Anne Corrinne L.

Bacolod

201810051

BS Accountancy 3-2

ENRON SCANDAL

Introduction

Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and
services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of
the largest auditing and accounting companies in the world. The collapse of Enron, which held more
than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United
States, and it generated much debate as well as legislation designed to improve accounting standards
and practices, with long-lasting repercussions in the financial world. It stands for the greatest company
scandal in the history of the US economy and has become a symbol of corruption for the whole Western
economic system.

Brief History

In 1985, Houston Natural Gas Co. and InterNorth Incorporated decided to merge and formed Enron
Corporation. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of
Houston Natural Gas, became Enron's CEO and chairman. In 1990, Lay created the Enron Finance
Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had
impressed Lay, to head the new corporation. With the help of Jeffrey Skilling, Enron transformed itself
into a trader of energy derivative contracts acting as an intermediary between natural-gas producers
and their customers. Enron was named by Fortune, in 1995, as “America’s Most Innovative Company”
and continue to win this award for six consecutive years. Andrew Fastow was recruited by Skilling and
then later on promoted to CFO and is believed to have lead the creation of a network of companies that
hide Enron's losses. Fastow oversaw the financing of the company through investments in increasingly
complex instruments, while Skilling oversaw the building of its vast trading operation.

What happened?

The Enron Scandal surfaced in October 2001 when it was revealed that America's seventh largest
company was involved in corporate corruption and accounting fraud. The scandal surrounding the Enron
energy company included political implications due to Enron's close links with the White House, the
Deregulation of ENRON allowing the corporation to operate largely free from US government scrutiny,
misrepresentation in earnings reports, a fraudulent 'energy crisis' and embezzlement undertaken by
ENRON Executives. The Enron scandal eventually led to the bankruptcy of the corporation together with
and the dissolution of the auditing company Arthur Andersen. ENRON shareholders lost $74 billion
leading up to its bankruptcy, and its employees lost their jobs and billions in pension benefits. Enron
CEO Jeff Skilling was sentenced to 24 years, former CEO Kenneth Lay died before serving time.

What is the lesson that you have learned from Enron?

The auditors of Enron clearly failed on performing their true responsibility and ensuring that the
corporation is complying with all of the present standards. Some said that they may be paid to overlook
the discrepancies or simply just unqualified to decipher the unique accounting procedures developed by
the Enron management. I have learned that manipulation of reported financial statements occurred in
the corporation. With that being said, I can conclude that Enron has poor leaders. Bad leaders produce
unsurprisingly bad results. They only focus on generating profits and take no account of the unethical
business practices of the organization. One executive of Enron, Ms. Sherron Watkins, stated that Skilling
is portrayed as incredibly creative and intelligent but also as ruthless and ambitious. When other
executives like Watkins had expressed concerns of financial irregularities she was accused of not being
an Enron “team player”. This is clearly not how you should handle concerns inside an organization. I
believe in the saying, “absolute power corrupts absolutely”. As the company flourishes, their power in
the economy increases. It also morally destroys their nature. The emphasis on profits above anything
else makes them capable of doing things which are unlawful. We can also take Enron Scandal as a guide
on not making the same mistake again.