Corporate Fraud revised

Corporate Fraud

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Corporate Fraud

Enron was one of the largest American companies that filed for bankruptcy. It filed for bankruptcy in October 2011. The company took advantage of accounting loopholes to hide billions of dollars in debts incurred due to failed debts and deals. The Chief Financial Officer of the company, Andrew Fastow, and other executives misled the board of directors and audit committee of the company on high-risk accounting practices. They also pressured Arthur Anderson to ignore the accounting issues they faced. Several executives of the company were indicted for a variety of charges with some of them being sentenced to prison (Vinten, 2002). Arthur Andersen, the company’s auditor, was found guilty of illegally destroying documents that were vital in SEC’s investigations into the activities of the company.

Enron’s corporate fraud was detected after a Wall Street Journal reporter wrote a story about how mark-to-market accounting was being used in the energy company. This prompted other journalists to start questioning Enron’s accounting methods. The company used to report supernormal profits despite the fact that it was involved in several failed projects such as the Dabhol Power Project, which made the company lose several billions of dollars (Elson & Gyves, 2003).

The use of market-to-market accounting enabled the company to hide billions of dollars of debt from its investors. It provided the company with loopholes on how to hide its debt. Prior to Enron’s case, there was no legislation on how companies should develop their accounting statements. The collapse of Enron led to the development of the Sarbanes-Oxley Act led to the development of new standards for public and accounting firms and corporate management whose aim was to ensure there was transparency in the accounting methods used by the public companies (Vinten, 2002).

In conclusion, the corporate fraud involves the unethical conduct of the executives of an organization to meet their personal or organizational goals. Corporate fraud may have dire consequences on the individual and organizations that engage in the practice as highlighted by Enron’s case. In Enron’s case, corporate fraud not only led to the collapse of the company, it led to the imprisonment of the executives who were involved in the unethical practices.

References

Elson, C. M., & Gyves, C. J. (2003). The Enron Failure and Corporate Governance Reform. Wake Forest L. Rev., 38, 855.

Vinten, G. (2002). The corporate governance lessons of Enron. Corporate Governance: The international journal of business in society.