Abstract
The paper details the implication of violation of ethical decision making and professionalism citing the example of Enron Scandal. Enron, which was once rated as one of the most innovative companies by Fortune Magainze, is now largely known for the accounting scandal that eroded $78 billion from the stock market and affected thousands of company’s employees, just because of malfeasance activities by the company’s executives, who hide billion dollar losses and debt owned by the company to inflate the stock price and meet Wall Street’s expectations while in reality it was in massive losses.
About the paper
Anyone who has an inkling for the financial markets and its functioning, always see the glittering side of the Wall Street. However, the corporate world has many a times displayed the gloomy side when the greedy executives bypass the vow of ethical decision making and indulge in corporate malfeasance, which eventually brings in carnage for the investors.
In this paper, we will highlight the facts of insider trading and unethical attributes that lead to the most dramatic debacle in the corporate history, ‘The Enron Scandal’.
Once a gem of the American corporate world and rated as the most innovative companies for six consecutive years by Fortune Magazine, Enron now owns the status of ‘Defunct Entity’ and is cited as a model case study for the academicians studying accounting shenanigans.
The whole scandal was framed by the company’s President, Jeffrey Skilling and CFO Andrew Fasto, who used a complex business model and used an accounting technique, ‘Mark-to-Market accounting’ to hide billion dollar losses, which the company had incurred on its failed projects. Majority of the losses and debt borrowings were kept off from the balance sheet using Special Purpose Entities(SPE), which were created by the company only, just in order to deceive the investors. Additionally, using the same accounting technique, the company was claiming profits for the capital projects, which had never been operational and were just being designed on the accounting books.
Therefore, using the ‘Mark-to-Market Accounting’ technique, the company was able to hide its losses and debts from the investors, and was thus projecting a healthy balance sheet to meet Wall Street expectations and inflate the stock price.
However, the game could not go forever and soon the analyst started questioning the transparency of the company’s earnings. Unable to extend the malfeasance further, the management declared the first ever quarterly loss in October,2001 and closed two of the self-created Special Purpose Entities. Thereafter, the company changed the pension plan administrators and forbid its employees from selling their shares for 30 days. The whole process finally caught the attention of SEC and an official investigation was announced.
Finally, the company restated its earning since 1997 and disclosed that the company was in the loss of $591 million and had $628 million in debt. On 2nd December, 2001, the company filed for bankruptcy, which eroded $78 billion in stock value, and thousand of employees losing their jobs and retirement savings.
Ironically, within less than a year’s time, the stock price of the company, which increased to $84.87 per share and made Enron the seventh most valuable company in the United States, plummeted to $4.01 followed by de-listing in January, 2002.
On account of accounting irregularities, many executives of Enron were found guilty and were sentenced to prison.Jeffrey Skilling, the-then CEO and President was sentenced to prison term of 24 years.
References
Seabruy, C. (n.d.). Enron: The Fall Of A Wall Street Darling. Retrieved March 17, 2015, from http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
Timeline: Enron's rise and fall. (n.d.). Retrieved March 17, 2016, from http://news.bbc.co.uk/2/hi/business/1759599.stm
