Arthur Andersen- enron scandal case
Arthur Andersen knowingly aided in the falsification and alteration of the company’s accounting to hide losses working together with its auditors, in order to show a profitable, successful and sustainable company over time
The shareholders had the right to receive truthful information from the company so that they are aware of the performance of their shares and of the company, whether to continue investing or not, among other things. However, the information presented was not correct, the profits were “made up” to make the shareholders believe that everything went perfectly, when the truth was the opposite; a series of fraudulent techniques were made that were allowed by their auditing firm Arthur Andersen creating the biggest fraud in the business world.
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Cooperated with senior executive
Arthur Andersen worked closely with influential and senior executive such as Ken Lay
The two had a lot of influence and could dictate the accounting.
Andersen allowed influential executive to engage in fraud. Despite the fact that the future looked very promising in the eyes of the public, at the offices of Arthur Andersen (company auditor) there was already a debate about a crucial point in the life of Enron: the companies created and managed by the executive financially, Andrew S. Fastow. These companies represented a cornerstone in the existence of Enron because their transactions involved a considerable amount of Enron’s own shares and if these businesses failed, the stock price could plummet and bring the company down with it, which was exactly what happened. It is from this moment that the price of the shares of the powerful Enron begins to recede in record time in a little less than a year.
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Destroyed evidence
Arthur Andersen then contributed in destruction of accounting evidences.
Trial case established that the partners and employees of Andersen personally led the efforts to destroy the evidence
The US Department of Justice begins a comprehensive criminal investigation in the Enron case on January 9, 2002. A day later, the White House confirms Kenneth Lay’s participation as a lobby to support his own company before it will collapse. The auditor of Enron, Arthur Andersen, also admits that his employees destroyed confidential documents related to Enron as a result of the public scandal that was generated by the fraud. However, the trial case established that the partners and employees of Andersen personally led the efforts to destroy the evidence.
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BLAME OTHERS
Arthur Andersen placed the blame on employees for destroying documents
Arthur Andersen’s defense lawyers tried to convince the jury that their employees shredded thousands of documents and electronic files in accordance with the company’s internal regulations to eliminate unnecessary materials.
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Cooperated with Jeff skilling in Creating false report
A series of fraudulent techniques were made that were allowed by their auditing firm Arthur Andersen creating the biggest fraud in the business world.
Enron handled their accounting as “hypothetical-to-future-value”. Which consisted of writing down all the profits that have been projected to have in the future, regardless of whether the money has already entered the company or not, or if they were having losses. This violated basic accounting principles such as realization (because they do not recognize the economic events that happen) and prudence (because they overestimate assets and income) . This way of handling accounting was subjective and manipulative, as well as unrealistic and did not allow for making the right decisions.
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Contributing factors
Ethical misconduct
Deregulation
Inadequate management
Pure greed
There is not a single cause of the fall of Enron. The massive disaster that cost millions of dollars in employee pensions and shook the world of accounting was a perfect storm of ethical misconduct, deregulation, inadequate management and pure greed. These forces interacted to bring down what was once considered one of the most innovative companies in the world and one of the most desirable jobs
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Impact of scandal
Creditors lost $ 23 billion dollars
The shareholders of the company recorded losses of $ 74 billion dollars in the four years prior to bankruptcy
After the bankruptcy of Enron, its main creditors and some other commercial companies linked to its operations suffered heavy losses; the debt was estimated at around $ 23 billion dollars. This became one of the largest (second) bankruptcies in the history of the United State. On January 16, 2002, Enron shares are finally derecognized from the New York Stock Exchange. The shareholders of the company recorded losses of $ 74 billion dollars in the four years prior to bankruptcy.
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Deterring such crimes
Focusing on fraud triangle
Motivation
Opportunity
Rationalization
The motivation: It consists in that the subject can not solve his problems by legitimate means, so he begins to consider carrying out an illegal act. This involves a material or psychological desire of the fraudster to commit an illegal act.
The opportunity: It is critical that the fraudster be able to solve his problem in secret. If a perpetrator of the fraud is caught, it would damage both his status and the underlying problems he was trying to reconcile.
The rationalization: It is the perception that the fraudster has that his illicit activity is correct; he has a wrong appreciation of his actions, making them acceptable and correct.
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Deterring white collar crime
Mitigate the existence of opportunities
Without the existence of the three components of the fraud triangle, this illicit can not be perpetuated. One of the most effective mechanisms for the prevention of fraud is one in which organizations mitigate the existence of opportunities, since of the three aforementioned components, this is the only one that lies in the controls of the entities.. When organizations focus part of their resources on ensuring that opportunities do not exist, it is largely possible to reduce the probability of the illicit occurrence.
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Deterring white collar crime
Clear anti-fraud policy
When the organizations give a clear message from the shareholders’ meeting and the top management ( Tone-at-the-top) about the non tolerance of the illicit, a panoptic effect is created in the collaborators.
When the organizations give a clear message from the shareholders’ meeting and the top management ( Tone-at-the-top) about the non tolerance of the illicit, a panoptic effect is created in the collaborators.
The panoptic effect refers to the feeling that “someone is watching” and has its origin in the watchtowers that are incorporated in prisons. In this way, the inmates know that at the top of the tower there is a custodian who is watching them and who will act against any misbehavior. Psychology has shown that after a while, although no one is watching, the simple fact that the tower continues and the inmates can not see what is inside, makes the sense of vigilance is present and therefore the behavior of the inmate is as expected.
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Deterring white collar crime
Proper renumeration of employees
Most frauds are committed in the work environment, which highlights the connection between the economy and the actions of people
It is important to start thinking about employment as a behavioral system since most frauds are committed in the work environment, which highlights the connection between the economy and the actions of people. For both the thief and the dedicated employee, money exerts a powerful influence and it is very unlikely that this will change. [….] The greater our understanding of how people behave, the better we are prepared to change the way they do it.
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Deterring white collar crime
Corporate governance
This is the best preventive tool. It will be useless to punish the perpetrator, since it will be too late.
In occupational fraud, the perpetrator generally commits the crime for the first time. This behavior can be avoided if the corporate governance of the organization is sufficiently robust. The phrase “it is better to prevent than to regret” summarizes in a concise way what has been said about punishment and fraud. It will be useless to punish the perpetrator, since it will be too late.
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References
Gottschalk, P. (2010). White-collar crime: Detection, prevention and strategy in business enterprises. Boca Raton: Universal Publishers.
Williams, H. E. (2006). Investigating white-collar crime: Embezzlement and financial fraud. Springfield, Ill: Charles C. Thomas.
