Question

Enron Scandal Discussion

Read the article and watch the video Enron Scandal: The Fall of a Wall Street Darling (Links to an external site.)Links to an external site.. Summarize your understanding of the information you read and watched. Include in your response what Enron could have done differently to prevent the collapse of the organization.

Answer 1

 On December 2, 2001, Enron Corporation, then the seventh 
largest publicly traded corporation in the United States, 
declared bankruptcy. That bankruptcy sent shock waves 
throughout the country, on both Wall Street and Main Street 
where over half of American families now invest directly or 
indirectly in the stock market. Thousands of Enron employees 
lost not only their jobs but a significant part of their 
retirement savings; Enron shareholders saw the value of their 
investments plummet; and hundreds, if not thousands of 
businesses around the world, were turned into Enron creditors 
in bankruptcy court likely to receive only pennies on the 
dollars owed to them.

 SUBCOMMITTEE FINDINGS

    Based upon the evidence before it, including over one 
million pages of subpoenaed documents, interviews of 13 Enron 
Board members, and the Subcommittee hearing on May 7, 2002, the 
U.S. Senate Permanent Subcommittee on Investigations makes the 
following findings with respect to the role of the Enron Board 
of Directors in Enron's collapse and bankruptcy.

          (1) Fiduciary Failure. The Enron Board of Directors 
        failed to safeguard Enron shareholders and contributed 
        to the collapse of the seventh largest public company 
        in the United States, by allowing Enron to engage in 
        high risk accounting, inappropriate conflict of 
        interest transactions, extensive undisclosed off-the-
        books activities, and excessive executive compensation. 
        The Board witnessed numerous indications of 
        questionable practices by Enron management over several 
        years, but chose to ignore them to the detriment of 
        Enron shareholders, employees and business associates.

          (2) High Risk Accounting. The Enron Board of 
        Directors knowingly allowed Enron to engage in high 
        risk accounting practices.

          (3) Inappropriate Conflicts of Interest. Despite 
        clear conflicts of interest, the Enron Board of 
        Directors approved an unprecedented arrangement 
        allowing Enron's Chief Financial Officer to establish 
        and operate the LJM private equity funds which 
        transacted business with Enron and profited at Enron's 
        expense. The Board exercised inadequate oversight of 
        LJM transaction and compensation controls and failed to 
        protect Enron shareholders from unfair dealing.

          (4) Extensive Undisclosed Off-The-Books Activity. The 
        Enron Board of Directors knowingly allowed Enron to 
        conduct billions of dollars in off-the-books activity 
        to make its financial condition appear better than it 
        was and failed to ensure adequate public disclosure of 
        material off-the-books liabilities that contributed to 
        Enron's collapse.

          (5) Excessive Compensation. The Enron Board of 
        Directors approved excessive compensation for company 
        executives, failed to monitor the cumulative cash drain 
        caused by Enron's 2000 annual bonus and performance 
        unit plans, and failed to monitor or halt abuse by 
        Board Chairman and Chief Executive Officer Kenneth Lay 
        of a company-financed, multi-million dollar, personal 
        credit line.

          (6) Lack of Independence. The independence of the 
        Enron Board of Directors was compromised by financial 
        ties between the company and certain Board members. The 
        Board also failed to ensure the independence of the 
        company's auditor, allowing Andersen to provide 
        internal audit and consulting services while serving as 
        Enron's outside auditor.

The executives of Enron did not steal their employees retirement monies . However, the executives of Enron did act illegally that resulted in many of the Enron employees losing their retirement funds. The executives were encouraging Enron employees to invest their savings and retirement funds to buy Enron stocks . The stock was regularly increasing in value and the employees felt it was a good decision . Howver, Enron stock price dropped suddenly and the retirement plan did not allow employees to sell the stock they had invested until they reached retirement age, so they were forced to hold on to their shares as the price dropped. In the end the employees were left with no retirement funds and this is due to the illegal acts of the Enron executives.

The downfall of Enron and Arthur Andersen clearly explains that how unethical behavior by the top management and lack of strict corporate governance can lead to the down fall of the company. Enron in order to maintain its share prices used fraudulent accounting practices to show false financial results to the public. Arthur Andersen which was the accounting firm for Enron helped it in doing so and subsequently attempting to hide this scandal. When this scandal came out in open not only did the share prices of Enron fell but it ultimately resulted in the failure of both Enron and Arthur Andersen. Thus unethical behavior and bad corporate governance resulted in the failure of both Enron and Arthur Andersen.