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23 September 2014 By In Blogs

There were numerous accounting and ethical issues or reasons that can be attributed to the failure of the Enron Company. It can correctly be ascertained that the failure of the Enron Company was due to the discovery of several raptor problems arising from assets that were hedged with the entities. Some of the specific hedged losses that were incurred by the raptors actually came back to the Enron Company. This was due to the major fact that the Enron Stock which was used in the capitalization of the Raptor entities had actually declined in their value to an extent that the Raptors eventually had a shortfall and thus were incapable of paying back what they owed the company. In essence, it can therefore be correctly ascertained that the failure of the Enron Company was due the use of its own stock in the direct generation of a gain in order to avoid a loss in its income statement. This was done by the Enron Company thus violating the accounting rules (Watkins, 2003).

The numerous flaws in raptor transactions could also greatly explain the failure of the Enron Company and indeed, these were the worst forms of accounting fraud that made the company to eventually collapse. For instance, the $700 million owed to Enron by the Raptors through some specific hedging agreements could ultimately explain why the company failed. In addition to that, the unwinding of Enron’s transactions which had been questioned and the failure of the company’s top management to accept that something was amiss in the company could ultimately explain why the company failed. The unwinding was responsible for the wiping out of approximately $1.2 billion from the equity of shareholders resulting in the bankruptcy of the Enron Company and in its free fall thereafter.  The failure of the company can also be attributed to the enjoyment of its top management in numerous financial reporting and accounting practices so as to enhance its operating results (Arlette, 2001).

The ignorance of the company’s top executive on the issues and problems which were raised by the whistle blower (Sherron S. Watkins) who worked at the company in various roles are some of the causes that led to the failure of the organization. From research conducted, it can be correct to indeed assert that many people speculated that Enron’s top executives could either had some culpability in the accounting problems themselves or they even opted to ignore such problems since they didn’t want the money that came to them in form of stock option sales and bonuses to stop. It also emerged that the financial reporting and disclosures of Enron Company were not clear and forthright regarding the Raptor transactions and the legitimate business transactions.

 Based on available information, it is quite apparent that the fact that a set of financial disclosures and statements are supposed to depict or portray a fair picture of the financial status of Enron Companies went out of the window thus leading to its eminent collapse. Indeed, it can also be correctly proved that the failure of the auditing watchdogs in preventing the lapses that were prevalent in the financial reporting of Enron also contributed to its own failure. The approval of the company’s financial statements which were highly manipulated contributed to the failure of the company. That apart, the company’s failure can be attributed to the external auditors who terribly failed in the execution of their audit responsibilities.  

The Enron Company failed because the financial statements of the company did not actually present the actual financial position of the organization. For instance, the company had more than twice its reported levels which were hidden in the off balance structures which were narrated in “arcane footnote disclosures”. Enron’s failure can therefore be summed up in 3 major exhibits namely, the summary of improper or ineffective accounting, summary of the Internal Control failures and lastly through the summary of the major disclosure inadequacies (Wilson, 2001).   

Enron’s case happens in other companies as well since it is common knowledge that some of the companies have been known to pick and select some sets of accounting rules which they think are closely linked to their line of business, follow such rules regardless of the illogical outcome or impact of such rules and even feel justified in reporting such results in accordance with the illogical rules.  

Read 1253 times Last modified on Tuesday, 23 September 2014 09:39
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