Corporate Fraud

“Corporate Fraud”…when you hear those words the first, most recent incident, many think of is The Enron Scandal. This same scandal produced the Public Company Accounting Reform and Investor Protection Act of 2002. This much needed act created the Public Company Accounting Oversight Board under the Security Exchange Commission’s supervision. This board sets accounting standards and investigates Certified Public Accountants and companies to ensure they are following the guidelines set forth. This board has also been given the authorization to fine, suspend and recommend criminal investigations in the event CPA’s and their firms violate the standards. (Lindstrom) To understand the stringency of this Act is to recognize what brought it about.

Many, like myself, barely followed along on the nightly CNN reports about a billion-dollar company who filed fraudulent financial statements for five years, Enron. We are used to hearing about such things happening. Companies go bankrupt everyday. Yet, the Enron scandal hit the financial world so hard that it unnerved the faith the American people had in our economic system. The lack of investing ripped the stock market, which has dropped $200 billion since the December 2001 when the company filed Chapter 11. (Saporito) This crash was noted as the most stunning bankruptcy in history.

Enron was originally a gas pipeline company. When the government deregulated the natural gas and electricity industry in the late 1980’s and early 1990’s, Enron took advantage. It dominated the gas, electricity, and water commerce and also commodities such as bandwidth. By the late 1990’s, “Enron controlled almost 25% of all electricity and natural gas contracts traded worldwide.” (Lindstrom) The company even had enough power to choose whom they wanted on the boards they had to do business with. (Gutman) By using illegal accounting tactics, the company escalated itself into a billion-dollar corporation.

This strategy worked for them for five years. When the corruption outreached the grasp of the company, executives authorized a change that froze employees retirement funds as stock prices (which were at $98 per share) took a dive, going as low as $1. While executive sold their shares and walked away with millions, the lower-level employees lost their pensions. Enron collected their money in the form of a 401K (where the company matched the employees savings with Enron Stock.) Pension plans became worthless overnight as the value of the stocks dropped. (Gutman) Not only did four thousand employees lose their jobs, they lost their life savings as well.

Some blame the accounting firm, Arthur Andersen, LLC, for not exercising the proper controls to prevent this from happening. They too could not come up with an explanation as to how Enron was able to get away with faulty financial statements for so long. Fearing the oncoming SEC investigations, they shredded and erased all the documents pertaining to Enron. Although the company proclaimed their innocence, it was investigated and later found guilty for obstructing justice. (Gutman)

Others believe that the government should accept some liability for the fiasco. It was our government that decided to deregulate the electricity and natural gas industry with no consideration to those it would affect, John Q. Public. From the beginning, Enron bought its way through the political realm. The Republican Party received over $1million dollars in the 2000 election and during Clinton’s term, the Democratic Party received $500,000 while President Bush received