Technological Institute of the Philippines

Quiapo, Manila

Enron: Questionable
Accounting Leads to Collapse

Submitted to:
Mrs. Regalado
Submitted by:
Fred Austie G. Dones
AC31FB1
1.0 Time Context
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the
Enron Corporation, an American energy company based in Houston, Texas, and the

dissolution of Arthur Andersen, which was one of the five largest audit and accountancy
partnerships in the world. In addition to being the largest bankruptcy reorganization in
American history at that time, Enron undoubtedly is the biggest audit failure. It is ever
the most famous company in the world, but it also is one of companies which fell down
too.
2.0 Viewpoint
This analysis will take the viewpoint of Jeffrey Skilling, the CEO of Enron.
3.0 Central Problem
Enron Corporation, which once ranked among the top companies, collapsed under a
mountain of debt that had been concealed through a complex scheme of off-balancesheet partnerships.
4.0 Statement of Objectives
4.1 Must Objectives
-

Losses should be recovered

Enrons Corporate Culture must be changed
To revive Enron
To properly record accountable events and to observe correct audit

4.2 Want Objectives

-

To establish a good relationship between those in the top management and

those who are in rank and file
To sanction those who needs to be punished
To have other sources of investments
To venture into another source of income

5.0 Areas of Consideration

5.1 Internal Environment
5.1.1 Strengths

The Enron Corporation is a big company globally known

The Enron Corporation is involved in distributing major
necessities such as gas and electricity
The Enron Corporation is Wall Street Favorite

5.1.2 Weaknesses

Intense, unethical competition amongst employees

Income is overstated
Off-balance-sheet transactions are still recorded in the books
Losses are almost impossible to be recovered

5.2 External Environment

5.2.1 Opportunities

The Enron Corporation can easily attract investors and buyers

of its stocks
The Enron Corporation, being a Wall Street favorite can gain
back what is lost
Should the Enron Corporation diverse its corporate culture, it
can positively access the full potential of its employees
without harsh competition

5.2.2 Threats

If things dont improve, over the next five years one may imply
that it is the bitter farewell for the Enron Company
Should its corporate culture be continued, unethical behavior
will always be a threat
Almost everyone in the corporation is morally responsible for
the downfall, should it continue, employees will not be
benefited from the companys earnings

6.0 Alternative Courses of Action

1
A more complete system is needed for owners of a company to supervise the
executives and operators and then get the idea of the companys operating situation. There
is no doubt that more governance from the board may keep Enron from falling to
bankruptcy. The boards of directors should pay closer attention on the behavior of
management and the way of making money. In addition, Enrons fall also had strikingly bad
influence on the whole U.S. economy. Maybe the government also should make better
regulations or rules in the economy. And maybe business ethics is the most thesis point
people doing business should focus on. As a loyal agent of the employer, the manager has a
duty to serve the employer in whatever ways will advance the employer's self-interest. In

this case, they violated the principle to be loyal to the agency of their ENRON. Especially for
accountants, keeping a financial statement disclosed with true profits and losses
information is the basic responsibility that they should follow.
2
There should be a healthy corporate culture in a company. In Enrons case, its
corporate culture played an important role of its collapse. The senior executives believed
Enron had to be the best at everything it did and the shareholders of the board, who were
not involved in this scandal, were over optimistic about Enrons operating conditions.
When there existed failures and losses in their company performance, what they did was
covering up their losses in order to protect their reputations instead of trying to do
something to make it correct. The to-good-to-be-true should be paid more attention by
directors of board in a company.
The next thing to do is to think of another way of accounting. Mark to market is a
plan that Jeffrey Skilling and Andrew Fastow proposed to pump the stock price, cover the
loss and attract more investment. But it is impossible to gain in a long-term operation in
this way, and so it is clearly immoral and illegal. However, it was reported that the then US
Security and Exchange Commission allowed them to use mark to market accounting
method. The ignorance of the drawbacks of this accounting method by SEC also caused the
final scandal. Thus, an accounting system which can disclose more financial information
should be created as soon as possible.
Lastly, convince Dynergy once more.
7.0 Final Decision
The second alternative should be chosen because it answers all the objectives needed
to be achieved. It has also a higher probability of success than the second one.
The decision is arrived at using this decision matrix
Decision Criteria
Ease of
Implementation
Probability of
Success
Answers the
problem
responsively
Total

Maximum
Percentage
10%

A.C.A. #1

A.C.A. #2

9%

7%

50%

45%

48%

40%

34%

36%

100%

88%

91%

*The better Alternative Course of Action is the A.C.A. #2

8.0 Detailed Action Plan

I.
II.

III.

IV.
V.
VI.
VII.

First, bend the corporate culture from harsh competition to a smarter and a
friendlier one.
Eliminate those people who are fraudulent and selfish through evaluation, even
those who are in the top management. The corporation needs a new set of
honest officers.
The next thing to do is to change its accounting policy. Even though the first one
covers major losses, still, it is not effective on the long run, so changing the
accounting policy will cover losses in a slower but a surer manner.
Attract investors, prove to them that Enron is still on the hook, hanging tightly,
needing to be trusted once again.
Convince Dynergy once again to purchase Enron even just for $5 billion; lower
than the $10 billion that was once negotiated
Change the auditing firm it is in partnership with.
Lastly, Skilling must utilize the strengths of his corporation, since it is an energy
distributor, it can once more become one of the biggest companies in the world
specializing in energy.

Reflection
One thing that I have learned in this case is that the end does not justify the means.
Even though what Enron used in covering its losses is an allowable procedure, it is still off-

balance-sheet, immoral, and does not take effect in the long-run. Another thing that I have
realized is that when at the peak of success; hold onto everything that you have to make
sure that youll not fall down back to the ground or worse, even deeper below the ground,
just like what happened to Enron, it was once known as one of the top 50, but now, nothing
can be recovered as if it did not really exist.
I also have learned in this analysis is that yes, competition brings out the best in
employees maximizing their potentials, but it somehow made them become unethical and
integrity was pushed aside. Competition is not a bad thing as long as it is a healthy one and
a friendly one.
Everything that is earned in a fraudulent manner will be taken away if not today,
may be in the future. Honesty is still the best policy. Those upper men, who made a way to
conceal the losses through partnerships, cannot evade the law and will be liable to
everything they have damaged. They fooled a lot of stockholders into investing into their
business not knowing that the losses of Enron are already accumulating.
In conclusion, I can see that a variety of perspectives can be applied to the Enron
scandal. Policy perspectives such as punctuated equilibrium and Edelmans symbolic
politics and constructing of the political spectacle help to frame the issue politically and
symbolically. Viewpoints such as mixed deontology and universal ethical egoism help to
understand how the culture of narcissism at Enron developed from an ethical framework.
Trait and transformational theories help us to make sense of what went wrong at Enron
from a leadership perspective. Historical, economic, and political conditions aid in making
sense of the situational factors contributing to the rise and fall of Enron. In the end, there is
no one answer why Enron became the largest bankruptcy in the United States history.
Perhaps, that is part of the reason why people continue to find the story so fascinating.