Instance of a Corporate Fraud: The Case of Enron

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In a retrospect, the corporate fraud committed by Enron was deemed as one of the greatest scandals in the history of the business and finance realm not because of its scale or magnitude but because of the circumstances that caused it. Instead, it is the glaring denial of the contemporary principles of corporate ethics making the foundation of financial transactions and the lack of concern for the entrepreneurship as an extension of one’s business progress that makes the case of Enron so shockingly unbelievable (History of Enron Corporation 2015).

Enron’s background was rather impressive. The company used to be one of the global leaders in the gas and electricity production field (McLean & Elkind 2013). Particularly, the organization used to supply natural gas liquids to all corners of the world. In addition, Enron also gained quite a reputation of an innovator for promoting the use of alternative energy sources, such as solar and wind energy. Moreover, the company did not shy away from taking innovative trading products, including the futures related to gas and weather. As a result, Enron literally reinvented the utility industry, paving the way to new and exciting explorations.

The company’s demise, however, was inevitable. Arthur Andersen, one of the partners that Enron’s existence revolved around, and who contributed the most to its untimely demise, should be mentioned as the key figure in the infamous fraud case. An accounting firm, whom the entrepreneurship trusted with audits and analyses of the firm’s financial transactions, Arthur Andersen was responsible for providing reports on the key financial changes that occurred to the organization (Chandler 2014).

When it comes to identifying the point at which the premises for the corporate fraud to occur emerged, one must mention the fact that the relationships between Enron and Arthur Andersen became very informal once Andersen exerted its influence on Enron. In other words, Arthur Andersen became acceptable of Enron’s culture to the point where the organization’s members could overlook the build-up for an instance of a major fraud (Herrick & Barrionuevo 2002).

Run by Ken Lay at that point, the Enron Company switched from its traditional concept of business ethics to a more morally ambiguous one. It is quite remarkable, though, that the era of Ken Lay’s leadership was marked with an incredibly fast rise in the firm’s revenue: “A meteoric rise in both reputation and stock value followed, with Enron named as one of Fortunes’ most admired companies in 2001 and its stock price peaking at $90.56 a share on August 23, 2000” (Sundem 2003, p. 1). Nevertheless, the approach that Lay adopted could be deemed as the development of the platform for Enron to steer off the traditional ethical path and consider the idea of a financial fraud.

However, merely changing the ethical principles in accordance with which Enron operated was not enough. Apart from developing the platform for the change to occur on, the people involved needed to alter the principle of accounting adopted in the firm so that the environment for fraudulence could be designed. Specifically, the necessity to switch from the current standard to the Mark-to-Mark approach could be viewed as the key element of the preparation. The specified necessity was predetermined by the fact that the company should be able to keep up the pace with the contemporary economy. By definition, a mark-to-mark accounting strategy presupposes that the expected financial benefits should be included in the calculations prior to their acquisition (Miller 2010). Therefore, the specified type of accounting could help the firm set specific boundaries for taking expenses. However, it was used instead to cover up for the fraud that Jeff Skilling, the company’s CEO, was about to make.

It would be wrong to assume that every newcomer in the organization contributed to conceiving the crime. Quite on the contrary, Andrew Fastow, one of the company members arriving roughly at the same time that Skilling did, was credited as the financial genius, as “Much of the company’s success was attributed to the financial wizardry of Fastow” (Sundem 2003, p. 1). In other words, Fastow’s strategy worked wonders as far as an attraction of new investors was concerned.

Unfortunately, Fastow’s actions only aggravated the situation as they allowed for creating the bait for other companies to fall for the unreasonably high increase in the company’s stock prices, which followed the financial fraud, could only be viewed as an attempt to hold the company that was falling apart together for a while. Indeed, the sharp increase in the firm’s stock prices was rather impressive at the time. According to the existing records of the organization, the company was delivering very poor performance, yet its stock prices were kept very high, which tricked investors into supporting the organization. The reasons behind the actions of the people involved were rather basic. Fearing to find themselves completely bankrupt, they put the firm’s reputation at stake, thus, sacrificing its good name and corporate ethics: “If a few rules actually got broken, it was not so bad either. The shackles needed to come off. It is hard to consider what you are doing fraudulent if you do not think that following the rules conveys much truth either” (Langevoort, 2003, p 10).

The expansion into new markets has also created premises for the firm to increase its stock prices. Being under the illusion that Enron functions perfectly, its numerous investors and customers considered it an asset, thus, encouraging the further devolution of the corporate fraud. To camouflage the dents in the financial strategy of the organization, Enron’s leaders suggested that the employees should invest in the organization as well, therefore, tricking people into giving the entrepreneurship additional $401,000. As a result, the stock prices of Enron rose as high as they could possibly get despite the deplorable state of the company’s Finance Department.

