ENRON

What do you think are the most important lessons to be learned from the Enron scandal? The Enron scandal is the most significant corporate collapse in the United States since the failure of many savings and loan banks during the 1980s. This scandal demonstrates the need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business Why did this happen? There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures. The root cause of this failure is the fact that every person who participated did so in their own personal interest. The Enron officers manipulated the financial statements so as to benefit from their high compensation packages in pretence of best performance. The auditors and the lawyers were interested in their fees rather than giving out the true position of the company. This failure occurrence was driven by ethical egoism where the only interest was to promote is self-interest.

Conflict of Interest The purpose of an auditing firm is to work with the board in checking the state of a firm's finances. It is supposed to act as the diagnostic eyes and ears of the stockholders. In Enron's case, however, Arthur Andersen was also a consultant to Enron. This meant that the auditors had an interest in the continued prosperity of the firm and, therefore, had no incentive to expose the fraudulent record books Enron kept. Again --- so long as the money rolled in, and the board was happy, there was no incentive to blow the whistle. Legislation The Enron scandal was the real cause of the 2002 passage of the Sarbanes-Oxley Act. This act sought to eliminate the conflict of interest between auditors and firms. It empowered the federal government to create its own auditing boards and commissions that exist to make sure such collusion never happens again. Executives in all firms, according to the act, are to take total, personal and financial responsibility for the accuracy of all financial reports made available to the pubic and stockholders.