Enron Scandal: What Happened and Who Was Involved

Summary 

The Enron scandal is one of the largest corporate scandals in the history of America. The Enron saga demonstrates the need for reforming corporate governance and accounting. In addition, the presence of ethics and the underlying culture in organizations need deeper analysis and transformation because the scandal was essentially a failure of ethics and weak accounting regulatory regime. In the case of Arthur Andersen, there was a conflict of interest because he was the auditor for the firm as well as the consultant. Playing such a dual role made it hard for him to expose irregularities taking place inside the organization (Farrell, Faedrich, and Ferrell, 2009). 

Background 

The topic covered corporate governance and ethics. The objective of any business is to generate value for its shareholders but sometimes, a business fails in that mission if its corporate governance structures are weak. In this case, the company had a weak corporate governance structure where senior management had too much power and the board failed to make them account for their actions. For over a decade, the company took too much debt and engaged in risky activities leading to its collapse and massive losses for investors (Boje, Gardner & Smith, 2006). The case demonstrates the value of the strong corporate governance in helping companies achieve their objectives. 

Ethics refers to moral principles that govern conduct. In business, ethical conduct is important hence the reason companies have a code of conduct. With the code, it refers address moral dilemmas that are common. Once of the dilemmas is a conflict of interest. Ideally, the management or those in charge of a business should not engage in a business similar to that offered by their employer or engage as supplier or in any way a partner to the business. In this case, there were obvious incidences of conflict of interest. The management owned special purposes vehicles that did business with the firm. 

A story statement 

Enron expanded operations rapidly within ten years to the extent that its operations started to become unsustainable. Soon, losses started to accumulate but Jeffrey Skilling hid tem using the mark-to-market accounting. This accounting method measures the value of a security based on its current market value instead of book value. The company could build an asset and then included projected profits on its books even before the company had made profits from it. The accounting method made the company look more profitable than it was the case. Andrew Fastow, the chief accounting officer, hid mounting liabilities using special purpose vehicles (SPVs). 

The company assigned all liabilities the company had accumulated to the SPVs and therefore it appeared profitable and less indebted on paper than was the case in reality. Enron capitalized the SPVs held in the name of the managers and did not disclose the conflict of interest. Despite the poor accounting practices of Enron, the Arthur Andersen LLP failed report the issue due to conflict of interest as well. Employees of the accounting firm shared building or offices with the Enron employees and that somehow undermined the ability of the accounting firm to offer an objective audit. Finally, senior managers led by Skilling, stole money from the company and hid the embezzlement using creative accounting methods. 

Analysis 

Enron executives manipulated the operations of the company in order to get more compensation. They, for instance, manipulated mark-to-market accounting to declare more earning for the company than was the case. This was possible because the company controlled the estimation of its earnings for contracts extending up to 20 years in the futures market and these earnings were recognized in the first year of the contract (Mallin, 2007). Recognizing earnings immediately for long term contracts created more problems are there was an incentive to sell more contracts in order to get more earning for the present period. Without an active market for commodities Enron was dealing in, the company was reporting fictitious earnings. Arthur Andersen did not flag down this practice as a big risk for the eventual survival of the company. 

In addition, the auditor did not question values assigned to long-term contracts nor object to abuse of mark-to-market accounting to inflate earnings (Farrell, Faedrich, and Ferrell, 2009). Financial reporting of Enron SPEs or special purposes entities was wanting. The main purpose for creating SPEs is leasing or owning real estate. Enron had more than 3000 SPEs. Before the collapse of the company, the management created most of these SPEs for manipulating financial reports and they had complex ownership structure. The company and the CFO had equity interests in SPEs, the board had even exempted the CFO of the company from conflict of interest policies, and this allowed him to amass personal fortune when dealing with SPEs at the expense of the company. 

Conclusion 

This case has taught me the value of ethical conduct in business. Jeff skilling was involved in massive cover-up of what was happening inside the company in order to mislead banks and analysts. He also diverted company finances to fund his lavish lifestyle as the company sunk into deep financial problems. Kenneth Lay was also involved in the same misdeeds. All they cared were their personal interests. They had the choice of committing fraud or not committing fraud but they chose the former because it served best their interests. They were good to people who acquiesced to their demands in their quest to gain unlawful income. 

The case has also taught me the value of the excellent corporate governance. As discussed in this case, the board exempted senior managers from following ethical code of conduct and engaging in business with the firm. Consequently, the management sought to profit from the company as the expense of shareholders. 

References 

Boje, D., Gardner, C., & Smith, W. (2006). (Mis)Using Numbers in the Enron Story, Organizational Research Methods Volume 9 Number 4 October 2006 456-474 

Farrell, L, Faedrich, J, and Ferrell, O. (2009). Business Ethics: Ethical Decision Making and Cases . New York: Cengage Learning 

Mallin, C. (2007). Corporate governance . Oxford: Oxford University Press,