The Enron Scandal and Analysis- Business Law

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The Enron Scandal and Analysis
Business Law I- LEG100

*Describe how Enron could have been structured differently to avoid such activities.

Enron lacked what every company, big or small, must have in place to survive and continue in the long-term. Internal controls and procedures is a company’s shield against theft, waste, and inefficiency. If Enron had structured their business around the five components of internal control the company may still be alive today. Those five components are: monitoring of controls, information systems, control procedures, control environment, and risk assessment. Internal auditors are employees of the business who ensure that the company’s employees are following company policies. Information systems provide accurate information to keep track of assets and measure profits and losses. Control procedures ensure that the business goals are achieved. The control environment demonstrates to employees that they should act ethically. Former executives of Enron failed to establish a good control environment and are in prison as a result. Enron poorly assessed its risk assessments and falsified financial documents to make themselves look better than they really were. The corporate scandals that followed Enron led to the passage of the Sarbanes-Oxley Act on July 30, 2002. This act revamped corporate governance in the United States and affected the accounting profession. The company’s lack of transparency in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its demise. The company had some of the best trained personnel within its company however even Enron's audit committee did not have the technical knowledge to properly question the auditors on accounting questions related to the company's operations (and were often confused at the explanations that were given). Enron's aggressive accounting practices were not hidden from the board of directors, as later learned by a Senate subcommittee. The Senate subcommittee argued that had there been a detailed understanding of how the derivatives were organized; the board would have prevented their use. They needed to put in place a strong code of ethics that starts from the CEO and goes through the entire company.

*Discuss whether Enron’s officers acted within the scope of their authority.

As one knowledgeable Enron employee put it: “Good deal vs. bad deal? It didn’t matter. If it had a positive net present value (NPV) it could get done. Sometimes positive NPV didn’t even matter in the name of strategic significance. This portrays an anything goes type of mentality. This type of practice is not in the best interest of the company or the employee. Enron’s officers did not act within the scope of their authority. The scope of authority should be in accordance with good ethical company policy and within the law. Enron hired numerous Certified Public Accountants (CPA) as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board (FASB). The accountants looked for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's standards. By intentionally looking for loopholes and ways to cheat the system and acting dishonestly the officers crossed the lines within the scope of their authority. Various prosecutors believe they violated statutes on accounting fraud (by manipulating financial results to create income and hide debt), insider trading and illegal destruction of documents. The scope of authority should never infringe upon laws or established statutes.

*Describe the corporate culture at Enron.

On the surface, the motives and attitudes behind decisions and events leading to Enron’s eventual downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and...
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