Enron Scandal

Introduction
With the dot com bubble of the 20th-century characterized by the rise in stock prices of internet
companies, it was common to see companies market capitalization grow exponentially. It was in
this era that Enron the energy company constantly reported profits thus its stock price more than
doubled in two years. Not all Enron projects at that time were profitable but the company could
exploit loopholes in accounting rules by manipulating financial statements to hide its debts from
investors. When this was discovered Enron’s stock price fell from 90.5 to 0.26 and they later
declared bankruptcy. 

The role financial instruments played in the downfall of Enron

Enron’s executive managers owned part of the stock so they benefited from an increase in the
company’s stock price which was caused by the good performance of Enron as shown on the
balance sheets they produced by performing three major violations which include:

Creation of off-balance-sheet special purpose vehicles and colluding with accounting firms to
help them hide accumulated loans from creditors and investor by presenting to them that the
company is in good financial state meanwhile many of it subsidiaries were losing money.

They used the mark-to-market method of accounting which was approved by the SEC
commission which aim is to provide a realistic fair valuation of a company. However, Enron
used it to their advantage by displaying estimated profit as actual profit which was quite
misleading.

Manipulations with derivatives, which is hiding the losses in the derivative section (loans were
presented in the form of prepaid commodity swaps)

Due to these practices, the company's market capitalization was inflated thus enabling them to
take in more loans since they appeared more creditworthy to banker this accumulation of loans
resulted in their bankruptcy.

1. Manipulations with derivatives,

which is hiding
2. the losses in the derivative
section (loans were pre-
3. sented in the form of prepaid
commodity swaps)
 4. Manipulations with derivatives,
which is hiding
5. the losses in the derivative
section (loans were pre-
6. sented in the form of prepaid
commodity swap
The broader market effects resulting from the rise and fall of Enron
The rise and fall of Enron had a tremendous effect on the financial market and its player.

Firstly their auditing firm Andersen lost its reputation for high standards and quality risk
management. Coupled to that was the negative reaction of Andersen’s client's stock price since
their stocks where instantly perceived as riskier by analysts.   
 
Also, this scandal let to the establishment of new regulation and legislation to promote the
accuracy for financial reporting of public companies thus leading to the creation by George Bush
of the Sarbanes-Oxley Act which stated the consequences for destroying altering, or fabricating
financial statements and with the aim of misleading investors.

Also, new compliance measures were put in place which substantially raised the level of the
Financial Accounting Standards Board (FASB) ethical conduct also the board of directors
become more independent and cold monitor the auditing companies and replace poor managers.

Recommendations of risk mitigation techniques that could have been applied to minimize
Enron’s risk profile
Since stock price constantly change based on the investors view on the risk level of the particular
stock and the stock market view in general, the risk profile of Enron could be minimized by
putting in place a system which will permit the availability of reliable data to investors such
systems includes, implementation of current accounting standards and regulations which present
accurate data of the companies current situation and thus the companies real situation could be
detected early by analyst

Conclusion
Enron scandal was caused by the manipulation of financial statements due to the lack of
appropriate legislation and accounting standards at that time. this tremendously impacted the
financial market and Let to increased regulations and monitoring to prevent such from recurring.
References
Segal, Troy. “Enron Scandal: The Fall of a Wall Street Darling.” Investopedia, Investopedia, 22 Sept.
2020, www.investopedia.com/updates/enron-scandal-summary/.

Aven, B. L. (2015). The paradox of

corrupt net-
works: An analysis of organizational
crime at En-
ron. Organization Science, 26(4),
980–996
Aven, B. L. (2015). The paradox of
corrupt net-
works: An analysis of organizational
crime at En-
ron. Organization Science, 26(4),
980–996
Aven, B. L. (2015). The paradox of
corrupt net-
works: An analysis of organizational
crime at En-
ron. Organization Science, 26(4),
980–996
Aven, B. L. (2015). The paradox of corrupt net-works: An analysis of organizational crime at En-ron.
Organization Science, 26(4), 980–996.