Needless to say, the demise of the company affected the people who had invested in its development greatly. Seeing that Enron promised to be prosperous entrepreneurship based on its stock prices, people invested in it by buying its stocks in an ample manner. As a result, when the firm announced its bankruptcy and the fraud was unveiled, every person investing in its development suffered an extensive financial damage. Likewise, the people, who had trusted Enron with their pensions, were also robbed of their investments.

The infamous scandal that Enron was involved in provided a lot of food for thoughts for the U.S. accounting services and served as a bitter yet important experience to draw essential lessons from. Particularly, the case of Enron triggered the acknowledgment of the necessity to reinforce the existing system of financial control over organizations and their key transactions.

Indeed, a closer look at the contemporary principles of carrying out a financial analysis and checking the companies’ operations will reveal that a range of measures has been taken on a corporate and state level to avoid any further instances of a corporate fraud. Particularly, the adoption of the Sarbanes-Oxley Act deserves to be mentioned. According to the existing definition, the specified regulation is supposed to create premises for tracking down any instances of unlawful financial transactions. The specified goal presupposed accomplishing two main objectives. First, a regulation committee was created to supervise the designated area and address any instances of suspicious financial activities in the U.S. economic environment. Known as Public Company Accounting Oversight Board (PCAOB), the board “is in charge of registering and inspecting public accounting firms, and for adopting and modifying audit standards” (Donald & Ghoddoucy 2003, par. 4). The second objective involved the design of the so-called micromanagement principles. The given requirements could be described as liberating for the leaders of global companies, as they did not require state governance of the global organizations and instead promoted the idea of local governance. This laissez-faire approach allowed for an impressive amount of flexibility for the leaders of the organizations to make local decisions that affected the viability of the firms, yet they also promoted clarity as the basis for the firms to build their financial strategies on.

Moreover, substantial changes have been made to the reporting format of the U.S. Securities and Exchange Commission (SEC). Primarily, the current strategies are aimed at increasing the assurance of the credibility of the financial reports filed by a company. As the infamous case of Enron’s scandal has shown, the approach previously adopted by SEC to review the financial transactions of the corresponding companies did not hold any water due to the lack of consideration of the reports’ credibility: “The SEC has lived nearly all its life in a world of chronically inadequate resources, for reasons that are complex but I suspect at least include the business community’s unwillingness to let go of the underlying rents” (Langevoort, 2003, p. 3).

Needless to say, the above-mentioned changes affected companies and investors not only in the US and the UK but also all over the world. Naturally, the specified change triggered an increase in complexity rates of the financial processes, as the reporting system require a consistent update on the changes in the organization. Regardless, the positive effects of the given innovation are still evident. Specifically, a rise in the security rates for the states involved must be viewed as the greatest accomplishment. With clarity as the basis or most financial transactions, the threat of investing in a fraudulent organization is reduced nearly to zero. Moreover, the specified innovation has contributed to shaping the corporate culture considerably. Particularly, the promotion of strong corporate ethics needs to be brought up as an essential outcome. The corporate culture, therefore, is aimed nowadays at meeting the needs of the key stakeholders instead of making quick cash (Fisher 2004).

Last but definitely not least, the fact that CEOs are nowadays held responsible for the financial frauds taking place in their companies needs to be discussed. The specified change guarantees that the company leaders are most likely to do everything possible to eradicate the slightest chance of a financial fraud to occur. Therefore, financial security rates have been increased significantly after the analysis of the mistakes made with Enron.

In a retrospect, the infamous case of the Enron fraud may have been prevented with the reinforcement of the corresponding regulations. However, to eliminate the threat of the scandal completely, one would have had to change the way in which people viewed the concept of entrepreneurship at the time. In other words, the reinforcement of financial security would only have led to people searching for other avenues of committing the fraud, whereas the reconsideration of the corporate ethics would have altered people’s concept of financial fraud, thus, convincing them to abandon the very idea (Brigham & Houston 2011).

In other words, the regulations that had to be made tighter concerned not only the security system, although the latter also mattered significantly, but the corporate ethics and people’s concept of corporate justice. Thus, the redesign of the company’s vision was required to avoid the problem in question. The specified change could have happened once the corresponding regulations regarding the need to promote the policy of clarity and corporate social responsibility in the global environment had been suggested at the time. The enhancement of the legal regulations, in its turn, may have postponed the fraud, yet it would not have prevented it. People had to come to the conclusion that corporate fraud inevitably leads to failure no matter how much money it promises since it triggers an inevitable drop in the firm’s trustworthiness and credibility as a partner and the provider of products or services (Dewing & Russell 2003).

