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Enrons Scandal

The Enrons Scandal and its Consequences


Jorge Gonzalez, Jose M. Flores, Amanda Gaona, Gabriela Rodriguez
South Texas College

Accounting History and Regulations


Problems surge now and then especially when money is involved. Such has been the

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case of many accounting firms that have taken advantage of the poor system to enrich
themselves and the corporations that they are doing the accounting for. Many problems arose
dating back to the 1920s. The 1920s was a period of industrial growth. With this growth came a
big surge of stock prices. Automobiles, oil, steel, radio communications, and real estate drove
market prices to a record high for that time era (Pearlstein, 2002). During this time accounting
measures were poorly enforced and accounting firms were manipulating reports in order to
enable corporations for business loans. By doing so they could hide losses and increment gains.
This would look tempting for banks to give out loans. During these times, it was so easy for
accounting firms to manipulate the books and to report fraudulent numbers. Their incentives
were driven by their personal gains. For corporations, it was much more. They would have
more investors and more power. Power was very important because the more powerful the
business the more likely it would control most of the market. Unfortunately the results were
frauds such as the Ponzi Scheme, diminished market values and the crash of 1929 (Howard
Rockness, 2005) Soon after Congress responded with the Securities Act of 1933 and 1934 where
it established the US Securities and Exchange Commission or SEC. The SEC regulates
securities standards, and requires Certified Public Accountants or CPAs to go through regular
audits to ensure ethical behavior. This act was a big change in the accounting industry since it
would regulate their work (Howard Rockness, 2005). Although accounting firms were heavily
regulate, they did not stop security and accounting frauds. The 1960s saw various unethical
accounting behaviors in the real estate business. The 70s marked an era of international fraud
and bribery. These events brought the 1977 Foreign Corrupt Practices Act, which imposed new
ethical behaviors with foreign companies. The 80s brought a downfall of the real estate market
due to previous malpractices and correspondingly the fall of Wall Street with corruption. By

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1991 the FBI got involved with the persecution of securities fraud, savings and loans fraud and
accounting fraud. Several Acts were established to cover holes in the system such as the Federal
Deposit Insurance Corporation Improvement Act in 1991 and the Private Secuirtes Litigation
Reform Act of 1995. All these regulations lead to the discovery of the events happening with
Enron in 2001.
Enron Ethics
Big business is a major facet in the United States today. It seems that everywhere you
look that organizations and companies are looking for efficiency and they will take it any way
they can get it. This can sometimes conflict with principles that are also needing to be looked at.
For instance, the notion of business ethics is something companies sometimes refuse to
acknowledge and that is where big business attracts big trouble. The Enron scandal was infamous
for pushing the ethical envelope all that they could which led to their downfall. So infamous that
this is a case to be studied and learned from, so that future ethical minds can avoid the pitfalls
and the perils that come from short-cutting and the execution of unethical business practices.
Like Enron, the temptations of having ethics take a back seat to profit might seem in the short
term a good idea, but this can lead to consequences that may be irreversible
The Rise and Fall
Starting out as struggling Pipeline Company in 1985, Enron soon redefined its identity as
an energy broker instead, profiting from the buying and selling exchanges from products. It soon
grew as a powerhouse and its belief was that they needed to push the limits for survival. It grew
so big that it needed to deter any negative earnings outlook, which led to mischievous accounting
methods to uphold such a monster of a company they had become. One such method of cooking
the books was that of SPV's (special purpose vehicles). These were in a sense false created

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partnerships which allowed Enron to fabricate earnings and report profits before they actually
happened to fool the business world. If ever the earnings were questioned, they simply were
shifted around from SPV to SPV and wasn't noticed. According to Sims and Brinkman (2003)
Moving debt was as easy as pre-dating a check, and would harm no one, and therefore was not
an ethical issue (p. 245). Enron was in trouble. In order to keep the SPV's from being looked at
by the SEC (Securities Exchange Commission), they needed to not be classified as subsidiaries.
Having an impeccable accounting and legal team, a loophole was found. Enron's SPV's would
not be considered subsidiaries as long as 3% of their equity came from outside investors along
with management, which also had to be separate and independent. Of course this delighted Enron
as they could easily manage such a feat; or so they thought. Conflicts of interest arose. Andrew
Fastow, former CFO of Enron was partial owner of two SPV's along with other key players in the
organization. The cooking of the books was being shielded pretty well until many executives
started rewarding themselves in ways that were difficult to hide from prying eyes. The snowball
effect had taken over, promises that were made could not be delivered and robbing Peter to pay
Paul tactics had run out. At the brink of Enron's demise they needed to renounce $390 million
and were forced to report records dating back to 1997 in the amount of $586 million which was
just a fifth of what they initially stated they had made that year. In 2001 during the wake of all
this devastation, even the companys leader (CEO) Jeffery Skilling resigned and sold all of his
stock valued at $66 million. Such a promising company from humble beginnings rose and fell in
such a way that shocked the world with their lack of ethics and morality (Sims & Brinkman,
2003).
It is a lesson to learn from, to be a part of a scandal like that would hurt ones reputation
and make it difficult to find work later down the road.

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As it is noted in our Organizational Ethics book, it all begins with laying an Ethical
Foundation, with practicing Ethics in an Organization and Promoting Ethical Global Citizenship.
If only Enron had make better decisions since the beginning, they might not have found
themselves in the mess they created. By adopting ethical perspectives, we have a better chance of
making better decisions. It is up to each and every person within an organization to be an ethical
change agent. When we know enough about out morals, our character, our skills and limitations,
we can begin to model that desired behavior for the organization. Every organization must also
have an ethical leader. This leader will serve as a moral guide even when faced with all the
challenges it carries. On the followership side, challenges are also present but not impossible to
overcome. Followers have a responsibility to become engaged and to have courage. It is also
important to uphold the organization to high standards when we look at it as a global society. We
need to look at what society expects an organization to be; be profitable, be just, be beneficial to
society and to be environmentally responsible.

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References
Sims, R.R., & Brinkman, J. (2003). Enron ethics (or: culture
matters more than codes) Journal of Business Ethics, 45 (3), 243-256
Last Name, F. M. (Year). Article Title. Journal Title, Pages From - To.
Last Name, F. M. (Year). Book Title. City Name: Publisher Name.

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Footnotes
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Figures

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