Enron Corporation, once the 7th largest company in US and a global leader of electricity and natural gas industries, filed for bankruptcy protection in late 2001. It was revealed that the company had been hiding investment losses and created fictitious revenue through several complicated accounting gimmicks. Besides Enron’s senior management who created the whole fiasco, many people believed that several other parties, such as the Board of Directors and the external auditors should also share the blame. The public began to question the integrity of US corporations, especially surrounding the fiduciary duties of Boards of Directors, conflicts of interest between the role of auditor and the advisory unit, as well as moral standards of business management.
At that time it was the largest bankruptcy in history. The empire that Enron built over several decades was destroyed within mere weeks when the scandals were made public. This eventually led to the disintegration of the Arthur Andersen and the enactment of the famous Sarbanes-Oxley Act that aimed at enhancing reporting and internal governance standard of public companies.
The first issue is the lack of independence of the board of directors and their breach of fiduciary duty. The Board of Directors has the legal and ethical duty of monitoring the company’s management on behalf of the shareholders. The members should remain independent and should always examine the company’s operations with great care. In Enron’s case, the Board of Directors was comprised of members who were too close to the senior management to act objectively. Many of them also served on the board for over 20 years. They were much less likely to be unbiased and to question the company’s business model. In addition, the board members received twice the national average compensation and had little incentive to complain about current operations. Despite receiving a huge compensation, the board members ignored many red...