Southern New Hampshire University
April 19, 2015
In a world where performance includes high stakes and competition where each firm is trying to win over as many customers as possible, organizations are under a lot of pressure to show progress in their firm. “Progress,” in Corporate America, is measured by high profit margins and maximum shareholder wealth. The perception of positive corporate wealth is dictated by share price and the organizations’ ability to make money. However, the word “perception” is often the crux of American business. The public often sees high-end business owners and their board members commit heinous crimes such as embezzlement, extortion, false tax returns, and even systematically organized Ponzi schemes in order to give the perception of healthy profit. However, in October 2001, one of the largest scandals of systematic corporate malpractice rose when Enron became the consequential example of fraudulent business ethics. In this research paper, I will breakdown the elements of corporate fraud in legal terms and how all elements tie into the Enron case. I will also back these points using very present examples of fraud and how these cases have been resolved. Lastly, I will then go over of the measures taken after the Enron collapse in an effort to prevent future cases from occurring. The use of unethical or illegal means to misrepresent information about a firm’s financial health constitutes fraud. In legal language, "corporate fraud" means a violation of state or federal law or rules relating to fraud committed by a corporation, limited liability company, or registered limited liability partnership or an officer, director, or partner of those entities while acting in a representative capacity.”1 There is always increasing pressure on the CEO and the board to increase the income and today such pressures are really high as compared to the past. It is these pressures that force the use of unethical behavior. To prove fraud, there must be a material misrepresentation of fact with:
1. Knowledge of the falsity or reckless indifference of truth.
2. The intent that the listener rely on it.
3. The Consequence that the listener is harmed.2
In the case of Enron, Chief Operations Officer Jeffrey Skilling composed a staff of executives that were able to hide billions of dollars in debt through misrepresentation of accounting principles and financial reporting. Enron then encouraged its employees to invest in more shares of Enron stock so that the share price would dictate a healthy profit margin. Ultimately, the financial statements of Enron raised questions to their shareholders which lead to a $40 billion lawsuit after the stock price plummeted from $90.75 per share to less than $1 in seven months.3 In order to fully justify the fraudulent actions of Enron’s top executives, we must analyze the three elements that constitute fraud and see how it applies to the case against Enron.
Corporate Fraud: 1. Knowledge of its Falsity or Reckless Indifference to its Truth
With 21,000 employees and operations in more than 30 countries, the company it seemed was doing extremely well and this was further supported by the evidence presented by its auditors, namely the companies’ CFO Andrew Fastow. Fastow was in direct contact with Arthur Andersen, LLC, one of the largest audit and accountancy partnerships in the world. He would often share his accounting books with Andersen, whom were often skeptical about Fastow’s reporting. Even during intense scrutiny from Andersen’s audits, Fastow convinced Jeff Skilling to not worry about the numbers that were presented. The accounts of the company showed that Enron’s revenues in 2000 were over $100 billion. Enron was growing rapidly as it was selected by Fortune Magazine as the fastest-growing and most profitable stock in the last