The fall of the colossal entity called Enron has forever changed the level of trust that the American public holds for large corporations. The wake of devastation caused by this and other recent corporate financial scandals has brought about a web of new reforms and regulations such as the Sarbanes-Oxley Act, which was signed into law on July 30th, 2002. We are forced to ask ourselves if it will happen again. This essay will examine the collapse of Enron and detail the main causes behind this embarrassing stain of American history.
Whenever someone hears the word "Enron" today, they usually think of the transgressions committed by the top-level executives who successfully managed to destroy the company's reputation and achievements. Actually, the company has been in business for more than 20 years and was once well known for being one of the premier American energy corporations [1]. The key to its inevitable downfall was greed. A group of Enron management made the decision to put their own personal desires for wealth and power ahead of the company, its employees, and the thousands of investors who trusted in the stocks they held. How did they do it?
The problems began in 1999 when Enron created two non-consolidated special purpose entities, or SPEs [2]. The investment companies were formed by Enron's CFO Andrew Fastow with the approval of the board of directors [3]. A major conflict of interest lied in the fact that Mr. Fastow became managing director of these companies while holding onto his title of Enron CFO [3]. Enron used the SPEs to help reduce visible losses and spread the overall risk by using them as separate investment entities [2]. These entities dumped millions of dollars into various investment deals and outside...
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...IGATION BY THE SPECIAL INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF ENRON CORP., February 1, 2002, Pages 1-218, Available at: http://energycommerce.house.gov/107/hearings/02052002Hearing481/report.pdf, Retrieved July 13, 2005
[3] Tom Fowler, Enron adds up 4 years of errors, Energy giant scours books, finds $600 million unaccounted for, Houston Chronicle [3 STAR Edition], Houston, Texas, Nov 9, 2001, p. 01.
[4] No Author listed, Timeline of Enron's Collapse, The Washington Post [Washingtonpost.com], Sept 30, 2004, Available at: http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10.html, Retrieved July 14, 2005
[5] Carrie Johnson, Federal Judge Approves Enron Bankruptcy Plan, The Washington Post [Washingtonpost.com], July 16, 2004, p. E03, Available at: http://www.washingtonpost.com/wp-dyn/articles/A53231-2004Jul15.html, Retrieved July 14, 2005
The Fastows headed to Mrs. Fastow's native Houston in 1990, both taking jobs at a young company called Enron. Just five years old, Enron was starting to evolve from a natural-gas and pipeline company into a trading firm. Mr. Fastow was one of the first managers hired by Mr. [Jeffrey Skilling], who himself had only recently arrived, from management consultants McKinsey & Co. Brought into Mr. Skilling's inner circle, Mr. Fastow returned the loyalty, telling colleagues he had named a child after his mentor. When Mr. Skilling became Enron's president and chief operating officer in early 1997, he and Mr. [Kenneth Lay] promoted Mr. Fastow to lead a new finance department. A year later, Mr. Fastow became chief financial officer.
