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Example research essay topic: Sarbanes Oxley Act Securities And Exchange Commission - 1,857 words

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The Beginning of the End of Enron Enron Corporation, an energy and communications company was established in 1985 by the merger of Houston Natural Gas and Inter North (enron. com). This merger catapulted Enron into becoming the largest natural-gas company in America. Fortune magazine named Enron "America's Most Innovative Company" in the years of 1996 to 2000. And in 2000, Enron was Fortune's " 100 Best Companies to Work for in America. " In 1986, Enron's CEO, Kenneth Lay, proclaimed that the vision of Enron is to become "the premiere natural-gas pipeline in North America" (enron. com).

However, this vision of Enron would ultimately lead to the most scandalous fall of a business lead by corporate greed. Enron continued its meteoric rise to becoming the world's leading Energy Company. In 1989, Enron formed a trading company, Gas Bank, run by CEO Jeffrey Skilling, and within a year Gas Bank became Enron Finance Corporation and Enron Gas Services. This corporate split was renamed in 1997 to Enron Capital & Trade Resources. This marked the beginning of a series of events that brought on the evolution of Enron into different markets. Originally Enron was the operator of gas pipeline, but soon diversified into other markets.

In 1998, Enron created Azurix, a water company to enter into the water and waste waterford market. In 1999, Enron stretched even further by creating Enron Broadband Services, which sells broadband internet services as a wholesale commodity. It appeared Enron had created a successful business through diverging itself into different areas of energy and service markets; Enron was trading pulp, paper, fertilizer, plastics and other commodities in addition to natural gas. By 1999, Enron had grown so much that it was involved in about a quarter of all energy deals.

In late 2000 Enron reported earnings tripled since 1998; however, this event would mark the sudden fall of a great empire. In May 2001, the energy market took a tumble as Californians struggled with the soaring prices of energy. California politicians blamed Enron for manipulating the energy market. In 2001, Californians were hit with skyrocketing energy prices, rolling blackouts, and one of the leading utility companies, Pacific Gas and Electric Company, filing for bankruptcy. Enron was hit with a change of CEO's; Lay resigned as CEO and Skilling replaced him (for only a short time).

In October 2001, the energy crisis took a turn for the worst and marked the beginning of the end of Enron. On October 12, 2001, Enron disclosed a $ 638 million loss in its third quarter for the fiscal year. This monetary disclosure sparked an interest by the US Securities and Exchange Commission (SEC), who began to inquire about Enron's financial statements. Shortly after, Enron fired Andrew Fastow, the organization's CFO, due to what Enron calls losing investor confidence (Swartz). The termination of Fastow increased suspicion and the SEC announced Enron will undergo a formal investigation. The once mighty energy company took a downward spiral into the largest bankruptcy in US history.

Enron revised their financial statements; they restated earnings, which decreased by $ 586 million and a reduction of shareholders' equity of $ 1. 2 million over the past four years (enron. com). Enron also announced $ 690 million in debt with an additional $ 6 billion due by next year. Dynergy, another energy business, attempted to rescue Enron by entering into an agreement to purchase stock and relieve debt, but later withdrew and terminated the agreement on November 28, 2001. On November 30, 2001 the stock closed at 26 cents per share and in an effort to relieve its debt obligations, Enron filed for Chapter 11 Bankruptcy on December 4, 2001 (schwab. com).

With the announcement of revised statements and changes to key executive positions, the stock price took a nose dive, causing the market to halt the sale of the stock as it reached an all time low. The graph below illustrates the rise and fall of Enron's stock prices: Source: Encarta. com Crucial moments show the downward trend of Enron's stock value: Date Event Stock Price 8 / 23 / 2003 Enron Stock Reaches All Time High $ 90. 00 8 / 14 / 2001 Jeff Skilling Resigns $ 42. 93 10 / 12 / 2001 Enron Announces $ 638 Million Loss $ 35. 81 10 / 24 / 2001 Andy Fastow Is Fired $ 16. 41 10 / 31 / 2001 SEC Announces Formal Investigation $ 13. 90 11 / 8 / 2001 Financial Statements Revised $ 8. 41 11 / 19 / 2001 S& P Downgrades Enron Stock to 'Junk Status' $ 9. 06 11 / 28 / 2001 Dynergy Terminates Agreement to Assist Enron $ 0. 61 11 / 29 / 2001 Stock Plummets $ 0. 36 11 / 30 / 2001 Stock Reaches All Time Low $ 0. 26 12 / 4 / 2001 Enron Files Chapter 11 Bankruptcy $ 0. 87 Source: Investing guide. com The fall of Enron's stock ultimately led to the removal of trading Enron on the stock market. The current value of Enron stock (ENE - renamed to ENRNQ) is 4 cents (investing guide. com).

Enron also laid off nearly 4. 000 employees, who lost nearly 90 percent of their 401 (k) investments. How it Came Tumbling Down In order to keep Enron growing, it had to borrow money, which in turn made earnings less impressive. In order to keep investor confidence, Enron engaged in mark-to-market accounting and the most complex off-balance sheet accounting. Many executive members of Enron and auditors of After Anderson contributed to demise of Enron; however, Jeffrey Skilling, Kenneth Lay, Andrew Fastow, and Sherron Watkins played a significant role in the collapse of Enron. Typically assets and liabilities are valued on a historical cost basis, but this method is difficult to apply to contracts that shift in value constantly. Enron opted to use mark-to-market accounting, by the advice of Skilling (McLean and Elkind, 39).

