Before 2000, Enron was famous in the business world. It was known as an innovative company, a technological powerhouse, and a major corporation with no fear. It was founded in 1985 as a natural gas pipeline company. The company emerged as a pioneer in the deregulated energy market rapidly, and within fifteen years, the enterprise had built various businesses in international energy-asset construction and energy trading.
From1990 to1998, Enron’s stocks appreciated by three hundred and eleven percent; however, the value of the stocks began to increase rapidly such that, by the end of 2000, Enron stocks were priced at eighty-three dollars, with a market capitalization in excess of sixty billion dollars. The company was rated in the Fortune magazine surveys of the most admired companies as the most innovative company. It, however, surprised many people with its spectacular fall within a year, and its image damaged forever. Its stocks price plummeted almost to zero.
At a glance
- Grade: 1.0 (1.0 is the best grade)
- Enron used hundreds of special purpose entities to fund expansion and forward gas contracts
- The analysis examines mark-to-market accounting and forecasts of future prices and interest
- Enron’s stock was voted the most admired company for six consecutive years
- 10 sources in the bibliography
Contents
1. Introduction
2. Enron – an Admired Company
3. The Rise and fall of Enron
3.1 Failure of Internal and External Check Balances
3.2 Continuous Auditing
3.3 The Failure of the Board of Directors
3.4 Breaches of Accounting and Ethical Conduct
4. Lessons Learnt from the Enron Case
5. Alternative Evaluation
6. Conclusion and Recommendations
Purpose and Thematic Focus
This work examines how Enron’s accounting practices, corporate governance failures, and breaches of professional ethics contributed to the company’s collapse. It also considers whether continuous auditing could have detected irregularities earlier and what responsibilities accountants, auditors, and directors have in protecting investors and the public.
- Enron’s rise as a major energy company and the accounting practices behind its reported performance
- Special purpose entities, structured finance, and mark-to-market accounting
- Failures of internal controls, external auditors, and the board of directors
- Continuous auditing and its potential role in identifying irregular transactions
- Professional accounting ethics, conflicts of interest, and corporate responsibility
- Lessons and recommendations for companies, accountants, auditors, and directors
Excerpt from the Book
Failure of Internal and External Check Balances
The company used Special Purpose Entities (SPEs), either to manage the risks, or to fund specific assets. The special purpose entities are shell companies created by a sponsoring company, but funded by outside debt financiers and equity investors. The special entity, in accounting practices, is supposed to be separate from the sponsoring company. The rules demand that an independent third-party shoulder a substantive equity stake at risk in the entity. The risk was supposed to be three percent of total debt and equity (Gore & Murthy, 2011, p. 19). The third party was also expected to have controlling shareholding of more than fifty percent of the special purpose entity. Enron had hundreds of these special purpose entities which it used to fund its expansion and fund the purchase of the forward contracts it signed with gas producers to supply gas under long-term contracts. These entities were designed to aid in the dubious financial reporting objectives. Consequently, Enron ended up understating its liabilities and overstating the equity and earnings, clearly in violation of the accounting principles, but with the effect of portraying the company as thriving financially. The market response when the accounting irregularities were made public was to halve the price of Enron stocks and increase their borrowing costs. Suffice to say, the practices that allowed the company to succeed were the same that led to the company’s fall. Enron’s
attempt to avoid bankruptcy by being bought by a smaller competitor fell apart when the stocks were downgraded to junk status (Healy & Palepu 2003, p. 12).
When faced with greed, lapse of ethics, and collusion among company officials, auditors, lawyers, bankers and investment agencies, it is most unlikely that any credible regulatory activities would be undertaken to prevent any financial losses to shareholders, creditors or employees of Enron. Enron as a company did not benefit from the collusion, whilst its shareholders and employees lost the funds invested in Enron shares (Cunningham & Harris 2006, p. 42). Arthur Andersen, the internal and external auditor for Enron, in collusion with Enron financial executives, did not fulfil his mandate as the auditor of the firm.
Chapter Summaries
Introduction: Introduces Enron’s rapid rise and its dramatic decline after its share price and public image collapsed.
Enron – an Admired Company: Describes Enron’s expansion after energy deregulation and the use of partner entities to keep debt out of view.
The Rise and fall of Enron: Explains how accounting loopholes, special purpose entities, complex contracts, and misleading financial reporting helped conceal debt and distort the company’s performance.
Failure of Internal and External Check Balances: Examines the use of special purpose entities and the failures of auditors and other oversight mechanisms to prevent or expose misconduct.
Continuous Auditing: Discusses how technology-based continuous audits might identify unusual transactions, while noting that collusion can undermine audit systems.
The Failure of the Board of Directors: Describes the board’s failure to uphold its oversight duties and protect shareholder interests.
Breaches of Accounting and Ethical Conduct: Reviews accounting abuses involving special purpose entities and derivatives, alongside conflicts of interest and failures of professional conduct.
Lessons Learnt from the Enron Case: Emphasizes integrity, objectivity, and professional ethical responsibilities in accounting.
Alternative Evaluation: Considers accountants’ professional duties and the roles of auditors, management, and other actors in the Enron case.
Conclusion and Recommendations: Concludes that Enron’s management and auditors disregarded their responsibilities and urges greater attention to social responsibility and professional ethics.
Keywords
Enron, corporate collapse, accounting fraud, special purpose entities, mark-to-market accounting, structured finance, continuous auditing, corporate governance, board of directors, external auditors, Arthur Andersen, professional ethics, internal controls, investor protection
Frequently Asked Questions
What is this work about?
It analyzes the accounting, governance, and ethical failures associated with Enron’s collapse.
What are the central topics?
The work focuses on financial reporting, special purpose entities, auditing, board oversight, and professional ethics.
What is the work’s main research question?
It asks how Enron’s unethical entrepreneurial practices contributed to its collapse and what lessons can be drawn from the case.
What research method does the work use?
It presents a documentary case analysis of Enron, drawing on published studies, reports, and professional discussions rather than reporting original survey or interview research.
What does the main body discuss?
It examines Enron’s accounting practices, its use of special purpose entities, auditing and board failures, and the potential and limits of continuous auditing.
Which keywords characterize the work?
Key terms include Enron, accounting fraud, special purpose entities, continuous auditing, corporate governance, and professional ethics.
How were special purpose entities used at Enron?
The work describes them as a means of funding expansion and forward contracts, while also helping to understate liabilities and overstate equity and earnings.
What role does continuous auditing have in the analysis?
The work considers whether monitoring transactions as business unfolds could flag discrepancies, while also warning that collusion can compromise audit systems.
What oversight failures does the work identify?
It discusses failures by external auditors and the board of directors, including inadequate scrutiny of risky accounting procedures and conflicts of interest.
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- Caroline Mutuku (Autor:in), 2018, Analysis of Enron’s Unethical Entrepreneurial Practices Leading to its Collapse, München, GRIN Verlag, https://www.hausarbeiten.de/document/426909
