Enron's Collapse

Powerful Essays
Enron's Collapse

In the case of Enron’s collapse, many would blame the external auditor’s collusion with the management, the aggressive accounting policy it had adopted to manipulate its earnings or the Special Purpose Entity (SPE) it had created as a sham to conceal its debts. However, everything began from an internal environment with weak controls.
The internal environment is the capstone of all other components within an organization’s ERM framework, influencing strategy formulation, objective setting, as well as risk management. The internal environment is largely shaped by the tone at the top. And in the case of Enron, its failure was primarily attributable to the board and management’s failure to take responsibility for the risks inherent in the company’s business plan and strategy.
Various elements of the internal environment had contributed to Enron’s failure.

Risk Management Philosophy and Risk Appetite
Enron had a huge risk appetite which can be seen from its speculative trading activities as well as the use of “mark-to-market” accounting and SPE to manipulate earnings and conceal debts. The source of revenue was vague and highly volatile. It was almost like Enron was engaged in gambling. However, well knowing the nature of income, the management still continued to carry out such activities. Management’s huge risk appetite reassured the employees that Enron could easily handle these risks. Hence, everyone in Enron became risk-seeking.

Board of Directors’ Attitudes
One of the core principles of Anglo-American corporate governance is that “the board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets”.
Enron’s board had defended itself by claiming that they had no idea about the unethical conducts Enron’s management was involved with. However, the board had, in the first place, failed to make an appropriate assessment of the risks to which the company was exposed of. And it did

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