The Le-Nature Inc. scandal is the largest financial fraud that the Western District of Pennsylvania has ever seen (Gallagher, 2011). This elaborate pyramid scheme fraud was very similar to a loan-Ponzi scheme that cost lenders and investors $685 million when the company collapsed in 2006 (The U.S. Attorney’s Office, 2011). 4.1 THE COMPANY Le-Nature was a privately-held company based in Latrobe, Pennsylvania, and headed by its founder, chairman, and CEO, Greg Podlucky. It was mainly run by the Podlucky family and a few other trusted employees in high positions. A variety of fruit drinks, teas, and flavoured bottled waters were some of its specialty products on offer. The company was forced into a Chapter 7 bankruptcy in 2006 by its minority stakeholders, which was the primary reason for its collapse (Lippard, 2006). The creation and manipulation of fraudulent financial and accounting documents and misappropriation of funds are viewed as some of the main reasons that the company collapsed. 4.2 THE FRAUD The Le-Nature fraud was similar to the Madoff Ponzie scheme, where Gregory Podlucky took money from new participants and investors to pay off longer-standing investors. A combination of various forms of frauds committed from January 2000 to October 2006, including but not limited to, accounting and money laundering, were the primary causes of the company’s ultimate demise. However, unlike Madoff, the Le-Nature collapse was an internal failure that was not related to external economic conditions. The lack of transparency in financial and accounting records to stakeholders was the reason for the investors to force Le-Nature into an involuntarily bankruptcy in 2006. This step led to the discovery of the fraud committed and the company’... ... middle of paper ... ...e to inflate its equipment and product prices and assisting the CEO in a transfer pricing scheme. 5 CONCLUSION Consistent accounting and financial frauds in the U.S. alerted the SEC to the imperative need for policy and corporate governance changes. The Sarbanes-Oxley Act in 2002 was enacted to encourage financial disclosures, enhance corporate responsibility, and combat fraudulent behaviour. This Act also helped create the PCAOB, which oversees the auditing practice (Stanwick & Stanwick 2009). As continuation to improving this Act, the Public Company Accounting Oversight Board proposed amendments, in December 2013, to the SEC (PCAOB, 2014). The Dodd-Frank Act was a major financial regulatory reform brought in by the Obama government in 2010 primarily to protect consumers and to improve financial transparency and accountability within businesses (Amadeo, 2013).
Le-Nature was a Latrobe Pennsylvania based beverage maker owned by Gregory Podlucky, who is now serving a 20 year prison sentence in New Jersey’s Ft. Dix Federal Corrections Institute. Gregory Podlucky was the admitted ring leader, but in all 5 people plead guilty and another 3 took their chances at trial, where they were all found guilty as well. Le-Nature went into bankruptcy in 2006, and 3 years later they were indicted by the federal government being accused of scamming investors and banks out of more than 800 million dollars. The accounting fraud was an elaborate Ponzi scheme and financial statement fraud. Company officials created false documents, invoices, customer checks, and statements to record activity that never occurred.
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
Dodd-Frank and Sarbanes-Oxley Acts are important legislations in the corporate world because of their link to public and privately held companies. Sarbanes-Oxley Act was enacted to enhance transparency and accountability in publicly traded companies. On the contrary, Dodd-Frank Act was enacted to disentangle the confused web of financial service company valuations. Actually, these valuations are usually hidden by complex and unclear financial instruments. The introduction of Sarbanes-Oxley Act was fueled by recent incidents of accounting frauds by top executives of major corporations such as Enron. In contrast, Dodd-Frank Act was enacted as a response to the tendency by banks, insurance companies, hedge funds, rating agencies, and accounting companies to serve up harmful offer of ruined assets and liabilities brought by systemic non-disclosure (Anand, 2011, p.1). While these regulations have some similarities and differences, they have a strong relationship with the financial markets.
