Free essay on the enron scandal


It is a requirement for all the financial institutions to be accountable for their financial activities and present their financial statements in such a way that they are not fraud. This means that they have the mandate to provide financial information that is trustworthy and reflect the mission of the entire institution or company. However, this has always not been the case where in some cases various financial corporations and companies try to present financial documents that do not reflect their shareholders’ interest. Because of this, the stakeholders who have interest in them are only left frustrated hence, lose their interests in these financial institutions and this contributes to the downfall of such institutions. It is therefore imperative for the institutions to present financial information that is not fraud and reflects the true nature of the institution. The prepared financial statements should be audited correctly to detect any error whatsoever. The auditors and accountants in charge should possess the necessary skills in auditing and accounting and the management on its part should be in a position to scrutinize the reports presented before it without any favor. Nevertheless, this fails to be possible as was the case with the Enron Company.
This scandal was discovered in October 2001 and it eventually led to Enron Corporation bankruptcy. Enron Corporation is actually an American energy company that was based in Houston. In the American history, the company was the biggest bankruptcy reorganization and as a result, it was in fact attributed as biggest audit failure in America. Kenneth Lay formed this Company in 1895 after it merged with Internorth and Houston Natural Gas. Some years afterwards, when the Company hired Jeffrey Skilling, he actually developed executives’ staff, which by using loopholes in accounting, poor financial accounting, and special purpose entities was in a position to conceal billions of dollars in debt from the failed projects and deals. The company’s Chief Financial Officer by the name Andrew Fastow together with the other executives misled its audit committee and board of directors on the high risk accounting practices and in addition pressurized Arthur Andersen to ignore the issues at hand.
The shareholders in the Company lost approximately $ 11 billion when the company’s stock price that received high of $ 90 per share in the mid 2000, plummeted to below $1 by end of November 2001. The Securities and Exchange Commission in the United States actually began an investigation and the rival competitor in Houston called Dynegy offered to purchase it at a thrown away price. However, this deal failed and on the 2 of December 2001, Enron Company filed for Bankruptcy under the United States Bankruptcy code chapter 11. The $63. 4 billion in assets made the company to become the largest corporate bankruptcy in the United States history.
Majority of its executives were actually indicted for various charges and later they were sentenced to prison. For instance, the company editor was found guilty in the United States of America district court. However, by the time the company ruling was overturned at the Supreme Court, Enron had in fact majority of its customers and had eventually closed. The shareholders and employees received limited returns in the lawsuits in spite of losing billions in stock prices and pensions. Because of this scandal, new legislation and regulations were actually enacted to expand the public companies financial reporting accuracy. For instance, the Sarbanes-Oxley Act in fact increased the penalties for altering, fabricating, or destroying the records in the federal investigations or for the act of attempting to defraud the shareholders. In addition, this act increased the auditing firms’ accountability to remain independent and unbiased of their clients.
The complex financial statements that the company was presenting to its analysts and shareholders only confused them. This is actually attributed to its downfall. Additionally, its business model was complex hence unethical practices in the company required it to use the accounting limitations in order to misrepresent the earnings and this led it to modify its balance sheet to stipulate favorable performance. Enron scandal actually grew out of steady habits accumulation.
Skilling on his part relentlessly focused on meeting the expectations of Wall Street, pressured the executives in the company to discover new ways of hiding its debts, and advocated mark to market accounting use, which is the accounting that is based on the market value that was at that time inflated. Fastow together with the other executives created financing structures that were complex, created off balance sheet vehicles, and made the company deals to be so bewildering which made only few people to understand them.
The Company’s aggressive accounting practices were not actually hidden from its board of directors. The board was in fact informed the rationale behind using the Whitewing, Raptor transactions, LJM and after approving all of them, they received the status update on the operations of the company. The company extensively relied on the derivatives for its transactions. However, Enron’s Finance board and Committee lacked enough experience with derivatives for them to have an understanding of what they were essentially told.
