Fraud in the AIS - Running Header ASSIGNMENT 3 FRAUD IN THE AIS Assignment 3 Fraud in the AIS Student Peter M Burke Instructor Jim Ridilla ACC564

Fraud in the AIS - Running Header ASSIGNMENT 3 FRAUD IN THE...

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Running Header: ASSIGNMENT 3: FRAUD IN THE AIS Assignment 3: Fraud in the AIS Student: Peter M. Burke Instructor: Jim Ridilla ACC564: Accounting Information Systems May 26, 2013
ASSIGNMENT 3: FRAUD IN THE AIS Accounting System Failures and Enron Introduction: The 1990s saw the United States enjoy unprecedented economic growth. This would be led largely by the enormous profitability of large corporate entities and multinational conglomerates. At the height of this period of economic dynamism, it did appear that these corporate entities were leading the charge toward a new national prosperity. Sadly, the decade immediately thereafter would prove much of this unbridled success to be manufactured and much of the profit to be totally false. Faulty accounting practices would be revealed as a most insidious culprit as a mountain of corporate scandals became apparent in the early 2000s. Certainly, none of these accounting scandals was quite as visible as the collapse of Enron and its accounting partner, Arthur Andersen. The events of 2002 would begin the uncovering of a world of malfeasant practices and would demonstrate the need for far greater transparent, oversight and legislative intervention. The discussion here considers the accounting system at Enron and how this produced an environment where fraud, embezzlement and deception were a part of the company culture. Accounting System Failures: The system failures that allowed for the collapse of Enron were neither technical nor accidental. They were willful, patterned and inevitable. The flaw in the accounting system was that it could be held hostage by the avarice and ambition of a core of corrupt executives. According to BBC News (2002), reporting at the time of the scandal’s revelation, “Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts.” (BBC News, 1) According to these revelations, Enron’s executive leadership had conspired to 2
ASSIGNMENT 3: FRAUD IN THE AIS falsify its economic performance in order to stoke higher stock values and embezzle massive sums of shareholder money. When the company’s straw house of false earnings could no longer sustain its weight, the largest energy supplier in the nation collapsed. Its shareholders withdrew their remaining investments, the company filed for Chapter 11 bankruptcy, and all that was left was a tangled legal mess for prosecutors to sort through. The economic damage of the Enron scandal was absolutely enormous. According to the article by Iwata (2002), Enron “had $100 billion in annual revenue, suffered a $1 billion loss, restated $600 million in inflated profits and filed for bankruptcy restructuring. About 4,000 Enron employees were let go. Top Enron officials ran a vast web of partnership deals that misled Enron and investors, according to an Enron internal report.” (Iwata, p.1) In many ways, the accounting system failures revolved almost entirely over the ability of leadership to manipulate and falsify performance. In other words, there was a willful subversion of accounting transparency.

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