Accounting Fraud at Enron
Since the collapse of Enron over a decade ago as a result of deceptive and manipulated accounting practices, America got into headlines for a large number of white-collar crimes. White collar crime is a nonviolent criminal activity that is committed by people in the course of business in the form of bribery, fraud, extortion or even embezzlement with the primary purpose of financial gain ( Simpson, 2013) . The fraud by a few individuals can result in the loss of billions of dollars to the company leading to the collapse as in the case of Enron. White collar crime can also result in loss of stock value as well as jobs and damage the reputation of the firm. With the rising number of accounting scandals in the major accounting firms as well as the rise in other professional malpractices, there has been the growing need to come up with strict measures that will eliminate or reduce white collar crimes.
Enron Company, formed in 1985, became the most innovative companies in America by then. The company was making a lot of profits from the energy trade and supplies. With its stock value being stable and high, it had an advantage over other firms. However, the company started to crumble in the year 2000. The then CEO, Jeffrey Skilling introduced a way of hiding the financial losses of the business, a method that was called market to market accounting ( Steffensmeier et al., 2013) . In this technique, the value of the security is measured based on the current market value rather than their book value. This fraud could deceive the public that the security was doing well in the market, but in the real business, it was disastrous. In this case, the company would construct an asset and claim a projected profit immediately on its books even before the real profit was realized. This was done to deceive the public and investors that the firm was making profits, yet it was a way of hiding the financial fraud that was going on in the business. If the revenue from the projected plant profit were less than the amount recorded in the books, the company would write off the amount instead of recording it as a loss. These were tactics used to make the company appear to be making profits if in the real sense it was losing money through fraud and deceptive accounting tricks. By its collapse, the company had lost over 100 billion dollars in value through fraud and deceptive accounting treatments.
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An investigation by the FBI revealed sufficient evidence that there was deliberate accounting fraud to deceive the public and embezzle the money. Enron top officials were convicted for deceiving investors with sham accounting treatments, making thousands of workers lose jobs as well as their pensions. The investigation also revealed how the company sold energy to state at inflated rates. The stock value was also inflated and the assets overvalued by billions of dollars to generate cash flows and manipulate earnings in the books to keep stock prices high ( Cliff & Desilets, 2014) . This case represents one of the biggest accounting scandals in American history where investors lost huge sums of their investments in the hands of the management. The accounting scandal affected not only the investors but also the employees who other than losing their jobs; they also lost their retirement benefits and health insurance. The officials of the company who took part in the fraud were punished.
Certain issues exist in the contemporary law that make it difficult to combat white collar crimes completely. The major defense that most professionals who take part in the white collar crimes use is that they were not aware the act was illegal. The accounting profession has some loopholes in the standards. These accounting loopholes can be used by accountants to commit white collar crime. For example, some accounting treatments are left to be judged by the accountant on the best treatment to apply. It is difficult to prove that the accountant made a wrong accounting treatment willfully and that the accountant was aware of the illegality. So many cases of white collar crime have been taken to court, but the suspects are freed on the grounds of lack of proper evidence or the defense of being unaware of the illegality nature of the act. This has made it difficult to bring to book all the professionals who want to use their positions to commit fraud, hindering the efforts made to combat the white-collar crime. Like in the Enron case, the accused pleaded not guilty by arguing they made the accounting treatments in the interest of the investors and that they did not know it was illegality.
Also, the justice system does not have an adequate emphasis on fraud and all other white collar crimes especially due to the non-violent nature of these crimes. These offenses are perceived not as criminal offenses making it difficult to combat such frauds. Compared to other offenses which are considered major criminals such as murder and rape cases, the white collar crimes do not get much into the public, and they are not taken as any serious crimes that deserve to be punished. White collar crimes are not a priority for the police departments which are to majorly deal with crimes of violence and restoration of law and order. There are fewer chances of enforcement by the police on any white-collar crime. Unless a country has an institution mandated to deal with ethics and corruption matters, enforcement of the white collar crimes remains a major challenge. Jurisdiction limitations also drag the fight against white collar crimes. Some individuals can be found in fraud of having embezzled billions of dollars, but when taken to courts, they are charged minor offenses. Such jurisdictions will only facilitate the act.