Indeed, the further analysis of the surge of responses that the Enron scandal triggered showed that, as bitter as it was, it still contributed to the further evolution of the global financial security and the reconsideration of the audit system as the basis for promoting clarity in the global economy environment. As Masters (2011) explains,

The Enron experience – particularly the unsuccessful efforts of insider Sherron Watkins to highlight and stop the fraud – also continued to resonate in Congress where it helped lead to provisions in the 2010 Dodd-Frank Reform Act that protect whistleblowers and give them a share of any penalties recovered because of their information. (Masters 2011, par. 13).

Therefore, making the financial regulations and the supervision of the company’s financial transactions tighter may have postponed the scandal, yet, without the proper ethical values, the leaders of the organization would still have found a way to evade the existing regulations and abuse their rights. In other words, to promote changes in the organization, one must alter its ethics and system of values.

The participation in the massive corporate fraud that Enron was involved in resulted in major negative consequences for all involved. Particularly, the people responsible for the financial crime and the concealment of the documents that displayed the drastic state of the entrepreneurship received rather severe punishments. For instance, Skilling was sentenced to 24.5 years of imprisonment after he had been convicted of fraud. In addition to the charge mentioned above, Skilling was convicted of conspiracy and making false statements (Atrill & McLaney 2014). Last but definitely not least, insider trading was added to the list of his crimes prior to him being sentenced to the specified punishment. Skillet’s accomplices also received rather harsh prison sentences.

The punishment that Skilling and the rest of the Enron members received seems rather appropriate based on the current legislation of the U.S. However, the fact that the current justice system is based on punishing criminals rather than rehabilitating them clearly is a major dent that contributes to the further development of even more sophisticated crime plots in the financial field. It seems that the focus should be shifted to the rehabilitation process and the provision of refunds to the people that suffered from the actions of the malefactors. It is rather doubtful that, after serving their sentences, the former members of Enron will mend their ways and accept the idea of corporate responsibility (Owen 2005). Instead, it is highly likely that they will try conjuring further plans of corporate fraud that will help them evade the law and, therefore, cause even more harm. Therefore, the penalties for the people involved in the scandal are appropriate, yet they clearly lack the element that can be defined as a chance for redemption. It is strongly suggested that the measures for the reinforcement of the basic ethical principles and the idea of responsibility should be undertaken (Apostle 2010).

The changes in question, however, are not as hard to carry out in the environment of the modern global economy as they were a decade ago. With the introduction of the principles of the corporate social responsibility, the concept of sustainability and the understanding of the need to promote the satisfaction of all stakeholders involved, most companies are likely to accept the basic principles of corporate ethics. Moreover, the specified environment is also perfect for the rehabilitation of the people such as the members of Enron.

Reference List

Apostle, J 2010, ‘The role of remorse in court convictions’, Financial Times. Web.

Atrill, P, & McLaney, E 2014, Accounting and finance: an introduction, 7th edn, Financial Times Prentice Hall, Upper Saddle River, NJ.

Brigham, E F, & Houston, J F 2011, Fundamentals of financial management, concise, 7th edn, South-Western College Publishing, Chula Vista, FL.

Chandler, R C 2014, Business and corporate integrity: sustaining organizational compliance, ethics, and trust, ABC-CLIO, Santa Barbara, CA.

Dewing, I P & Russell, P O 2003, ‘Post-Enron developments in UK audit and corporate governance regulation’, Journal of Financial Regulation and Compliance, vol. 11, no. 4, pp. 309–322.

Donald, E, & Ghoddoucy, S 2003, Corporate governance and Sarbanes-Oxley “Post-‘Post-Enron’” an interview with Professor Thomas Joo of UC Davis School of Law. Web.

Fisher, K R 2004, ‘The higher calling: regulation of lawyers post-Enron’, University of Michigan Journal of Law Reform, vol. 37, no. 4, pp. 1017–1144.

Herrick, T, & Barrionuevo, A 2002, ‘Were Enron, Anderson too close to allow auditor to do its job?’, The Wall Street Journal. Web.

History of Enron Corporation 2015. Web.

Langevoort, D C 2003, ‘Managing the expectations gap in inventor protection: the SEC and the post-Enron reform agenda’, Villanova Literature Review, vol. 48, no. 4, pp. 1–28.

Masters, B 2011, ‘Enron’s fall raised the bar in regulation’,Financial Times. Web.

McLean, B, & Elkind, P 2013, The smartest guys in the room: the amazing rise and scandalous fall of Enron, Penguin, New York City, NY.

Miller, D S 2010, ‘A progressive system of mark-to-market taxation’, Tax Analysis, vol. 1, no. 109, pp. 1047–1080.

Owen, D L 2005, CSR after Enron: a role for the academic accounting profession?, International Centre for Corporate Social responsibility, Nottingham.

Sundem, G L 2003, Ethics and financial reporting in a post-Enron environment. Web.

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Instance of a Corporate Fraud: The Case of Enron

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