Enron Scandal Analysis

Introduction - Historic Enron Financial Scandal

In 1985 Houston Natural Gas and InterNorth merged to become Enron which started specializing in natural gas production. It moved from a $10 billion company in 1990 to a $101 billion in ten years. Kenneth Lay is the founder, Chairman and CEO who was challenged by the board of directors to diversify the company portfolio, grow faster, increase investor’s confidence, attract more investments and increase their credit rating. This is a great vision that has to come through legitimate means and sustainable growth. Unfortunately Enron managements’ greediness justified to themselves a lot of unethical actions to achieve their self-interest. They took advantage of loop holes in deregulated markets, influenced

The first is the fact the Enron and its board of directors created a corporate culture that inspires innovation and creativity while totally ignored Ethics. It was not in the board of directors nor the corporate management top priorities, so how it would be for those who report and commit day to day transactions. The absence of a corporate culture that motivates transparency, integrity and courage to report was a major cause of Enron’s Scandal. For example, Enron hired several accountants who understood the accounting loopholes. They helped the company to maximize on the loopholes in the Generally Accepted Accounting Principles (GAAP). (Rapoport , Van Niel, & Dharan, 2009). The accountants did not write-off the losses from the special purposes entities but they only deferred the charges from them. This was also coupled by management focus on share prices, the second intrinsic variable, that will impact their allowances and compensation packages. The focus on meeting or exceeding external analysts made Enron’s management manipulate financial statements and take advantage of any loops in the system that helps in claiming unrealized profits. The company had to make more deals to illustrate the growth in its income. Jeffrey Skilling, the CEO, wanted to meet Wall Street projections and listed revenues from projects that losing. (Unerman & O 'Dwyer, 2004). Such aggressive and fraudulent

One important element Enron took advantage of is the gas industry deregulation. This legislation enabled Enron to sell the natural gas and electricity in California at deregulated prices. Enron made excessive earnings from its sales by controlling the supply to inflate prices. They sometimes intentionally fake power shortages to raise prices (Egan, 2005). With the absence of legal liabilities on auditing and investment banks, they were not aggressive in reviewing company’s claims and revenue recognition policies. This second extrinsic variable made it easy to Enron to gain support from accounting firms and investing banks. (Paul H. Dembinski, 2005). Finally the fact that there was no clear conflict of interest policies stop financing firms, Arthur Andersen in case of Enron, from engaging consulting and services agreements with the company they are responsible to Audit. As a matter of fact it was very lucrative that made it difficult to report any thing that can destroy such relationship. (Paul H. Dembinski, 2005). The Auditing firm could not give proper audit reports (Prebble, 2009) since it had the conflict of interest in the affairs with Enron. Enron would sometimes invite Ernst & Young or PricewaterhouseCoopers to finish the auditing process to create a face confidence to investors and shareholders. Enron’s Corporate Audit Committee were very brief and shallow