Under mark-to-market accounting, the values of assets and liabilities on the accounting books are adjusted to reflect the constant changes of market prices. Enron would see changes in their contracts on a daily basis and would take a snap-shot of the market prices on their quarterly statements. On their quarterly statements, Enron would make adjustments to unrealized gains and losses to the income statement to reflect the market price of their contracts. The controversy arises because there is difficulty in applying this method to long-term contracts with unknown prices. Companies have to adopt some method of determining a discretionary valuation method. Invalid entries can have a very big impact on the reported earnings.

It is believed that Enron used mark-to-market accounting in a manner to improve the reported earnings by inaccurately determining the market value of assets and liabilities. Enron engaged in a form of off-balance sheet financing by investing in an enormous amount of Special Purpose Entities to hide an incredible amount of debt obligations. Off-balance sheet financing allows companies to borrow money without recording it on their financial statements. One way to use off-balance sheet financing is the use of Special Purpose Entities (SPEs), which are entities created to perform special projects. The rationale behind using off-balance sheet financing is to improve the appearance and quality of the balance sheet, which in turn attracts investors.

Off-balance sheet financing also increases the ability to obtain credit and at a less cost. Most companies use off-balance sheet financing to hedge risk and obtain capital. However, Fastow used SPEs to hide a considerable amount of debt and improve the company's performance and promised issuance of stock to compensate investors for their risk. Below is a chart of the complex nature of Enron's Special Purpose Entities provided by Time Magazine: The most controversial SPE was LJM Cayman LP and LJM 2 Co. Fastow received more than $ 30 million in management fees for overseeing the activities of these SPEs during the years of 1999 to July 2001. LJM also invested in another group of SPEs, the Raptor vehicles, which was used to hedge the bankrupt broadband company.

Skilling and Fastow appear to be the most active executives involved in the scandal; however, other members of Enron contributed also. Kenneth Lay, founder of Enron, was CEO of the corporation in 1985 to February 2001, and then stepped back into his CEO role in August 2001. Lay's involvement is not clear; two theories have emerged according to LA Times - "He was an isolated statesman, unaware of financial trickery perpetrated by underlings, or he was a hands-on manager who knew what was going on" (LA Times, August 21, 2002). Sherron Watkins, Vice President of corporate development at Enron, is considered the whistle-blower of Enron. She helped uncover the scandal; Watkins wrote a note to Lay informing him of the misstatements in the financial statements. The Aftermath and Accounting Reform After the Enron scandal, investors were left with little confidence in the financial statements of a corporation.

In an effort to reassure investors, SEC Chairman Harvey Pitt called for accounting reform that included the announcement of the Sarbanes-Oxley Act (SOX). The goal of SOX was to protect investors by improving the accuracy and increasing the reliability of financial statements through the use of disclosures. The major provisions of SOX include: o Financial Reports must be certified by CEOs and CFOs o Additional disclosures o Auditor independence o Companies are required to have internal audits procedures, which are to be certified by external auditors o Auditors will not be able to provide firms with additional consulting services Source: Securities and Exchange Commission Website With SOX in place, the possibility of another big accounting scandal has decreased. A lesson has been learned. In addition, many corporations are reviewing their financials more closely to prevent any issues from arising similar to the Enron scandal, but also to increase reliability of their financial statements for investors. Works Cited Clow, Robert. "Enron in Crisis. " Financial Times November 9, 2001. "Enron Provides Additional Information About Related Party and Off-Balance Sheet Transactions; Company to Restate Earnings for 1997 - 2001. " Enron press release.

November 8, 2001. Goldberg, Laura and L. M. Site. "Enron on Edge of Collapse/Stock Value Plunges as Dynergy Bails Out; Bankruptcy Expected. " Houston Chronicle.

November 29, 2001. Graphic of SPE Complexity provided by Time Magazine Website: web Graphic of Stock fluctuations provided by Encarta Website: web Information on Enron vision and Timeline provided by Enron Corporation Website: web Information on Stock prices provided by Investing Guide Website: web Information on Bankruptcy provided by Schwab Investing Website: web Information on Sarbanes-Oxley Act provided by Securities and Exchange Commission Website: web Mclean, Bethany and Peter Elkind. Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. September 1, 2003. Pitt, Harvey L. "How to Prevent Future Enron's. " Wall Street Journal.

December 11, 2001. "Power Play/Enron Timeline. " Houston Chronicle. November 10, 2001. "The Enron Crisis: the AICPA, the Profession and the Public Interest. " web "The names in the Enron game. " Los Angeles Times. August 21, 2002 (from Newsday. com) Thomas, C William. "The Rise and Fall of Enron. " web


Free research essays on topics related to: balance sheet, securities and exchange commission, sarbanes oxley act, houston chronicle, financial statements

Research essay sample on Sarbanes Oxley Act Securities And Exchange Commission

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