Lessons from the ENRON fiasco Did We Really Learn

TheENRON scandal is one of the most memorable if not the most infamous corporate failure in the history of the United States that has led to thousands of people losing their lives investments and resulting into the immediate demise of Arthur Andersen, one of the biggest audit firms in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure. The whole collapse was mired by incredulous accounts of grave misdeeds on the part of its executive circle as well as a conspiracy with its auditing firm similar to that of a Hollywood conspiracy film. ENRON enjoyed an era of prosperity in the market with the prices of its stocks reaching a high of US90. This rate plummeted straight to the ground in a matter of several months and saw the stocks go for as low as US1 (Fusaro and Ross, 2002). This caught the attention of the U.S. Securities and Exchange Commission(SEC) which prompted to begin an investigation which later uncovered the shady dealings the executive group of the company has committed. It was not long until ENRON was forced to sell everything to its rival Dynegy and almost immediately right after file for bankruptcy. The executives of ENRON were all indicted and sentenced accordingly to the rule of law (Eichenwald, 2005).

As a result, the United States government saw the need for tighter regulations regarding financial reports as these reports are the bases on which investors base their confidence on a companys capacity to be profitable (Bratton, 2002).An example is the Sarbanes-Oxley Act which was designed to respond point-for-point to the manoeuvrings of the ENRON executive board that almost made them get away with it. The Sarbanes-Oxley act aims to rectify all the mistakes with regards the incident and reconstitute order within auditing big business (Benston, 2003). The auditing firm has been found to have been pressured by the ENRON executives to follow their plans and as a response safeguards in the law protect the independence of auditing firms from their clients as well as heightened surveillance of their dealings.  Such is the magnitude of the whole fiasco that its effects still resonate within the discussions among American people and more directly, their psyche as these concepts challenge the values on which their country was built on strife for freedom, fairness and truth. The deception used by individuals such as Lay, Skilling and Fastow is something that never be easily forgotten as they did not only play with money they in fact played with peoples lives. Many of their investors used their lifes savings to invest in the company as the company reported huge returns. Many can also say that what happened in ENRON mirrors what happened in the economic crisis because the financial services industry also work on the same accounting methods that ENRON used (which is to report future gains as current gains which is practiced especially by credit-card companies). This kind of method created what scholars call a financial bubble because they tend to invest in something using funds that are not there yet (Salter, 2008).

For us to further understand how ENRON became the poster-child of the worst auditing practice ever in the history of America, we have to take a look at how they did it and the steps they took that have led them to do what they have done. ENRON was formed in 1985 through a huge merger betweenHouston Natural GasandInterNorth which are two natural gas pipelinecompanies (Healy and Palepu, 2003).The 1990s saw Kenneth Lay, the founder and CEO, initiate thesale of electricity at market pricesand after dogged lobbying, helped in making the congress pass deregulations on the sale of natural gas (Fusaro and Ross, 2003). As such, they were able to sell energy at much more higher prices which ushered in an era of prosperity for the company. Despite outcries of overpricing, ENRON in unison with other energy companies were able to make the necessary stops to retain the current free-market system that continued to pour-in more money into their profit sheets.

By 1992, ENRON became the biggest name in natural gas in North America, withearnings punching up until US122 million. EnronOnline also contributed in the development of its business horizons by providing clients as much access to simplified and modernized sale transactions as possible (Healy  Palepu, 2003). In 2001 ENRON adopted a diversification strategy (Toffler  Reingold, 2004) which resulted to it owning and operating gas pipelines, pulp and paper plants, broadband assets, electricity plants, and water plants worldwide. The corporation also traded in financial markets for the same types of products and services (Healy  Palepu, 2003). Because of this expansion, Enrons stock went 311 percent in a span of 8 years, which is very high in the SP 500 index (Toffler and Reingold, 2004). However something was already wrong. Enron was not transparent with itsfinancial statementsand did not clearly share its finances and plans with its shareholders and analysts (Healy  Palepu, 2003). Moreover, the complex expansion of the company required them to use a system of accounting that shows them favor with regards their profits. McLean and Elkin (2003) summed it up in saying that The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control.The key players here, who are the executives, often boosted what should really be truly reflected in their statistical sheets though manipulating the numbers as well as gambling with current investments hoping for future gains.

