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Enron: key events, SOX effective? Fortune 500 techniques

Hi, I am doing research on the company Enron Corporation that want bankrupt back in 2001. I have compiled a few questions of my own that will help me develop information to compose my paper. I am not that familiar with the company and the whole overall scandal that they had going on, so I came here to look for help. I would love your input and assistance. Thanks in advance.

Topic: Enron: Questionable Accounting Practices Bring New Regulation to the United States

1. Elaborate in a paragraph how the key facts and critical issues are presented in the Enron case.

2. Why do I think companies such as Enron use complex accounting schemes and loopholes in regulation to seemingly boost the company's revenue?

3. Do I think that Sarbanes-Oxley Act of 2002 was the right reaction to the accounting scandals associated with Enron and Worldcom and in light of 2008-2009 accounting scandals, has it been effective in preventing accounting misconduct?

4. If I were the CEO of a Fortune 500 company, how could I ensure that my accounting system is in compliance with regulations and best practices within the industry?

Solution Preview

1. Elaborate in a paragraph how the key facts and critical issues are presented in the Enron case.

Enron was likely the most well-known scandal that tarnished the accounting profession. This was a fabulously successful Fortune 500 firm, just hailed as the 30th best run firm in October 2001. What was not known about Enron was that they were speculating in fuel markets and hiding their loss positions with the help of the auditors. Under water futures trades (contracts to sell or buy that were under the market or over the market) were "sold" to entities that Enron set up so they could control the pricing of the transaction. As such, they could sell an unprofitable future control at an artificial price and make it look like a good one to the main company. If the price of the trade in the spin off organization did not improve prior to contract expiration, the loss was captured in the spin off entity.

How was Enron able to sell this inflated price securities? They obtained loans, guaranteed by the Enron, for created entities whose only purpose was to hold the losses. Enron hopes that the inflated price securities would correct (market go back up) before the loans taken out to buy those loss positions came due. Unfortunately, the loans came due and the securities did not yield enough in the market place to repay the debt taken out to buy them. Enron guaranteed the debt but did not have the funds to make up the difference. So, they went bankrupt. Enron knew about avoiding reporting the losses for some time as they had to do considerable work to create an entity that would buy the securities at above market rates. They even engaged the auditors to assist in creating these entities and making sure that the losses were not co-mingled with profitable results. The auditors not only were helpers in the deceit, they shredded the work papers to try to cover up their role. Key C-level managers claimed that they didn't understand the financial statements and used this supposed ignorance to avoid legal responsibility.

In addition to these serious issues, Enron made it even more egregious by refusing to permit their employees to diversity out of company stock in their pensions, showing that they were not ...

Solution Summary

Your discussion is 1,297 words and four references and discusses Enron, how SOX improved governance but did not necessarily reduce fraudulent reporting and what I would do to create a strong reporting system in a Fortune 500 Company.