What Were the Consequences of the Enron Scandal Case Study

What Were the Consequences of the Enron Scandal - Case Study ExampleThis case study represents a bold attempt to answer the question verbalize in the works title What Were the Consequences of the Enron Scandal?Enron, a provider of products and services related to natural gas, electricity and communications to wholesale and retail costumers represented one of the largest player scandals in history. As a result of the fraud investigations, the company was forced to file for bankruptcy in December 2001. While the bankruptcy of a slight company is taken as a routine, Enrons case is different as the company was ranked seventh by Fortune 500.During the 1990s, Enron expended quickly into several(prenominal) areas such as developing a power plant and a pipeline. This expansion, however, required large initial capital investments and long gestation period. By that time, Enron already raised a lot of debt funds from the market and hence any other attempt to raise funds would affect Enrons c redit rating. except Enron had to maintain the credit ranking at investment rate in order to continue business. On top of that, the company wasnt making plenty profits either, as it promised to investors. Hence, Enron began making partnerships and other special arrangements (Special Purpose Entity, or SPE). These companies were used to keep Enrons debts and losses away from its balance sheets, therefore allowing it cede a good credit rating and look good in front of the investors.Figure 1 How SPEs workedAdapted from Chary, VRK. (2004). Ethics in Accounting. Global Cases and Experiences. Punjagutta. The ICFAI University Pres., India, pg. cxv-$ millions-Year1997199819992000Revenues20,27331,26040,112100,789Total assets22,55229,35033,38165,503Long Term Debt6,2547,3577,1518,550Shareholders Funds5,6187,0489,57011,470Table 1 Enrons Financial HighlightsAdapted from Chary, VR. ((2004). Ethics in Accounting. Global Cases and Experiences. Punjagutt., The ICFAI University Press. India. pg. 1 19Enrons goal was to bypass the rules of consolidation and still increase credibility. If a parent company (in this case Enron) financed less than 97% of an initial investment in a SPE, it didnt have to consolidate in into its own accounts. If properly done, the legal isolation and the tercet party control over the SPE, reduce the risk of the credit. Therefore, off-balance sheet treatment of such a SPE involves liberal third party equity. The third partys equity must be at risk, otherwise the transferor would be required to consolidate the SPE into its own financial statements. Up to end of 2000, no one pointed fingers at Enron. For 2000, the corporation reported $101 billion revenue and the auditors gave a clean report. But, at this stage, Enron announced its intention that during the third quarter of 2001, it would book a loss of $1.01 billion and, at the same time, reducing shareholders funds by $1.2 billion as a result of correcting report errors in the past.After a long tri al, Andrew Fastow, the former Enron finance executive has been sentenced to six years in prison. Fastow pleaded guilty for fraud and money laundering in 2004 and also became the chief whiteness in the trial against Jeffrey Skilling and Ken Lay. His testimony helped convict Lay (who died in July 2006 after a heart-attack) and Skilling, who was sentenced to 24 years in jail. In May 2006, the latter was found guilty on 19 counts of conspiracy, fraud and inside trading over Enron scandal. Skilling was found to have orchestrated a series of deals and financial scheme which later