In October 2001, Enron scandal came into picture and it was declared that Enron Corporation is bankrupt. Enron was based out of Houston, Texas. This was the largest case of a company going bankrupt, in the history of America. The major reason was the audit failure. Enron was formed in 1985. The collapse of the company was followed by several disclosures on how the company was manipulating its success.
Enron was thought of being the most innovative company in America. It was the seventh largest corporation in America. The downfall of the company revealed that the profit made by the company was only on papers. In real, the company was in debts. It hid losses which forced the company to declare it bankrupt in 2001.
The company was following various malpractices to be ahead of its competitors and to increase the stock prices. Those practices are explained below. These practices led to the downfall of Enron which was once the seventh largest American company and was thought to be the most innovative company of its times.
Another change was made by Jeffery Skilling in the accounting system of the company in 1997. He suggested that instead of having a direct and straightforward accounting system, the company should resort to having a mark to market accounting system. In this the future income was also taken into account while accounting. Mark to market accounting resulted in the inclusion of the estimated income even before the money was actually received. It was quite evident that the accounting was not exact and also the estimations were prone to changes in future (Gordon, 2002).