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Enron Essay

3201 words - 13 pages International Journal of Business and Management Vol. 5, No. 10; October 2010
Published by Canadian Center of Science and Education 37
The Case Analysis of the Scandal of Enron
Yuhao Li Huntsman School of Business, Utah State University, Logan city, U.S.A
E-mail:, Abstract The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at ...view middle of the document...

At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. According to Thomas (2002), the drop of Enron's stock price from $90 per share in mid-2000 to less than $1 per share at the end of 2001, caused shareholders to lose nearly $11 billion. And Enron revised its financial statement for the previous five years and found that there was $586million in losses. Enron fall to bankruptcy on December 2, 2001. One of the lessons of the Internet boom is that it's often difficult for analysts to understand and evaluate new kinds of businesses. And executives like Mr. Skilling, who once swore at an analyst during a conference call for asking a pointed question about Enron's balance sheet, don't do much to foster the kind of open inquiry that could lead to better information. But the Enron debacle is also emblematic of another problem that has become all too evident in the last few years: Wall Street's loss of objectivity. Investment banks make far more money from underwriting or merger deals than they do from broker fees. Analysts at these firms often face conflicting loyalties. They can be put in the position of having to worry as much about whether a chief executive might find a report offensive as whether an investor might find it helpful. 2. The Causes of Enron's bankruptcy 2.1 Truthfulness The lack of truthfulness by management about the health of the company, according to Kirk Hanson, the executive director of the Markkula Center for Applied Ethics. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. The duty that is owed is one of good faith and full disclosure. There is no evidence that when Enron's CEO told the employees that the stock would probably rise that he also disclosed that he was selling stock. Moreover, the employees would not have learned of the stock sale within days or weeks, as is ordinarily the case. Only the investigation surrounding Enron's bankruptcy enabled shareholders to learn of the CEO stock sell-off before February 14, 2002 which is when the sell-off would otherwise have been disclosed. Why the delay? The stock was sold to the company to repay money that the CEO owed Enron-and the sale of company stock qualifies as International Journal of Business and Management Vol. 5, No. 10; October 2010
ISSN 1833-3850 E-ISSN 1833-8119 38
an exception under the ordinary director and officer disclosure requirement. It does not have to be reported until 45 days after the end of the company's fiscal year. (The Conference Board, Inc., 845) 2.2 Interest It has been suggested that conflicts of interest and a lack of independent oversight of management by Enron's board contributed to the firm's collapse. Moreover, some have suggested that Enron's compensation...

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