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
While the intention for the Act is clear but its ultimate effects continue to be debated. SOX proponents maintain that the act alleviates investor concerns by improving the transparency and accuracy of financial reports. Opponents are saying that compliance
Kenneth Lay was at the height of his career in April 2001, when Fortune magazine had claimed Enron to be the seventh largest company in the United States (G.Velasquez, 2006). However Kenneth Lay’s journey of success had a terrible downfall six month later when his company filed for bankruptcy December 2, 2001 (G.Velasquez, 2006). The claim of Enron’s bankruptcy is considered to be one of the largest corporate bankruptcies in U.S history. Throughout Kenneth Lay’s trial he still claimed that he did nothing wrong and he had no part of what happened to his company and turn the blame on Andrew Fastrow. Down the line Kenneth Lay’s company was convicted for wiping out, $60 million in market values, 56 hundred jobs, and hundreds of employee’s life savings. Kenneth Lay claimed that Fastrow was the one behind the entire operation of the pension wipe out.
The American Dream typically involves working hard to build up an organization, maintaining it well, and reaping the benefits. This vision most certainly drove the formation of the energy powerhouse known as the Enron Corporation. The company began as two average sized organizations and within 15 years emerged as America’s seventh largest company. The organization employed close to 21,000 staff members with locations in over 40 nations around the world. Unfortunately, this success was decimated by numerous scandals involved with accounting practices. From lies of profits to questionable dealings, such as concealing debts, the parties involved with running the company had made some fatal errors. The end result left Enron without creditors and investors, leading to the firm to file for Chapter 11 bankruptcy (British Broadcasting Corporation, Enron Scandal at a Glance). The story of this once remarkable company is one that can be traced from the decisions made from its inception leading all the way to the much publicized trials that ensued.
Enron was a Houston based energy, commodities and services company. When people hear the name Enron they automatically associate their name with one of the biggest accounting and ethical scandals known to date. The documentary, “Enron: The Smartest Guys in the Room,” provides an in depth examination of Enron and the Enron scandal. The film does a wonderful job of depicting the downfall of Enron and how the corporate culture and ethics were key to Enron’s fall. As the movie suggests, Enron is “not a story about numbers, it is a story about people.”
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
The overall view clarification of the issue illustrates the evolution of Enron’s innovations and fraud. The business records of the company financial economists and accountant’s uncovered considerable number information and incentive issues. The issues both complicate and potentially resolve the appraised valuation questions such as; earnings growth, stock splits, dividend changes, free cash flow limitations, share price-based compensation and hedging of market risks. The Enron Company contributed large sums of money to non-profit organizations for the purpose of acting on probable ethical issues before they become legal dilemmas. The company failed to inform its consumers of the business decisions made even though they had knowledge that the person at the other end of the business deal did not. The Enron Company filed a Chapter 11 to seek bankruptcy protection. The uncertainty of the company’s standings impacted the market’s confidence in...
Our economy has been built upon for decades creating growth within the business industry. Businesses provide jobs, finances, and security for individual’s within society and is a main source of what defines our prosperous country. Every business has an ethical responsibility to its members and employee’s and to society at large. Ethical responsibility is a major component in which society needs to reinforce because it helps create principles, values, and standards, all of which help to guide a person’s behavior (Ferrel et al. 2013). Ethics help to create balance which in turn will have positive results for the business versus negative results. It seems that no matter where we look today, companies like Enron, WorldCom, AIG and many, many others substantiate the lack of business ethics in this country. At no other time than the last few decades has the need for ethical business oversight been of such importance to the prosperity of our country. As an example, Bernard Madoff is known to be the executor of the most fraudulent and deceitful Ponzi scheme in history, creating a stark reminder that the corrosion of ethics and lack of basic moral principles have taken this country to the point where trust in institutions and the very market driven systems that make our society work are in imminent danger of collapse. The Bernie Madoff case is a clear example of what can occur when businesses ethics are not in place. This case outlines a business man who defrauded thousands of people for years and caused major problems for those involved and for society at large. This essay is going to outline the major aspects of the case which include the nature of the problem, who are the major stakeholders, what is the problem from each of the stake...
The scandals have made some big implications on the profession as a whole. One being the decision from the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act (SOA) of 2002, in April 2003 they voted to assume the responsibility for establishing auditing standards. The Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) previously played this role.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron.
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,