This is where Skilling and mark-to-market accounting came into the picture so that ENRON could hide that it has huge amounts of debt as well as to meet expectation set fourth by Wall Street (Ayala  Ibaguen, 2006). Mark-to-market accounting surely has done in part in creating an illusion of growth. Skilling who advocated this method stated that it will reflect the ... true economic value of the good and services they are offering.ENRON became the first non-financial company to use the method to account for its complex long-term contracts. He urged fellow executive Fastow and other executives to follow all of his instructions so much so that they, ...created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people can understand them even now. (Eichenwald, 2005) ENRON operated on a system of providing a variety of services which is a trend among energy providers like as wholesale trading andrisk managementin addition to developing electric power plants, natural gas pipelines, storage, and processing facilities.Risk buying allows corporations to report the selling price as revenues and the products costs ascost of goods sold. An agent on the other hand does provide services to a consumer but without having the same risks that merchants face and what ENRON did was to assume the role of agent even if it is a service provider. The overall result was the inflation of trading revenue. The sad part is that other companies adopted the same method in order to be in competition with them (Fusaro  Ross, 2002). The companys utilization of these methods that show hyper-inflated revenues became more central to their agenda than to actually improve on areas that needs it. This placed ENRON in the upper echelon in business by posting incredible amounts of growth at 65 per annum (Bratton, 2002).

In simpler terms, ENRON executives used deception to lure people to invest in their company and run away with the money. This kind of deception has created a model for greedy individuals to satisfy their aims at the expense of another. In any business, there will always be losers and there will always be gainers. However, what ENRON did was to stack every odd in their favor and used any and every tactic to maximize their gains. What this has done for the American people is for them to see their moral fabric being attacked for the sake of money and this has pushed them to question the processes involved in how these big corporations have profit. The ENRON affair served as a precedent to other massive corporation failures in the United States and in the view of the economic crisis which saw unemployment rates soar, the confidence of the American public in these big corporations are now questionable, owing to the fact that these kinds of shenanigans did not end with ENRON. It went on and on and on, with the most recent being the case of Bernard Maddoff. What all of these shows is that there is an inherent flaw in the economic system that needs to be addressed and checked by the government. The Sarbanes-Oxley act is a step in the right direction with regards responding to this need as it constrains greed from completely ruining the system in which trade operates in the Unites States. One might argue on the philosophical level that greed is indeed a necessity for growth and that it is what fuels competition. This is very true indeed for without any desire to have the things that we want (not need), humanity would not have gotten to where it is today. It is through that desire to have something better than what status quo gives us that we as a species have continuously pushed the envelope and come up with new ways to make life a tad easier. However, having too much of everything is a disaster waiting to happen. This rings much truer when we talk about greed because too much of it poisons the judgments of people which lead them not to think about long-term consequences for the benefit of having short-term ones. What this provides on the other hand is a model of what should not be done if we want to rise above the precarious situation ENRON and other companies have placed us as a people.

This trend in the financial sector which works with speculation of profit as its core proves to be an unsustainable economic system. The fact of the matter is all of these corporations and individuals have the gall to do the things that they did because the government has been to lax in policing their affairs. Deregulation spells out less government participation in price controls as well as the accounting of financial reports and all of this is borne out of a runaway free-market system that is prone to abuse, as proven by the cases cited above. At the end of the day, there has to be a balance between corporate interest and government responsibility and the only way of doing this is for the state to keep tabs on the activities of these big firms. If we really think about it, the (absolutely) free market does not deliver what it promises (which is high windfalls due to high levels of competition without government controls). In the end, they still sought the help of the government to bail them out of bankruptcy and restart their businesses. What led to the downfall of other companies anyway It is their high reliance on speculative stocks and the promise of profits in the future that are not 100 to actually come. As the United States begins to little-by-little come out of the economic crisis, other safeguards should follow the Sarbanes-Oxley act as well as providing more venues for the government to intervene when need be. It is after all the main reason why the state was created in the first place it is to protect a citizen from harms from outside as well as protect the individual from harms coming from within his or her nature. The government is the embodiment of that restraint and as such, it should serve its function as that which defines right from wrong.


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