Enron Accounting Scandal

Accounting Fraud > Accounting Scandals > Enron Accounting Scandal

The Enron accounting scandal is perhaps one of the largest accounting scandals to take place in recent history. This scandal took the Enron company down as well as the auditors, Arthur Andersen.

In late 2001, the energy giant Enron that had claimed approximately $100 billion in revenues the year before was suddenly exposed for its systematic use of accounting fraud to dupe investors into believing it had been making money for years. In fact, it had been burying losses it had been taking through utilizing accounting loopholes and tricks.

Enron utilized offshore entities for planning and avoidance of taxes, raising the profitability of a business. Based on this, management used these entities to hide losses and make the company look more profitable than it actually was, creating a downward spiral, in which each quarter, corporate officers would have to perform more and more contorted financial deception to create the illusion of billions in profits while the company was actually losing money.

As the company appeared to be making money, this drove up their stock price, and enticed the executives to work on insider information and trade millions of dollars worth of Enron stock. These top executives knew about the offshore accounts, however, the investing public knew nothing of this. CFO Andrew Fastow led the team which created the off-books companies. Through doing this, he manipulated the deals to provide himself, his family, and his friends with hundreds of millions of dollars in guaranteed revenue. The downside was that it was all being taken from the shareholders of Enron.

The other side of the Enron accounting scandal was the launch of EnronOnline, an Internet-based trading operation. Jeffrey Skilling, president and COO, pushed the company’s aggressive investment strategy, by adopting mark to market accounting. This allowed them to anticipated future profits from any deal were tabulated as if real today. Thus, Enron could record gains from what often over time turned out to be losses.

Eventually Enron collapsed and brought down with it the accounting firm Arthur Andersen, taking the number of major accounting firms down one from the Big Five to the Big Four.

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