Question

Apply the specific concept of moral disengagement to the Enron collapse and discuss how this framework sheds some light on what occurred.

Answer 1

INTRODUCTION:
Enron for one, was the greatest failure in the history of american mercantile capitalism and had a major impact on financial markets by causing significant losses to banks, insurance companies and pension funds that invested directly in enron , as well as on other small and large investors.
Moreover the breakdown of this coorporation made imperative to assess what has to be done to ensure the soundless of financial reporting worlwide and to encourage and support accountants in their efforts to protect the public interest. The company and its management, the auditors, banks, analyst, regulators, speculators, and standard setters are all responsible in some degree for this historical collapse.

ROLE OF DEREGULATION:
While deregulation generally led to lower prices and increased supply , it also introduced increased volatility in gas prices.Enron began offering utilities long-term fixed price contracts for natural gas , typically at prices that assumed long term declined in spit prices. Another dimension of enron case is the role that deregulation of electric power played in its rise and demise.Enron's collapse can be used as a prime example to demonstrate that deregulation of electricity went too far. As california's power disaster proved demand for electricity is relatively inelastic.

MANIPULATION OF ENRON'S FINANCIAL STATEMENTS:
Enron's buisness model reached across many products , including physical assets and trading operations and crossing national borders -stretched the limits of accounting. Enron highlights many many flaws prevalent in the industry.Many of enron's accounting actions were legal.Enron's external auditor arthur anderson accepted enron's decision not to consolidate the derivative-related liabilities of these entities with the corporation’s overall liabilities. As the value of the assets in these partnerships fell, Enron began to incur huge debt. From 1999 through July 2001, these entities paid Fastow more than $30 million in management fees, far more than his Enron salary. This was also with the approval of top management and Enron’s board of directors.. Enron failed because its management was caught defrauding the market with false reporting and manipulating accounting rules.
Enron also lost money trying to create markets in bandwidth access, and steel. Enron sold shares to offset the company’s private equity losses, severely diluting earnings.

LESSON'S TO BE LEARNED FROM ENRON:
What can we learn from Enron’s collapse, and how do we prevent another Enron? How can we avert situations in which corporate greed destroys not only shareholder value but also companies themselves?

Enron had been endorsed as a knowledge-intensive company that was leading the New Economy. This is why its bankruptcy shocked and infuriated many regulators, economists, accountants, and investors who have been taken in by the deliberate self-promotion of Enron. The failure of Enron undermined confidence in financial markets in the United States and abroad. It caused substantial damage throughout the financial system resulting from multi-hundred-million-dollar write-offs from exposure to Enron.

Most important, it promoted a culture based on oversized corporate egos that went beyond its original core business and fostered aggressive accounting practices , Enron’s leadership failed to protect investor interests by recording misleading transactions in which the economic risk stayed with the company, but liabilities and losses were transferred to off-balance-sheet entities. . Most important, it promoted a culture based on oversized corporate egos that went beyond its original core business and fostered aggressive accounting practices. Finally, although there is plenty of blame to go around, one of the most important lessons from Enron’s collapse concerns both the centrality and fragility of organizational trust. . The collapse of Enron provides a vision into how this web of corporate governance, with multiple players, can go off track. Enron carried out many, many highly complex and carefully crafted financial transaction.

CONCLUSION:
The Enron story, is one of actual achievement, but also of arrogance, ambition and deceit. It’s the story of how so many people and agencies missed the cracks in Enron’s front, in part because the system was set up that way. In short, it’s the story of how American capitalism worked at the end of the twentieth century. The Securities Exchange Commission (SEC) and other government agencies have placed the improvement of financial reporting at the top of its agenda and has issued numerous new rules and rule proposals including the creation of a new regulatory framework for the accounting profession and rulemaking to implement the requirements of the Sarbanes-Oxley Act.

Directors, accountants and auditing firms need to be sensitive and responsive to the new levels of scrutiny and exposure caused by the Enron bankruptcy, the WorldCom debacle, and other recent corporate scandals. The new emerging reporting and auditing standards along with firm ethical decision making should be the basis for leading corporate practices for the XXI Century.