CASE ASSIGNMENT 2

The Demise of Enron Corporation in the Global Marketplace

Accounting is one of the key foundations of any business or organization. Without its aid,

a firm cannot provide financial and nonfinancial information to its respective stakeholders such

as investors, creditors, suppliers, employees, customers, and even the government that will help

also help them to scrutinize its transparency, accountability, and integrity. Hence, financial and

management accountants ensure that these three (3) standards are met with success.

However, it cannot be denied that there are some companies that set aside these core

values because they always want to be on top of the ladder. Simply, they want to gain “success”

through unethical means, and this is what happened to Enron. Before, Enron Corporation, an

American-based energy company located in Houston, Texas, became one of the biggest and most

successful companies not just in the United States but also in the world. In fact, according to

Mangham (2021), Enron, during its height, was worth $90.75 per share, and was awarded as

Forbes’ “Most Innovative Company” for six (6) consecutive years. It was even listed in Fortune

magazine’s list of top 500 U.S. companies, garnering the number seven (7) spot. But Enron’s

success ended when it became the biggest and most remarkable symbol of corporate fraud in the

history of modern business (Cohn, 2021).

Of course, like any other company, Enron also faced increased competition in the energy-

trading business that led to its slow downfall. Consequently, under pressure from shareholders,

the company’s top executives began to rely on dubious accounting practices, including a

technique known as “mark-to-market accounting” where it allowed the company to write

unrealized future gains from some trading contracts into current income statements, thus giving
the illusion of higher current profits (Bondarenko, n.d.). Enron wanted to hide its troubles from

its stakeholders so that it could continue its daily operations and attract new investors and

creditors. It resorted to unethical practices just to boost their brand image in the marketplace.

As a result, financial experts and analysts were intrigued by the sudden change in the

financial statements of Enron. They argued where the numbers came from while the company

was suffering from its financial weakness. Even Jeff Skilling, Enron’s CEO, found it difficult to

explain this controversy to financial reporters (“What is the Enron Scandal?,” n.d.). However,

worse things awaited the company because in October 2001, Enron announced that it was going

to post a $638 million loss for the year’s third (3 rd) quarter and this event shocked its investors.

Consequently, the United States Securities and Exchange Commission (U.S. SEC) and the

Department of Justice (DOJ) formed a thorough investigation and they found out that Enron has

inflated its earnings by hiding debts and losses in subsidiary partnerships (Onion, Sullivan, and

Mullen, 2021).

Shortly thereafter, in November 2001, the company’s shares plummeted to an all-time

low of $0.26. A month later, it filed for Chapter 11 bankruptcy protection and its accounting

firm, Arthur Andersen, was dissolved. It also wiped out some 5,600 jobs and liquidated almost

$2.1 billion in pension plans. The Enron scandal shook not just the business community but also

the legislators to their cores. As a result, the U.S. Congress passed the Sarbanes-Oxley Act of

2002 where it shall impose harsh penalties for “destroying, altering, or fabricating financial

records.”

Lagace (2008) proposed three (3) key measures to prevent another Enron. First is to

strengthen board oversight. Second is to curb perverse financial incentives for executives. Lastly,

companies must instill ethical discipline throughout their top to low management. In the case of
the accountants, especially management accountants, they must always remember and practice

the Institute of Management Accountants’ (IMA) code of ethics because they have an obligation

to provide services at the highest ethical level possible. These four (4) standards include

competence, confidentiality, integrity, and objectivity (VanBaren, 2017).

Competence requires management accountants to present and provide clear and

comprehensive financial, as well as nonfinancial information, to a company’s stakeholders. This

also entails their strict compliance with the relevant laws, regulations, and standards. In Enron’s

case, competence was not practiced by its management accountants because they fabricated the

company’s books and did not present accurate financial information. Confidentiality, on the

other hand, involves the consensual disclosure of confidential information. Management

accountants need to keep in mind that it is unethical to leak sensitive information that would

affect the company’s stakeholders. In addition, integrity includes the honesty and accountability

of management accountants in presenting financial and nonfinancial information. Enron failed to

establish this ethical standard. Lastly, objectivity requires management accountants to provide a

truthful, concrete, and precise way of presenting financial and nonfinancial information. Enron

did not practice it because it was subjective of putting numbers in its books just to create a false

picture that they were gaining profits.

Undeniably, what happened to Enron was a big blow to modern business. However, it

also gave companies, as well as governments, an opportunity to learn from it and ensure that this

huge scandal or corporate fraud would never happen again.

References
Bondarenko, P. (n.d.). Enron scandal. Britannica. https://www.cnbc.com/2021/12/02/twenty-

years-after-epic-bankruptcy-enron-leaves-a-complex-legacy.html

Cohn, S. (2021, December 2). Twenty years after epic bankruptcy, Enron leaves a complex

legacy. CNBC. https://www.cnbc.com/2021/12/02/twenty-years-after-epic-bankruptcy-

enron-leaves-a-complex-legacy.html

Lagace, M. (2008, July 7). Innovation Corrupted: How Managers Can Avoid Another Enron.

Harvard Business School. https://hbswk.hbs.edu/item/innovation-corrupted-how-

managers-can-avoid-another-enron

Mangham, G. (2021, October 15). Enron Scandal: 20 Years on What Have We Learned?

Convene. https://www.azeusconvene.co.uk/blog/enron-scandal-20-years-on-what-have-

we-learned

Onion, A., Sullivan, M., & Mullen, M. (2021, December 3). Enron files for bankruptcy. History.

https://www.history.com/this-day-in-history/enron-files-for-bankruptcy#:~:text=An

%20energy%2Dtrading%20company%20based,the%20top%20500%20U.S.

%20companies.

VanBaren, J. (2017, July 5). The Institute of Management Accountants’ Code of Ethics. Career

Trend. https://careertrend.com/list-6613370-challenges-accounting-job.html

What is the Enron Scandal? (n.d.). Corporate Finance Institute.

https://corporatefinanceinstitute.com/resources/knowledge/other/enron-scandal/