The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganisation in American history at that time, Enron undoubtedly is the biggest audit failure. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. In this paper, it analysis the reason for this event in detail including the management, conflict of interest and accounting fraud. Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and Corporation’s Angle.
Enron shocked the world from being “America’s most innovative company” to America's biggest corporate bankruptcy at its time. At its peak, Enron was America's seventh largest corporation. Enron gave the illusion that it was a steady company with good revenue but that was not the case, a large part of Enron’s profits were made of paper. This was made possible by masterfully designed accounting and morally questionable acts by traders and executives. Deep debt and surfacing information about hiding losses gave the company big problems and in the late 2001 Enron declared bankruptcy under Chapter 11 of the United States Bankruptcy Code.
Many factors affected Enron's surge to the top and its sudden fall. In this report we will discuss and present what we think were the main reasons of their rise and fall.
Morally questionable acts were made from both executives and traders. One thing that is unavoidable is the fact that employees at Enron were partially paid in stocks which motivated the workers to take actions that were unethical in order to raise the stock price and equivalently their own money. As seen in the California case traders manipulated the market in favour of the company. Enron culture was heavily influenced by competition and since the employees were motivated by fat bonuses and scared of getting laid off if they did not perform well, and in effect resulted to an unhealthy competition between the co-workers. The colleagues would rather stab each other in the back then help one another to close a deal. Employees getting paid in stock did not help, neither the working environment nor the competition among colleagues. The working environment at Enron became unbearable and from an outsider 's point of view, you can see that it is not impossible that illegal and immoral things were done. Incentives such as money are always strong, we think that there is a higher probability that the greed will take over and people would do anything if the price is right. Mark-to-market accounting mixed with the use of SPEs made Enron look financially healthy when it actually was bleeding, bleeding severely. Misleading information was given to the investors due to the accounting system, which eventually lead to decreasing stock price when the information about this started to surface. We think this was just a matter of time rather than a question about if they would get away with it. Sooner or later more and more of the bad investments had to be questioned because of its great sizes and also because at some time it had to show that there were short of real cash in the company. We think the downfall of Enron was caused by several factors. Among many are the topics we have chosen to present in this paper, the mark-to-market method, the competitive working environment and the use of special purpose entities. Not to forget is the importance of the people behind this, Lay, Skilling, Fastow and Mark. The Enron scandal is not only a story about complex accounting it is also a story about the people who made it possible. People that made decisions affecting not only themselves or the 21.000 employees at Enron but also America as a whole.
Recommendations
• Incentives must be paid after a project is done or at least when the company is really profiting from that certain project. • Operational risk should be minimised and there should be some sort of check up. • Careful selection of accounting approach and financial structures to use.
• Minimised payment in stocks.