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Enron scandal EssayA plan on Enrons history Enron was organize in 1985 by Kenneth Lay after mergingHouston Natural Gas and InterNorth. In the early 1990s, he helped to initiate the give awaying of electricity at market prices, The resulting markets made it possible for traders such as Enron to sell energy at higher prices, thereby significantly increasing its revenue. As Enron became the largest seller of natural bobble in North the States by 1992, Enron pursued a diversification strategy owning and operating a variety of assets including gas pipelines, electricity plants, pulp and paper plants, water plants, and broadband services across the globe. (cont.) brief Enrons decline change magnitude from the start of the 1990s until year-end 1998 by 311% percent, solitary(prenominal) modestly higher than the median(a) rate of growth in the Standard Poor 500 index. How of all time, the transport increased by 56% in1999 and a further 87%compared to a 20%increase and a 10% m inify for the indexduring the same years. By December 31,2000, Enrons stock was priced at $83.13and its market capitalization exceeded $60billion, 70 measure earnings and six times rule book value, an indication of the stockmarkets high expectations about its futureprospects. In addition, Enron was rated themost innovative large society in Americain Fortunes Most Admired Companiessurvey.Causes of downfall Enrons complex financial statements were confusing to shareholders andanalysts by using invoice limitations to misrepresent earnings and modify the balance weather sheet to indicate favorable execution of instrument, According to McLean and Elkind in their book The Smartest Guys in the Room, The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and in the long run spiraled out of control. the combination of these issues later resulted in the bankruptcy of the connection. the majority of them were perpetuated by the indir ect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and opposite executives, Skilling constantly foc apply on meeting Wall Street expectations, advocated the use of mark-to-market score and pressured Enron executives to find new ways to hide its debt. (Cont.) causes of downfallMark-To-Market accounting when Skilling joined the company, he demanded that thetrading communication channel adopt mark-to-market accounting, citing that it would represent true economic value. This method requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related comprises were difficult to estimate, investors were typically prone false or misleading reports. While using the method, income from projects could be recorded, although they might not have ever received the money, and in turn increasing financial earnings on the books. However, in future years, the lettuc e could not be include, so new and surplus income had to be included from to a greater extent projects to develop additional growth to appease investors. (Cont.) causes of downfall For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year engagement to introduce on-demand entertainment to various U.S. cities by year-end. After several pilot projects, Enron recognized estimated profits of more than $110 zillion from the deal, even though analysts questioned the technical viability and market demand of the service. When the network failed to work, Blockbuster withdrew from the contract. Enron move to recognize future profits, even though the deal resulted in a loss . Between 1996 and 2000, Enrons revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 23% per year to be respectabl e. For just the first nine months of 2001, Enron reported $138.7 billion in revenues, which placed the company at the sixth position on the Fortune Global 500. (Cont.) causes of downfallSpecial design entities Enron used surplus purpose entitieslimited partnerships or companies created to fulfill a temporary or circumstantial purpose . These shell firms were created by a sponsor, but funded by independent equity investors and debt financing. By 2001, Enron had used hundreds of peculiar(a) purpose entities to hide its debt . The special purpose entities were used for more than just circumventing accounting conventions. Enrons balance sheet under verbalise its liabilities and overstated its equity, and its earnings were overstated (cont.) causes of downfall administrator compensation Although Enrons compensation and performance steering system was designed to retain and reward its most valuable employees, the system contributed to a dysfunctional bodily culture that became obses sed with short-term earnings to maximize bonuses. Employees constantly tried to start deals, disregarding the part ofcash flow or profits, in order to get a better rating for their performance review. (cont.) causes of downfall The company was constantly emphasizing its stock price. Management was compensated extensively using stockoptions. Skilling would develop target earnings by asking What earnings do you need to keep our stock price up? and that number would be used, even if it was not feasible. Employees had large expense accounts and many executives were remunerative sometimes twice as much as competitors. In 1998, the top 200 highest-paid employees received $193 million from salaries, bonuses, and stock. Two years later, the figure jumped to $1.4 billion. (cont.) causes of downfall pecuniary audit Enrons auditor firm, Arthur Andersen, was accused of applying reckless standards in its audits because of a conflict of interest over the significant consulting fees generated by Enron. Andersens auditors were pressured by Enrons management to defer recognizing the charges from the special purpose entities as its credit risks became known. To pressure Andersen into meeting Enrons earnings expectations, Enron would occasionally allow accounting companies Ernst new-fangled or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new company to replace Andersen. In addition, after news of U.S. Securities and Exchange Commission (SEC) investigations of Enron were made worldly concern, Andersen would later shred several tons of applicable documents and delete nearly 30,000 e-mails and computer files, causing accusations of a cover-up. (cont.) causes of downfallOther accounting issues Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no official letter had stated that the project was cancelled. This method was known as the snowball, and although it was initially dictated that such pra ctices be used only for projects worth less than $90 million, it was later increased to $200 million. In 1998, when analysts were given a number of the Enron Energy Services office, they were impressed with how the employees were working so vigorously. In reality, Skilling had moved other employees to the office from other departments (instructing them to pretend to work hard) to create the appearance that the division was larger than it was. This ruse was used several times to fool analysts about the progress of different areas of Enron to help improve the stock price. Bankruptcy On November 28, 2001, The company had very little cash with which to operate, let alone satisfy enormous debts. Its stock price vaporize to $0.61 at the end of the days trading. Enron was estimated to have about $23 billion in liabilities from both debt large and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enrons bankruptcy. Enrons Eur opean operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection two days later on December 2. It was the largest bankruptcy in U.S. history (before being surpassed by WorldComs bankruptcy the next year), and resulted in 4,000 lost jobs. Sarbanes-Oxley Act The bill was enacted as a reaction to a number of major bodily and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook universe confidence in the nations securities markets. The main provisions of the Sarbanes-Oxley Act included the establishmentof the Public Company Accounting Oversight Board to develop standards for the preparation of audit reports the restriction of public accounting companies from providing any non-auditing services when auditing provisions for the independence of audit committee members, executives being demand to sign off on financial reports.Major elements(Cont.)SOX1.Public Company Accounting Oversight Board (PCAOB) act I consists of nine sections and establishes the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services (auditors). It also creates a central oversight board tasked with registering auditors, defining the detail processes and procedures for compliance audits2. Auditor IndependenceTitle II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients. (Cont.)SOX3. embodied ResponsibilityTitle III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and compl eteness of corporeal financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports.It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the companysprincipal officers (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly. (Cont.)SOX4. Enhanced Financial DisclosuresTitle IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. 5. psychoanalyst Conflicts of Interest Title V consists of only one section, which includes measures designed to help fix inves tor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest. 6. Commission Resources and AuthorityTitle VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SECs authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer. (Cont.)SOX7.Studies and ReportsTitle VII consists of basketball team sections and requires the Comptroller General and the SEC to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations and enforcement actions, and whether investment banks assisted Enron, Global get over and others to manipulate ea rnings and obfuscate true financial conditions. (Cont.)SOX8. Corporate and Criminal sham AccountabilityIt describes specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations,while providing certain(a) protections for whistle-blowers.9. White Collar Crime Penalty EnhancementThis section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds trouble to certify corporate financial reports as a criminal offense. (Cont.)SOX10. Corporate Tax Returns Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return.11. Corporate Fraud Accountability It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC t o refuge to temporarily freezing transactions or payments that have been deemed large or unusual.