Written by: Stacey Mikesh
In today’s business environment, company leadership is constantly met with overwhelming pressures and expectations to succeed. For these reasons, among many others, management may feel it necessary to “cook the books” when the company’s financial results are not favorable. Since there is an infinite number of ways in which accounting fraud can be committed, studies suggest we segregate them into two categories – financial statement fraud and misappropriation of assets. In this blog, we will discuss these two categories and then review the Enron scandal to determine how this case should be categorized.
Financial statement fraud deals with knowingly or intentionally altering accounting records or omitting accounts from the financial statements to present better than actual results. These cases most often involve higher management. Additionally, while this is the least common type of fraud, only occurring in roughly 10% of all fraud cases, it is by far the most expensive (Coenen, n.d.). These types of fraud generally include improperly recording revenue, overstating assets and failing to present proper disclosures. Misappropriation of assets is when an employee steals a company’s assets for which they are responsible for managing and uses deception to hide that the assets are missing. Misappropriation of assets is the most common type of fraud and represents over 91% of all fraud cases. This type of fraud can consist of the various types of money theft as well as inventory theft (Coenen, n.d.).
The Enron scandal was very much the icing on the cake as far as Wall Street was concerned. The Enron case, along with several other significant fraud scandals during the 90’s and into the early 2000’s, had severely shaken public confidence in the accounting profession. To restore some credibility after the Enron scandal, the Sarbanes Oxley Act was written to reduce these types of fraud cases going forward. Enron was formed in 1985 with the merging of Houston Natural Gas and InterNorth. Kenneth Lay, who was the prior CEO of Houston Natural Gas, remained on as CEO of Enron. Enron had major expansion into new industries which led to rapid growth over the next 15 years. In 2000, the company reached $100 billion in revenues as well as earning the titles as the seventh-largest company on the Fortune 500 and sixth-largest energy company in the world. These achievements helped the company to reach its peak stock price at $90 (CBS News, 2006). Unfortunately, by then end of the 90’s, Enron was hiding much of its debt from bad deals and failed projects in offshore partnerships and were using aggressive accounting methods to overstate revenues. Based on our definitions above, hiding debt and overstating revenues would classify this case as financial statement fraud. By the end of 2000, through 2001, rumors were swirling about Enron’s troubles and on October 16, 2001, Enron announced that it was going to report a loss for the first time in four years as well as make over a billion dollar reduction in shareholder equity. With concerns and interest mounting, the SEC had opened a full investigation. On November 8, 2001, Enron had revised their financial statements for the last five years and acknowledged that while they had previously reported profits, they had actually earned significant losses. From there, the stock tanked and on December 2, 2001, Enron had filed for bankruptcy. As a result of this financial statement fraud, thousands of Enron employees were left without jobs, key executives went to prison, and business units were sold as Enron was dismantled.
Coenen, T. (n.d.). Three Basic Fraud Types. All Business. Retrieved July 30, 2015.
CBC News. (2006, May 25). The rise and fall of Enron: a brief history. Retrieved July 30, 2015.
Fraud In Accounting 