When judges are undertaking a sentencing process, so many other things come into play in determining the outcome. While judges are always more likely to give lighter judgment on the white collar crimes because of the leniency in which they are treated, the outcome also depends on the impact the crime had on the victims. In Enron accounting scandal, billions of investors’ money were lost. Employees also suffered severe losses due to job loss, loss of their retirement benefits as well as health insurance. Due to this major loss, the court had to sentence the officials of the firm for the crimes committed. Given the magnitude that the Enron case had, it has created the need for numerous investigations into various fraud cases. Since the introduction of the case, many professionals have been found guilty of fraud and prosecuted. The case was, however, a drawback to the accounting profession. The chief accountants at Enron Corporation went against the professional code of conduct of the accountants who are supposed to act in good faith and protect the interest of the investors all the time.
Due to the increasing number of cases involving white collar crimes, increased state and other agencies involvement in the white collar crimes have been witnessed. The federal agencies through the national crime prevention council (NCPC) works to build a safer community by ensuring crime-related activities are prosecuted. In collaboration with other bodies, it ensures that any forms of crimes are prevented. Federal law enforcement agencies and the local law enforcement agencies have distinct responsibilities, but they work in collaboration with each other to help prevent crimes and fraud. The local law enforcement agencies handle more challenges than the federal law enforcement agencies. They train and equip the personnel with the right information required to ensure anyone who commits a white collar crime is brought to book. The federal agencies, as well as the local agencies, ensure that individuals who commit white collar crime are arrested and charged. In Enron Corporation case, FBI was used to investigate and unearth what happened. The FBI team were able to get documents that provided evidence of the frauds and accounts deception that the officials used to cheat the investors. The state law enforcement agencies, therefore, play a significant role in investigation to get the evidence before presenting it in court to charge the suspects.
The public, government, police, federal law agencies and the private security officers work together in a coordinated relationship to fight against the white collar crimes. After the government receives the report of a white collar crime through its institutions dealing with corruption, it uses the police to conduct an investigation. The role of the police is to ensure that evidence of the crime is found before the suspects can be presented in the courts. During investigations, police work hand in hand with the public. Certain relevant information required to prosecute the suspects can be found from the public. The police, therefore, work together with the public to enable them to acquire evidence and sufficient information necessary to initiate the trial. The federal agencies, on the other hand, can initiate the prosecution process for the suspects. They present the case in the court through the prosecutor. Depending on the nature of the evidence presented, the suspects can be charged. Various forms of charges can be put on the individuals. The suspects if found guilty can be fined, jailed, assets frozen to pay back the lost money as a result of the fraud.
The government also provides funds to various law enforcement agencies to help them fight against the white collar crimes. The police department needs funds to train officials on how to combat crime. Many other supportive types of equipment are also needed by the various law agencies so that they can carry out their duties effectively. Private security works together with the police to carry out investigations in an attempt to gather evidence required to initiate prosecution. The coordination between the various agencies has ensured that no white collar crime case goes unprosecuted.
In conclusion, more serious actions need to be taken in dealing with the white collar crimes which are on the rise currently. Due to the perception of people about such cases, most white collar crimes go unprosecuted, an act that has led to more serious white collar crimes. Some laws need to be reviewed regarding the jurisdictions made when sentencing those involved in frauds. Frauds and other white collar crimes should be categorized as major offenses due to the nature of the loss they cause to the victims. Making it a major offense with serious punishment will make professionals act professionally in their duties and work in the interest of their principals. It is due to the various loopholes in the law in the jurisdiction of white collar crimes and lack of clarity in some accounting treatments that have made accounting scandals increase for the last one decade. If the loopholes are sealed, there will be much progress in combating white collar crimes.
References
Cliff, G., & Desilets, C. (2014). White collar crime: what it is and where it's going. Notre Dame JL Ethics & Pub. Pol'y , 28 , 481.
Simpson, S. S. (2013). White-collar crime: A review of recent developments and promising directions for future research. Annual Review of Sociology , 39 , 309-331.
Steffensmeier, D. J., Schwartz, J., & Roche, M. (2013). Gender and twenty-first-century corporate crime: Female involvement and the gender gap in Enron-era corporate frauds. American Sociological Review , 78 (3), 448-476.
