Identify an organization that was involved in corporate fraud. Explain how fraud can be detected and evaluate the importance of teamwork and leadership in a fraud investigation.
For this assignment, research the Internet and identify an organization that was involved in corporate fraud.
Write a 3 page paper in which you:
Based on your research, identify and assess the fraud that occurred in the organization and the impact it has had on the corporation’s investors and creditors. Provide support for your rationale.
Suggest how a financial forensic investigation could have detected fraud in the organization that you researched. Consider the risk factors, the elements of fraud, and the analysis of competing hypotheses.
Evaluate how teamwork and leadership is an effective tool for financial forensic investigations. Provide support for your Assessment.
Assess the role of research in fraud examinations and financial forensics professions. Give your opinion on whether or not fraud examinations and financial forensics professions can have long-term success without continuous research in the field. Provide support for your rationale.
Use at least 6 quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s
ENRON CORPORATION FRAUD
Enron, was a corporation headquartered in Houston and operated one of the biggest and largest natural gas transmission networks visibly in North America which totaled over 36,000 miles. Despite being the largest marketer in the natural gas and electricity industry in the United States, Enron also managed world’s largest portfolio of natural gas risk management contracts and pioneered innovative trading products. Due to its dominant presence Enron was on Fortune’s “Most Innovative” company in the United States for several years running reaching no 7 on the same Fortune 500 list in 2000. As corporate fraud started rocking its foundation its bankruptcy in the December of 2001 became the largest filing in United States history. As a result the name Enron became associated with corporate greed and corruption all over ,while its demise ended up to cost investors and company employees over $70 billion in lost capitalization and retirement benefits.
Enron was initially formed by a merger between Houston Natural Gas (HNG) and InterNorth. The HNG was in fact formed from the Houston Oil Co. in the 1920s, providing gas to retail customers in Houston. But in the year 1976 it sold its retail gas business in Houston so as to concentrate on gas exploration and production venture as well as other businesses. In around 1984 HNG had accumulated assets of about $3.7 billion, total sales of over $2 billion, and a profit margin of $123 million.
In January 2000 Enron entered into the broadband fiber optic business and as a result created Enron Broadband Services. This Enron Online became the largest e-commerce site in the world. However in a few months there was an oversupply of capacity with technological innovation doubling the carrying capacity of already laid fiber in the ground. In addition within months after the Enron’s entry, there was a glut of unused fiber connections across the country, and unfortunately numerous Internet startups that were targeted to consume much of the anticipated bandwidth failed and caused prices to fall by fifty percent. As a result of this failure it was estimated that Enron lost about $1 billion in the broadband venture. Surprisingly, Enron was able to use accounting mechanisms for it to record a profit of over $100 million attributed on a deal with Blockbuster that, never saw a single dollar of revenue in reality.
Enron’s increased reliance on trading brought about some basic changes in its accounting procedures, therefore under Skilling the trading operation opted to adopt mark-to-market accounting whereby the present value of the anticipated revenue is realized while the expected costs of fulfilling the contract are expensed once a contract is signed. This led Enron and one of its outside auditor, Arthur Andersen, to take the practice to previously untested parameters. This saw the stock rise to 56 percent in 1999 and 87 percent in 2000; in actuality Enron was losing money from its operations but using fraud accounting practices to appear profitable and stable. It also made use of frequent and heavy prepaid agreements which would allow a company to raise cash, just like a loan, but was not included in the liability on the balance sheet. With their attempt to bury debt and raise funds 2001 Enron signed over $5 billion worth of prepaid agreements in 2001.
The Raptors, entities created in 2000 to remove troubled international assets from Enron’s books, were nearly insolvent. The Raptors were restructured which allowed Enron to hide another $200 million in losses in March.
In November Enron with Houston-based Dynegy, Inc. entered merger negotiations , making Enron’s stock rose to about ten dollars. From the merger Enron received $1.5 billion in cash from Dynegy as well as the first $550 million as the pipeline loan. Due to Enron’s third-quarter loss which was restated to be $664 million, the merger was reviewed when credit rating services lowered Enron’s rating to just above junk status and also triggered an immediate repayment demand of $690 million for a Rawhide SPE. The Dynegy deal collapsed, while also banks refused to extend any further credit. Ultimately on December 2, 2001, the company filed for protection under United States bankruptcy laws, which was the largest at that time in United States history.
How a financial forensic investigation could have detected fraud in the organization
According to the Association of Certified Fraud Examiners (ACFE), a common way internal fraud can be detected is through a tip from a tipster who could be an employee or an outside vendor. It is believed that more than 34% of internal frauds have been detected with tips. This could have been from the suspicious Enron employees as they also lost at the end. Also the auditor could have tipped they authority though they risk their employment but further they even risked their profession for not reporting. Other ways of detecting fraud are internal controls whereby the Financial managers would have raised the questions and internal audits who would have reported the issue and adopt transparency.
The external audits would have helped Enron from continuing the poor accounting practices as they stand from independent view, and would have analyzed the hypothesis adopted and advice accordingly. Audits play a role by preventing some fraud from occurring. Yet they should not be heavily relied on to detect fraud. Forensic accountant should investigates crimes such as fraud, incorrect financial reporting of Enron, and illegal investment schemes. Forensic accountant should have investigated crimes such as fraud, incorrect financial reporting of Enron, and illegal investment schemes. It would encompass on litigation support for Enron, investigation and dispute resolution. Forensic accountants would provide expert advice relating to the financial and tax aspects of litigation which includes Enron’s forensic accounting, data analysis during the discovery process, Enron’s damage and lost income calculation together with income tax issues.
Teamwork and leadership would have been an effective tool for financial forensic investigations, since they affected leaders would have noted the fraud happening and sound an alarm which would then help in the forensic investigations. The teamwork in reporting will ensure better investigation and conclusive damage.
The role of research in fraud examinations and financial forensics professions is a very major one since they are the people trusted to identity the malpractices in a business. They however face a daunting task in their investigations due to the various forms fraud can be carried out thus more research needs to be done in the field, as they cannot have longterm success with the current findings.
REFERENCES
1) Alan Rubenstein and Thomas Weirich, “Accounting Issues at Enron,” CPA Journal 72 (December 2002).
2) Bethany McLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (New York: Portfolio, 2003).
3) Loren Fox, Enron: The Rise and Fall (Hoboken: Wiley & Sons, 2003).
4) Mimi Swartz with Sherron Watkins, Power Failure: The Inside Story of the Collapse of Enron (New York: Doubleday, 2003).
5) Paul M. Healy and Krishna G. Palepu, “The Fall of Enron,” Journal of Economic Perspectives 17 (Spring 2003).
6) Robert Bryce, Pipe Dreams: Greed, Ego, and the Death of Enron (New York: PublicAffairs, 2002).
