Fraud in the AIS

ENRON’S FRAUD IN THE AIS Name Institution Affiliation Course Date of Submission Introduction Accounting information system AIS is the key factor of determining the success of an organization because it prevents frauds from occurring since there are adequate accounting information system in place. If a business appears to be carrying its operations recklessly with gross negligence with intent of defrauding or any fraudulent purposes, it is declared that a person knowingly is a party to the carrying of a business in such a manner by the court of law and is personally liable for all liabilities of the corporation. An effective accounting information system prevents such instances since it provides compatibility, flexibility and a favorable cost-benefit relationship significant to the corporation (Hall, 2004). An accounting information system is therefore, a combination of resources; people, procedures and business records that a company maintains to provide its financial data developed to suit individual needs of organization type. The most important segment of accounting information system is the internal control system since it is a procedure employed to safeguard assets and authorize trasactions by ensuring accuracy of accounting records (Hall, 2004). AIS are a formal procedure in which data is collected processed into information and distributed to users. It is a system that processes financial transactions and non-financial transactions that affects directly the processing of financial transactions. Collapse of Enron Enron Corporation is a collapsed multinational energy giant in the US which was founded as a result of merger between two major natural gas pipeline companies. The corporation was engaged in exploration of gas and oil through its subsidiary in its domestic operations and internationally. The corporation was later forward integrated developing into a production and marketing of its products to consumers. Enron operated in the US Canada and India and some other selected international arenas. The company bought and sold in wholesale, natural gas pipelines, electricity contracts, management of waste water and still traded with retail customers globally (Cristina, 2007). The company’s profits were understood as coming mainly from marketing of future prices for energy contracts which implied that the company was working under the agreed prices of its products delivery in future. Owing to its operation and being a major conglomerate in the global market, Enron had to diversify to other major venture such as pulp and broadband assets. Failure of Accounting Information System Enron’s venture was noted due to its success with respect to growth of its profits and was quoted as the most successful company for several years in a number of publications. Enron’s performance was attracting as it reported a US$138.7 billon in revenues for the first nine years of 2001. This was a remarkable purported achievement which placed the company among the first ten profitable companies (Denteh, 2011). The company maximized its profits because of deregulation of gas and oil in the US which offered it an opportunity of pricing its products high. The collapse of this energy giant in 2001 was as a result of the huge gap between what people with vested interest in the company were made to believe the commercial performance of the company and the true and actual financial position. This was the corporation situation which was largely attributed to the huge gap between perception and reality. The existence of the company’s perception on its financial position and performance that ensued after its collapse was due to fraudulent intents of several perpetrators and top executive of Enron in addition to its external advisors and others. They were detrimental to employees and shareholders who lost their hard earned assets held by the company. Enron stock prices nose dived from US$90 in mid 2000 to a whooping US$1 at t he close in 2001 losing US$11 billion (Cristina, 2007). This situation shocked investors and the general public posing the question how much credence that one could place on future reports produced by public companies regarding their conduct of business, performance and financial position. The public was not aware of how much confidence to vest on institutions established to safe guard them from unscrupulous public companies and their agents (Hall, 2004). The authorities who were responsible with the duty of detecting, preventing, deterring and ensuring that things in this company were in order had gone asleep. This include the external auditors of Enron, Arthur Anderson which later appeared to be implicitly involved in massive fraud hence failed in their fiduciary duties as auditors in a gargantuan manner (Hall, 2004). The external auditors, Enron’s board of directors, and security regulators at the Securities and Exchange Commission (SEC) are institutions and people who failed the society. The collapse of Enron was caused by fraudulent activities within the company perpetrated over several years. The fraud was latent in spite of it being massive, persisted involving key executives. Its collapse resulted to the collapse of the biggest five accountancy and audit firms in the world with Arthur Anderson being the reference. The fraud that was taking place in Enron could not be prevented or detected until it caused massive harm to the company’s employees and shareholders who lost their lifetime jobs and investments respectively, and the general public lost confidence in investment to a significant extent. Most of Enron’s executives gained significantly by disposing most of their shares in the company in advance before its collapse. It was proved later that the fraud was an insider trading given that the top executives were aware of the eminent happening before disposing their shares. Many executives were indicted for fraudulent activities in the company that ranged from insider trading, money laundering, falsification of accounts and financial misappropriation (Cristina, 2007). As a consequence of Enron scandal, new rules and regulations were enacted by the US government to increase business rule relevance of ensuring accuracy of financial reporting for public companies and expansion of rules that governed accountability of auditing firms and the requirement for them to become unbiased and more independent of their clients. The new regulations were provided in Sarbanes-Oxley Act 2002. Arthur Anderson served as the sole auditor of Enron throughout its 16 years of its operation before its collapse. The company conducted internal audit and consulting services for Enron while at the same time served as an external auditor. Arthur Anderson was reported to have earned 25 million dollars for audit work and 27 million dollars for non-audit services from Enron in 2000 (Cristina, 2007). This led to the auditing firm to shred a large amount of Enron’s documents when the SEC announces its investigation on the operations of Enron and transaction in 2000. This saw the share price of Enron sink after it admitted that the inquiry of SEC were in conflict of interest between Enron and other partnership with which the company operated (Denteh). Enron shareholders value dropped by 1.2 billion dollars because of partnership it championed, though the write down value was not apparent due to the complex accounting rules which Enron had employed. This news resulted to its stock prices responding southwards significantly because investors were not confident with the investment. Enron’s market capitalization stood at US$60 billion which was about 70 times its earning and six times its book value (Cristina, 2007). This was a remarkable result which indicated high market expectation on Enron’s future prospects, but the share prices plummeted in 2001 to one US dollar. The massive drop in share prices was attributed to investigation by SEC of the company’s activities because the company could not explain the reason for massive drop in prices to bond rating agencies and its shareholders. Other major companies avoided certain trades that had closure per...