]

[blur] According to Watkins (119), besides the mark to market practice, the company relied on corruption to erase any form of suspicion from the employees. Any employee that seemed to go against the managementís position would be eliminated under the pretext of poor performance. All employees that accepted to go on with the plans of the company would be awarded huge bonuses and be assigned specific shares. [/blur]

[blur] At the same time, for the fraud to happen, Skilling made allies with auditing firms enabling them to hide the companyís real position. The case was discovered after the rise of stock prices, which urged US SCC to begin an inquiry into the companyís operation. Sherron Watkin also as an internal whistleblower made the company employees to begin evaluating the performance of the company. [/blur]

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Works Cited

Richard M and Barry R. Smith and Robersonís Business Law. Cengage Learning, 2014. Print

Nedelchev, Miroslav. "Good practices in corporate governance: one-size-fits-all vs. comply-or-explain." (2013).

Watkins, Sherron. "Former Enron vice president Sherron Watkins on the Enron collapse."†The Academy of Management Executive†17.4 (2003): 119-125.


?The Biggest Fraud in the Recent History-The Collapse of Enron

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