Skilling then hired Andrew Fastow to cover the holes in Enron’s finances and make the company look profitable. Fastow found a loop hole to cover Enron’s debt, amounting over $30 billion by using special purpose entities by liabilities to subsidiary firms like well-known banks. Therefore, the banks knew what was going on also, and loaned money to Enron. Enron used the money to reward their employees “bonuses”. To meet Enron’s high demands of profits, Enron’s employees would falsify an energy shortage in California that started to profit Enron, however, made California in a $30 billion debt. After Bethany Mclean published “Is Enron Overpriced?”, the troubles at Enron started to become public because Skilling aggressively bullied Mclean over the question “How exactly does Enron make money”. It was not too long when Enron’s stocks started to decline and Skilling resigned because of a “personal matter”. Kenneth Lay became CEO again and tried to reassure his employees and investors that the business was doing good, but in reality, the employees lost their 401k funds in Enron’s stock. Then in 2001 Enron declared bankruptcy and tried to blame Fastow for the
Take into consideration the auditors from Arthur Andersen. They did not take into consideration the greatest good for the greatest number of people. The auditors from Arthur Andersen took into consideration the consequences only for their own firm and their own well-being. Vinson & Elkins lawyers should not have destroyed evidence in order to protect their client Enron. Lawyers do take an oath to help protect and defend their client but they are not to help find ways for their client to violate the
However, there are more questions to ask than were answered by the court case. Were the executives making moral decisions? Whose fault was it; the individuals, the company culture, or the system of capitalism as a whole? What were the most nuanced causes of Enron 's failure? Throughout Enron 's history, Lay hired people who were willing to take risks until the line. The people he formed his team with, Skilling, Fastow, and more, we 're only concerned with making money and nourished to cut-throat survival-of-the-fittest culture that encourages employees to break the law. Skilling created a wild risk-taking environment by often taking dirt-biking and racing trips in exotic far out places. More often than not, the men were hospitalized for near-fatal injuries from collisions and crashes. These stories became urban legends at Enron and the team of men was soon idolized as macho men who knew no limits. Recklessness and risky behavior began to be seen as a positive, and led to an unhealthy company culture. The culture created by the executives led to incredibly immoral decisions by many of the lower-tier
Enron’s management style was apparent from the early years of the organization. In 1987, traders in New York manipulated transactions so it would appear as though volume was higher. Falsified transactions significantly increased the traders’ bonus pay out. A truly virtuous manager would deal with unethical behavior by swiftly dismissing those involved. Sadly, Chairman Kenneth Lay and his management team chose to keep the traders on payroll because “said the company needed the revenue” (Fowler, 2002). This event may have been the earliest indication of unethical behavior within the organization.
The three main crooks Chairman Ken Lay, CEO Jeff Skilling, and CFO Andrew Fastow, are as off the rack as they come. Fastow was skimming from Enron by ripping off the con artists who showed him how to steal, by hiding Enron debt in dummy corporations, and getting rich off of it. Opportunity theory is ever present because since this scam was done once without penalty, it was done plenty of more times with ease. Skilling however, was the typical amoral nerd, with delusions of grandeur, who wanted to mess around with others because he was ridiculed as a kid, implementing an absurd rank and yank policy that led to employees grading each other, with the lowest graded people being fired. Structural humiliation played a direct role in shaping Skilling's thoughts and future actions. This did not mean the worst employees were fired, only the least popular, or those who were not afraid to tell the truth. Thus, the corrupt culture of Enron was born. At one point, in an inter...
Enron. (2011, March 18). In Wikipedia, The Free Encyclopedia. Retrieved March 19, 2011, from http://en.wikipedia.org/w/index.php?title=Enron&oldid=419486167
Investors and the media once considered Enron to be the company of the future. The company had detailed code of ethics and powerful front men like Kenneth Lay, who is the son of a Baptist minister and whose own son was studying to enter the ministry (Flynt 1). Unfortunately the Enron board waived the company’s own ethic code requirements to allow the company’s Chief Financial Officer to serve as a general partner for the partnership that Enron was using as a conduit for much of its business. They also allowed discrepancies of millions of dollars. It was not until whistleblower Sherron S. Watkins stepped forward that the deceit began to unravel. Enron finally declared bankruptcy on December 2, 2001, leaving employees with out jobs or money.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Enron started about 18 years ago in July of 1985. Huston Natural Gas merged with InterNorth, a natural gas company. After their merge they decided to come up with a new name, Enron. Enron grew in that 18-year span to be one of America's largest companies. A man named Kenneth Lay who was an energy economist became the CEO of Enron. He was an optimistic man and was very eager to do things a new way. He built Enron into an enormous corporation and in just 9 years Enron became the largest marketer of electricity in the United States. Just 6 years after that, in the summer of 2000 the stock was at a tremendous all time high and sold for more than 80 dollars a share. Enron was doing great and everything you could see was perfect, but that was the problem, it was what you couldn't see that was about to get Enron to the record books.
Enron Corporation was based in Houston, Texas and participated in the wholesale exchange of American energy and commodities (ex. electricity and natural gas). Enron found itself in the middle of a very public accounting fraud scandal in the early 2000s. The corruption of Enron’s CFO and top executives bring to question their ethics and ethical culture of the company. Additionally, examining Enron ethics, their organization culture, will help to determine how their criminal acts could have been prevented.
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
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,