Last Updated 27 Jul 2020

Enron: What Caused the Ethical Collapse

Category Accounting, Enron, Ethics
Words 592 (3 pages)
Views 359

It is not easy to find one single person, who can be blamed for the collapse of Enron, because there was so many players in so many levels. We can’t find one responsible person, but there are many person who shared the blame for the scandal that turned Enron into the ultimate poster child for fraudulent accounting practices, and caused one of the largest bankruptcies in the us history. The key people involved internally at Enron were the executives, Kenneth Lay (Chairman and CEO), Jeffrey Skilling (President and CEO), and Andrew Fastow (CFO).

They built up a highly successful company, but soon they began to divert funds into phony investments, and cashed their own stocks, while the price was still high. From October 1999 to November 2001, Lay sold a total 1. 8 million shares for $101 million. Altogether, 29 Enron officers pocketed $1. 2billion from selling Enron shares, while unsuspecting employees went broke. Simultaneously, while this was going on, more than half of employees’ 401(k) savings, or about $1. 2 billion, were invested in Enron stock, which were rendered worthless.

The chairman sent an email to the workers: the company had "never been stronger" and its future growth "has never been more certain”, so most of the workers held their stocks, because nobody could foresee what was about to happen. In Texas, the Teachers Retirement system lost $35. 7 million in Enron stock, In Florida; the pension fund for teachers, state employees, and county workers bought 7 million shares of Enron stock (the fund that covers 650,000 workers and 150,000 retirees estimate they lost $306 million).

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In the end millions in 401(k) savings were lost. Enron was hiding massive losses by using their strategy of “mark to market” accounting. Fastow was also found by an internal Enron investigation to have secretly made $30 million from managing one of these partnerships. Outside of the company, Arthur Andersen, the gigantic accounting firm responsible for Enron’s accounting and outside auditing, also shares some blame for the scandal.

In theory, companies can't get away with cooking their books because honest, independent accounting firms are looking over their shoulders, protecting the public. In the case of Enron, however, Arthur Andersen failed at their duties. Four days before Enron reported a staggering loss of $618 million for the third quarter of 2001, one of Andersen's top lawyers sent out a memo ordering his staff to shred all Enron-related audit documents. Dvid Duncan got the maximum sentence for his crimes is ten years. redit rating agencys: Credit rating agencies like Moody’s, Standard & Poor’s and Fitch failed to inform investors how risky buying a company’s bonds might be, failed to spot any problems with Enron until the company was nearly bankrupt, only downgrading its bonds on 28 November 2001. t S&P and Fitch told a Fortune reporter they had no idea how Enron made its money. The lack of regulations, and the good relations with the White House, allowed Enron to have major influence over policy in America. On economic policy, Enron wanted complete deregulation with no government interference.

They got it. On energy policy, Enron wanted no caps on electricity prices in California. They got it. On tax policy, Enron wanted elimination of the corporate alternative minimum tax. They got it. In the end these policies created the perfect environment for their unethical games. The ultimate example occurred throughout the year 2000 during the California Electricity Crisis. The Enron traders exported the cheap electricity from California to another state and later they take it back and sold it for a higher price. This causes 42 billion losses in California in three years.

Enron: What Caused the Ethical Collapse essay

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