Business / Enron Scandal: Who Are Responsible For EnronЎ¦S Bankruptcy

Enron Scandal: Who Are Responsible For EnronЎ¦S Bankruptcy

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Autor:  anton  20 December 2010
Tags:  Scandal,  Responsible,  Enrons,  Bankruptcy
Words: 801   |   Pages: 4
Views: 931

Enron was once one of the world's leading electricity, natural gas, pulp, paper and communications companies. However, in December 2, 2001, Enron suddenly filed for bankruptcy. During the ten years before EnronЎ¦s went bankrupt, EnronЎ¦s management had started transferring EnronЎ¦s funding to personal accounts and made fake balance sheets, which provided investors information about how this company goes. (Gibney, 2005) These illegal actions, performed by certain individuals, finally led Enron to go bankrupt. These peopleЎ¦s unethical behaviors such as CEO (Chief Executive Officer) of Enron, auditors and journalists caused Enron to go bankrupt, and therefore are responsible for EnronЎ¦s bankruptcy.

First of all, the hypocrisy and dishonorable actions of Kennie Lay, the former CEO of Enron, led to EnronЎ¦s bankruptcy. In August of 2000, when EnronЎ¦s stock price reached $90, investors were told to buy the stock because Kennie Lay informed them that it would climb until more than $130. However, at this time, Kennie Lay started selling his stocks because he knew EnronЎ¦s financial problems and predicted the stock price would drop off. (Sherman, 2002, p. 22-28) As an Enron executive, all of his concern should be focus on EnronЎ¦s profits, but all he cared about was his property. When Kennie Lay noticed EnronЎ¦s financial problem, he did not attempt to fix it, but made effort to maintain his own benefit and ignored the whole companyЎ¦s and investorsЎ¦ loss. His selfish and unethical behavior not only deceived the investors but also finally resulted in EnronЎ¦s bankruptcy. Therefore, Kennie Lay is one of the causes of EnronЎ¦s bankruptcy. In addition, auditors also played an important role in EnronЎ¦s downfall.

Auditors who were negligent of their duties caused EnronЎ¦s bankruptcy. Jeffrey Madrick, an editor of Challenge Magazine and a contributing columnist to The New York Times, reported, Ў§most of the earning in three of the last five years were bogusЎKapparently, nobody was looking at cash flow, or if there were, they didnЎ¦t want to find out the truth.ЎЁ (2003, p. 5) As an auditor, the first job he needs to do is to check if this company has any financial difficulties or any unusual financial running. If a company has not made any profit for three years, it is an unusual situation and the auditors should have the ability to figure it out immediately and report it honestly on the balance sheet. Because of auditorsЎ¦ negligence, society never noticed EnronЎ¦s financial problem and was finally astounded by EnronЎ¦s bankruptcy. Moreover, journalists also play an important role in EnronЎ¦s downfall.

JournalistsЎ¦ corruption and negligence incurred EnronЎ¦s bankruptcy. Before Enron went bankrupt, Beth McLean of Fortune Magazine wanted to write a story to report that she could not find out how Enron made money. Later while EnronЎ¦s management received this news, they made every effort to stop this news publishing. (Madrick, 2003, p. 5) If Beth McLean published this story before the bankruptcy, investors may have gotten some warming and they would not have bought the stocks. Unfortunately, because of journalists bribes, investors did not realize the actual situation of Enron until Enron went bankrupt. Furthermore, journalists kept reporting some positive news about Enron without checking the dependability. Jeffrey Madrick mentioned, Ў§ in many cases, if you read Business Week about Enron or you read Fortune about Enron, it was not merely that such and such an analyst on Wall Street said Enron is a great company. ItЎ¦s that the journalists themselves were saying Enron is a great companyЎK Journalists took it for granted that Enron was a great company.ЎЁ (2003, p. 6) Because of journalistsЎ¦ falsity, investors and society believed that Enron was a great company and this confusion gave Kennie Lay the chance to steal the investorsЎ¦ money. Therefore, journalists are one of the causes of EnronЎ¦s bankruptcy.

All in all, in order to prevent this from happening again because EnronЎ¦s bankruptcy serious affected U.S. economy, Anna Schiffrin provides some effective techniques to figure out a companyЎ¦s finance:

l Read the footnotes: The footnotes, which are always on the bottom of a companyЎ¦s financial statement, often include some crucial information that does not appear in the body of the statement.

l Compare competitors: Comparing companies in the same field can give you a benchmark. For example, comparing how company X and company Y do their accountings can reveal some strange accounting practice and then later can help with an examination that is deeper.

l Figure out if a company is paying its bills: If a companyЎ¦s payables rise more than the cost of goods sold on the profit and lost statement, it could be a sign of cash-flow problems, or that a company canЎ¦t pay its bills.

(2002, p. 29)

In conclusion, Enron did not collapsed as a result of one event, but rather by several events. Kennie LayЎ¦s unethical behavior, auditorsЎ¦ negligence and journalistsЎ¦ false reports all aided in EnronЎ¦s demise.

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