The Enron Scandal
Enron, an energy trading company, collapsed due to its accounting frauds. Enron business rapid expansion ran ahead of the organization’s ability to fund it. The firm extravagantly spends on its development at the expense of its inadequate cash flow. At the beginning of 2001, Enron was among the top largest firms in the United States with a stock worth $100. Months later, the same stock was only worth a few dollars, and it led to Enron credit being rated at the junk level. The company’s share price collapsed, banks declined to offer any more financial support, suppliers stopped supplying, and buyers stopped purchasing. The corporate governance and dubious accounting practices dragged Enron to its downfall. In December 2001, Enron filed the biggest bankruptcy in the USA.
Enron’s bankruptcy scandal took Arthur Andersen (an accounting firm) down. Arthur Andersen was one of the largest firms in the world, and Enron was one of its clients. In many ways, Arthur Andersen participated in Enron’s inappropriate accounting procedures, and the firm was accused of associating with criminal activities (Li, 2010). The accounting firm was considered to have compromised its professional reputations for overlooking Enron’s cash records. The company was also accused of destroying computer files, physical documents, and E-mail files an action that tempered with the Enron scandal investigation. Arthur Andersen did not put the corporation general accepted accounting principles (GAAP) in consideration in its supervision of Enron’s dealings with other partnerships (Petrick & Scherer, 2003). The dealings assisted Enron in concealing some of its losses and Arthur Andersen to be judged guilty and placed on a 5-year working probation.
Enron’s downfall influenced readjustment of future corporation governance and risk management strategies. Increased regulations and oversight have been put in place to prevent another incident similar to Enron’s. Some of the new proposals on new corporate governance include;
- Public companies must have a majority of directors who are independent
- These independent directs should comply with an elaborate description of independent
- Committee of audit, nomination, and compensation must include independent directors.
Also, risk management regulations were proposed following Enron corporate fraud. Now all members of the audit committee required to be financially literate and at least one member to have financial management expertise. Firms should increase their board oversight and have extra committees without the management. Another area that faced risk management changes is the executive’s financial incentives. The incentives for executives should be limited, and ethical discipline should be enacted in business firms ( Nelson et al. 2008). Enron and Arthur Andersen collapse is a world reference story when it comes to risk management. The two firms underestimated the risk of overlooking a company’s value and violating rules for personal interests. Therefore, every time a firm fails at managing or reducing future threats, the two firms can be used as a prediction of what is likely to happen.
Reference
Li, Y. (2010). The case analysis of the scandal of Enron. International Journal of business and management, 5(10), 37.
Nelson, K. K., Price, R. A., & Rountree, B. R. (2008). The market reaction to Arthur Andersen’s role in the Enron scandal: Loss of reputation or confounding effects?.Journal of Accounting and Economics, 46(2-3), 279-293.
Petrick, J. A., & Scherer, R. F. (2003). The Enron scandal and the neglect of management integrity capacity. American Journal of Business, 18(1), 37-50.