The Enron Collapse and ERP System

Category: Accounting, Enron, Tax
Last Updated: 20 Apr 2022
Pages: 4 Views: 723

In business, companies have their glorious moments. However, they also have their periods of failure in management, spending or in other areas. There are also companies whose failures have led to total business closures. No matter how big or how successful the company is, the possibility of collapsing is still at hand, like what happened to Enron. As Enron collapsed, other businesses have been greatly affected as well. To prevent the same demise of other companies from happening again, Enterprise Resource Planning (ERP) must be implemented.

Enron was a giant company in the natural gas pipeline business. It was ranked as the most innovative company in 2000. It was also known for being the first on management talent and second on employee talent. In a p of 12 years, from 1989 to 2001, Enron’s market value has grown from $3 billion to $80 billion. With this growth and success, no one has foreseen that Enron would end up into bankruptcy (Doggett, 2009). In addition, Enron was also a large law firm, with more than 400 lawyers in the company’s general counsel office. This large number made Enron the second largest law firm in Texas.

Later investigations assumed that the main reason for its large legal staff has to do with the many offshore partnerships Enron has involved in, particularly with Caribbean countries. The company did not pay federal income tax in four years, although it was considered as a fast growing and most profitable company (Doggett, 2009). Aside from these, during those times that Enron was not paying their taxes, its 24 top executives and board members have sold $1. 1 billion in stock. These executives and board members committed another mistake when they kept their employees and retirees from selling their stocks.

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They switched the company’s pension plan administrator before they announced losses. The major player which caused the bankruptcy of the company was its auditor, Arthur Andersen. Andersen was also employed in an accounting firm that Enron hired to audit the company’s books, as required by the law. Speculations arose whether Enron implemented accounting practices that were questionable in misrepresenting the company’s true financial condition. Andersen was tasked to warn the public about those things, but he either just let things happen (Louis, 2002), could not see what was happening or was simply involved in a cover-up (Doggett, 2009).

The demise of Enron has affected other businesses, and they do not want to have the same fate as Enron. Some experts say that Enterprise Resource Planning (ERP) systems cannot prevent all fraud. However, companies with ERP systems can easily comply with the Sarbanes-Oxley Act, which encourages accountability of the top management. ERP systems, having centralized databases, can solve some of the problems faced by the companies. Since data sharing with accounting does not occur in “real time,” and there is always the need to do significant research to collect data for reports, ERP systems can help companies to avoid these problems.

The ERP systems can be used to avoid mistakes such as inconsistency in record keeping and inaccuracy in inventory-costing systems (Antony, n. d. ). Furthermore, ERP systems can better prevent corporate fraud through the following: archiving, user authorizations, tolerance groups and financial transparency. Archiving is important for auditors in order to validate the financial position of the company at any given time. ERP is also useful in keeping track of any changes or input of data. User authorizations help by making sure that the employees perform the transactions that their job requires. Also you may be interested in HealthSouth Corporation Scandal essay

Authorizations can also prevent them from making payments to a nonexistent vendor (Murray State University, n. d. ). A tolerance group is another way of preventing employees from exercising control beyond their authority. The company can set limits on the total document amount, payment difference and discounts (Antony, n. d. ). Most importantly, financial transparency is also a fundamental aspect of the system. ERP systems can allow companies “unprecedented levels of financial transparency” over operations (Hamblen, 2009).


Antony, S. (n. d. ). Concepts in enterprise resource planning.Retrieved January 14, 2009, from http://66. 218. 69. 11/search/cache? ei=UTF-8&p=ERP+systems+%2Benron+collapse&fr=yfp-t-501&fp_ip=PH&u=campus. murraystate. edu/academic/faculty/solomon. antony/Spring06/CIS545/ch05. ppt&w=erp+systems+system+enron+collapse&d=fg3h7kfiSFqJ&icp=1&. intl=us Doggett, J. N. (2009). The Enron-Andersen debacle. WorldNetDaily. com. Retrieved January 14, 2009, from http://www. worldnetdaily. com/news/article. asp? ARTICLE_ID=26110 Hamblen, M. (2009). CA picks SAP’s apps for global ERP system. ComputerWorld. Retrieved January 15, 2009, from http://www. computerworld.

com/printthis/2004/0,4814,98053,00. html Louis, A. M. (2002, January 19). The Enron Collapse. San Francisco Chronicle online. Retrieved January 14, 2009, from http://www. sfgate. com/cgi-bin/article. cgi? file=/chronicle/archive/2002/01/19/BU193561. DTL Murray State University. (n. d). Enron story and ERP implications. Retrieved January 15, 2009, from http://66. 218. 69. 11/search/cache? ei=UTF-8&p=ERP+systems+%2Benron+collapse&fr=yfp-t-501&fp_ip=PH&u=campus. murraystate. edu/academic/faculty/solomon. antony/Spring06/CIS545/EnronERP. doc&w=erp+systems+system+enron+collapse&d=JivwnUfiSELR&icp=1&. intl=us

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