The Case Analysis of Enron Scandal

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International Journal of Business and Management

Vol. 5, No. 10; October 2010

The Case Analysis of the Scandal of Enron
Yuhao Li Huntsman School of Business, Utah State University, Logan city, U.S.A E-mail: wyl_2001_ren@126.com, carolee1989@gmail.com Abstract The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. In this paper, it analysis the reason for this event in detail including the management, conflict of interest and accounting fraud. Meanwhile, it makes analysis the moral responsibility From Individuals’ Angle and Corporation’s Angle. Keywords: Enron scandal, Accounting fraud, Moral responsibility, Analysis 1. Review of Enron’s Rise and Fall Throughout the late 1990s, Enron was almost universally considered one of the country's most innovative companies -- a new-economy maverick that forsook musty, old industries with their cumbersome hard assets in favor of the freewheeling world of e-commerce. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses. Besides buying and selling gas and electricity futures, it created whole new markets for such oddball "commodities" as broadcast time for advertisers, weather futures, and Internet bandwidth. Enron was founded in 1985, and as one of the world's leading electricity, natural gas, communications and pulp and paper companies before it bankrupted in late 2001, its annual revenues rose from about $9 billion in 1995 to over $100 billion in 2000. At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. According to Thomas (2002), the drop of Enron's stock price from $90 per share in mid-2000 to less than $1 per share at the end of 2001, caused shareholders to lose nearly $11 billion. And Enron revised its financial statement for the previous five years and found that there was $586million in losses. Enron fall to bankruptcy on December 2, 2001. One of the lessons of the Internet boom is that it's often difficult for analysts to understand and evaluate new kinds of businesses. And executives like Mr. Skilling, who once swore at an analyst during a conference call for asking a pointed question about Enron's balance sheet, don't do much to foster the kind of open inquiry that could lead to better information. But the Enron debacle is also emblematic of another problem that has become all too evident in the last few years: Wall Street's loss of objectivity. Investment banks make far more money from underwriting or merger deals than they do from broker fees. Analysts at these firms often face conflicting loyalties. They can be put in the position of having to worry as much about whether a chief executive might find a report offensive as whether an investor might find it helpful. 2. The Causes of Enron’s bankruptcy 2.1 Truthfulness The lack of truthfulness by management about the health of the company, according to Kirk Hanson, the executive director of the Markkula Center for Applied Ethics. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. The duty that is owed is one of good faith and full disclosure. There is no evidence that when Enron’s CEO told the employees that the stock would probably rise that he also disclosed that he was selling stock. Moreover,...
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