The Enron scandal was one of the largest corporate bankruptcies that the world witnessed in 2001 and it led to the complete fall of Enron Corporation, a large energy based company in America. The devastating effect of the Enron Scandal can be accounted from the simultaneous dissolution of Enron’s accounting partner, Arthur Andersen LLP which was one of the Big Five accounting and auditing firms. The magnitude of the fraud in this case can be easily understood by the subsequent formulation of the Sarbanes-Oxley Act by the U.S. Congress in 2002 that ensured the security of the investors from such fraudulent accounting practices by the companies. In this case study I analysed the causes of its downfall and the role of accounting professionals in the demise of the company. Before going into the depth of the case I evaluated the corporate governance and the issues and challenges that the company were facing at that time. Deductive approach was used for analysing the concerned theme of research wherein the aim of the report helped in designing the research direction. I conducted an intensive study of the case to highlight the failures of internal and external checks i.e. the accounting regulations and auditors in detecting the fraud practices of the company. In this paper I have also provided a picture of corporate culture of Enron and the violations of the company’s code of conducts by its leaders. Lastly, my research on the case concludes with the lessons that should be learnt to prevent such corporate scandals reappear in future.
1.1 Background of the Case
Enron based in Houston, Texas emerged as the largest seller of the natural gas and other energy resources in America in 1990s. It was a multinational corporation providing energy, communication services and heavy goods employing approximately twenty thousand staff. Kenneth Lay founded the company in the year 1985 after Houston Natural Gas and InterNorth merged together. The company’s earnings increased when it followed a diversification strategy when it decided to expand its product base from natural gas to other products like coal, steel, paper and pulp, broadband communications etc. The rise of the company was evident from its revenue earnings which amounted to $ 112 billion during the year 2000 and it was rated as the most innovative company by the Fortune magazine during that year (Miceli da Silveris, 2013). The real misfortune of the company began at the end of 2001 when the financial state of affairs of the company was uphold by a deliberate accounting fraud which was renowned as Enron Scandal. The scandal consequently questioned the accounting and auditing practices of the company and the role of accounting professionals in providing such misleading financial statements for the company. Enron broke the trust of their investors, share holders and their employees as the top executives of the company were lured by the positive publicity and worldwide media attention undertook aggressive methods of hiding company’s weak finances.
1.2 Corporate Governance of Enron
The board of directors of the company included Jeffrey Skilling, President and CEO; Mark Frevert, Vice Chairman; Greg Whalley, Chief Operating Officer and Andrew Fastow, Chief Financial Officer. Andersen was responsible for handling the auditing and accounting business of the company. Enron’s rise and fall was due to the activities of the corporate governance which was of elaborated structure.