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Enron Accounting Fraud

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Enron:

        Enron has been branded as an energy trader and supplier.  The organization was formed in 1985 through the merger of Houston Gas Co. and InterNorth Inc.  To the public, Enron was a powerful and successful company. From 1996 to 2001 Enron was voted “America’s Most Innovative Company” by Fortune magazine.

        However, in 2001 Enron declared bankruptcy with it’s shares selling at an all-time low of $.26 per share.  The company paid its creditors more than $21.7 billion from 2004-2011.  Enron used a mark-to-market (MTM) accounting system. This is a technique where you measure the value of a security based on its current market value, instead of its book value. This is great when trading, but has proven to be bad for business.

        Enron would build asset and apply them as a profit on the books, without actually earning a profit. They would project the profit. This also occurred when they joined with Blockbuster. Enron logged earnings based on expected group which would inflate the numbers, but the value was not precise.

        When losses would occur Enron would use special purpose vehicles to hide debt and negative assets from investors and creditors. In 2011 analyst began questions the transparency and earning of Enron. They also downgraded their rating. Dynegy backed out of a merge with Enron leading them to file bankruptcy.

        Those charged include Enron’s accounting firm, Arthur Anderson; found guilty of obstructing justice. This charge was overturned, but the firm’s reputations was ruined. Former CEO Kenneth Lay was convicted of six counts of fraud and conspiracy, as well as four counts of bank fraud. Lay died of a heart attacked prior to sentencing. Former CEO Andrew Fastow plead guilty to two counts of wire fraud and securities fraud. Fastow served a four-year sentence. Former CEP Jeffrey Skilling was convicted of conspiracy, fraud and insider trading. Skilling received a reduced 10-year sentence and was ordered to pay $42 million to victims.

Worldcom:

        Worldcom was known as a leading long-distance phone company. another company accused of accounting fraud. The fraud, charges and penalties were one of the largest experienced by any company throughout the accounting fraud era.

        To hide falling profits from investors, Worldcom would hide falling profits. This in turn would inflate net income and cashflow. These expenses were not recorded as such, but rather as an investment. To further hide the negative turn on the company’s finances, Worldcom borrowed about $400 million from Bank of America to cover margin calls. A margin call is a demand by a broker for an investor to deposit more cash/securities to cover up the potential losses.

        CEO Bernard Ebbers was convicted of fraud and conspiracy as a result of the organizations false financial reporting. He was sentenced to 25 years in prison and is currently incarcerated. Former CEO Scott Sullivan received a five-year sentence. Worldcom settled lawsuits with creditors for about $6 billion.

Cendant:

        Cendant was a New York-based hotel franchiser. The organization was formed in 1997 with the merge of Hospitality Franchise Systems and CUC International Inc. Soon after the merge one of the biggest financial scandals were uncovered. The company’s revenue was overstated by $500 million over the course of three years. One inaccuracy discovered was the organization’s net income for 1997 was reported at $55.4 million when the actual result was a net loss of $217.2 million. This accounting fraud was kept from investors as executive hid numbers within the books. Cendant was forced to admit the overstatement of earnings. This caused the stock price to drop to $19 per share. The market loss was about $13 billion.

        In 1999, Cendant reached a $2.83 settlement on the class action lawsuit filed against them. Top executives Cosmo Corigliano, Casper Sabatino and Anne Pember were all convicted. Corigliano received three-year probation including 6 months of home confinement and 300 hours of community service. Sabatino received two years of probation. Pember received two years of probations along with 200 hours of community service.

Tyco:

        Tyco International was a security systems company with two major segments: Security Solutions and Fire Protection. Although incorporated in the Republic of Ireland, Tyco maintained headquarters in Princeton, New Jersey. The 2002 accounting scandal at Tyco led to hefty fines, but no jail time for one executive which leaves a lot to be questioned. Top executives were convicted of looting the company and inflated its profits. Investigations shows the corporate culture encouraged managers to ben the principle accounting rules to mislead investors about the company’s financial standings.

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