The Enron scandal discussion cannot be complete without discussing Anderson’s involvement. Arthur Anderson the Company’s firm editor was accused due to his application of reckless standards in the company audits due to a conflict of interest over the consulting fees that was generated by the company. When his officials were asked whether they were guilty of their wrongdoings, they claimed that the burn and crash of the Company was direct result of its faulty business model rather than the poor or questionable accounting practices. When this scandal was investigated by the law enforcement agencies and auditors, it was established that Anderson was in fact negligent at worst and at best completely in conspiracy with the Enron creating false earnings reports hence hiding enormous debt amounts and inflating stock prices artificially past the point of no return. Among the investigations findings about the role of Anderson in the whole conspiracy, it was actually determined that the Company had directly shredded many documents, which showed the true extent of the Company’s financial problems. With these documents, fraud was able to go on and Anderson’s involvement in this fraud was established firmly. Ultimately, this conspiracy led to total scrutiny of American accounting system.
The government employees were in addition involved in Enron’s scandal. Government employees were involved in the company’s shady dealings. The Company aided by the government resources was in a position to wreak a deal of havoc in a short period. Majority of the public officials described the demise of the company as a product of the corporate misbehavior. However, the company could not have scaled to such global heights nor could not have fallen so dramatically without the close financial relationships with the government agencies. Therefore, government employees had contributed to this scandal.
The Company’s audit committee usually met for only few times in a year and their members’ possessed modest finance and accounting experience. However, this audit committee was criticized for these brief meetings despite its members possessing modest accounting and finance knowledge. In addition, this audit committee lacked technical knowledge to query the auditors properly on the accounting issues that were related to the special purpose entities of the company. The other thing that contributed to the Company’s scandal was the audit committee inability to question the management of the company because of pressures on it. The board members were accused of allowing the conflict of interests to obstruct their duties as they monitored the accounting practices in the company. When this scandal became public, the conflicts of interest of this audit committee were regarded with a lot of suspicion.
The company in addition engaged in other accounting malpractices. It actually made an unethical habit of booking the costs of assets and projects that were cancelled with a rationale that there was no an official letter that was stating the cancellation of the project. This method was commonly called snowball method.
On November 2001, the company’s two worst possible outcomes came into being. The competing company, Dynegy Inc. disengaged from proposed acquisition of this company. In addition, its credit rating was actually reduced to the junk status. In fact, it possessed very little cash that was necessary for it to operate efficiently despite the enormous debts it had. The systematic consequences were actually felt where its creditors together with other trading companies essentially suffered several percentage points’ loss. This scandal in addition affected the individual employees and the US in various ways and it was a good thing for the responsible individuals to be brought to punishment, which actually happened.
Ethically speaking, this scandal led to what maybe are the most important pieces of legislation that is associated with oversight of corporate ethics. This actually led to the formation of the Sarbanes or Oxley Act. This Act sets the requirements and guidelines for financial disclosure, accounting, and corporations’ ethical behavior among others. With this legislation, there is a promise for the elimination and total eradication of the corporate fraud as it was practiced in Enron Company. The unethical behavior in this company had effects on its shareholders who initially had a lot of faith in the company’s existence. The formation of this Act was essentially important as it is and will continue being applied in cases like these hence provides the necessary guidelines.


Bryce, Robert (2008). Pipe Dreams: Greed, Ego, and the Death of Enron. Public Affairs. ISBN 1-58648-201-7.
Cruver, Brian (2003). Anatomy of Greed: Telling the Unshredded Truth from Inside Enron. Basic Books. ISBN 0-7867-1205-8.
Fox, Loren (2003). Enron: The Rise and Fall. John Wiley & Sons. ISBN 0-471-47888-1.
Salter, Malcolm S. (2008). Innovation Corrupted The Origins and Legacy of Enron’s Collapse. Harvard University Press. ISBN 0-674-02825-2.
Toffler, Barbara Ley; Jennifer Reingold (2004). Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen. Broadway Business. ISBN 0-7679-1383-3.