Custom «Enron and Employee Investment Risk» Essay Paper Sample

Enron and Employee Investment Risk

Introduction

Arthur Andersen-Enron Corporation's audit firm-was incriminated of employing foolhardy measures in its audits owing to a conflict of interest over the momentous consulting fees yielded by the Arthur Andersen's client, Enron (Zagaris, 2010). For instance, in 2000, the auditing firm made $25 million in audit levies and $27 million in consulting dues, which represented about 27% of the audit levies of public customers for the auditing firm's Houston office (Mill, 2003). Arthur Andersen's measures were called into question as either being accomplished purely to obtain its yearly levies or for the auditing firm's shortage of knowhow in properly examining Enron's revenue credit, derivatives, and special entities, among other accounting practices.

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Besides Arthur Andersen, Enron contracted several CPAs (Certified Public Accountants) and accountants to work on formulating accounting rubrics with the FASB (Financial Accounting Standards Board). The accountants generally searched new means to save Enron money. Among the means was taking advantage on ambiguities found in the accounting industry's standards-GAAP (Generally Accepted Accounting Principles). Indeed one of the Enron accountants revealed that they had attempted to aggressively apply the GAAP literature their advantage. The accountant acknowledged that since the GAAP standards created the opportunities for white collar crime, the accountant took advantage of that weakness (Cheeseman, 2004).

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Enron Corporation's management pressured Arthur Andersen's accountants to defer realizing the charges from the special purpose entities. Because the special entities would never bring back profits, accounting guiding principles demanded that Enron Corporation ought to take a write-off, resulting to the value of the entity being withdrawn from the balance sheet and tagged as a loss.

Employers Buying Stock in Their Own Companies

A pension fund collection having a colossal share of its assets in any one stock is typically bad, holding such am amount in the stock of the employer is even worse. For the employees and employers of any corporation, variegation away from the stock of that employer is more of import. This is simply because the employee is already hideously under-diversified by the employer or the corporation tying up his or her human capital. The employer is inevitably exposed to the business' risks by virtue of the employer-business relationship. The employee needs is to augment the inherent under-diversification of the employer-business relationship, by taking the employer's diversifiable investment capital and also tying up to the fate of the business. The Enron fiasco demonstrates this point. After many of the employees and employers have lost their jobs and position, they have as well lost their 401(k) savings. Businesses want to encourage employees to know about the business' stockholders. Typically, allowing buy stock in their own businesses will motivate them to care about the businesses' profitability, though to could be different in the Enron case.

 
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Information Disclosure

Had Enron abided by the prevailing market practices and the prevailing accounting and disclosure requisites, including regarding information disclosure, it could not have created the bubble that finally led to its collapse. The collapse of Enron evidenced a failure of corporate governance-information disclosure being part of it, in which internal business control strategies were compromised and bypassed by conflicts of interest that filled the pockets of some managers at the expense of the corporation's shareholders. In spite of the fact that derivatives made attendances in the course of information disclosures' failures, they made for no indispensible role. The Corporation's activities (including of faulty information disclosure), seem to have been accepted to mislead the market by crafting the sense of granger creditworthiness and financial stability contrary to what it actually was. Eventually, the market exercised the critical sanction over the Corporation.

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Overstating of Profit

Enron's failure can be traced back 1992 when the then president of trading operations, Jeff Skilling, influenced federal regulators to let the Corporation to enforce an accounting system identified as "mark to market", which was antecedently only applied by securities firms and trading companies (Bierman, 2008). Through this system of accounting, Enron was allowed to count estimated profits from longstanding energy contracts as the current earnings, which would actually never be realized. The mark to market system is thought used to inflate gross numbers by spoofing estimates for future profitability.

The use of mark to market system of accounting in, addition to some of the Corporation's dubitable practices obscured how Enron was actually making money. Since the numbers were recorded in books, stock prices continued to be valued highly, but Enron was not paying relatively high taxes. By then, Robert Hermann was Enron's general tax counsel, was advised by Skilling the mark to market accounting system allowed the Corporation to make profits and develop without attracting lot of tax. Because of its apparent growth, Enron bought any new venture that promised to be a new earnings center.

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Besides, Enron had been creating off balance sheet entities, such as LJM and LJM2, to move liability off of the record and channel risk for Enron's acquired businesses (Brooks & Dunn, 2009). These entities were also created to keep the corporation's credit rating high. Credit rating was very important in Enron's areas of business. Since the executives thought the Corporation's longstanding stock values would keep on being high, they searched ways to use the Corporation's stock to hedge its investments in the other entities. The executives achieved this strategy by a complex planning of special purpose entities, which they identified as the Raptors. The Raptors were created to cover Enron's losses incase stocks in the Corporation's start-up ventures fell.

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