CHRISTIAN COLLEGES OF SOUTHEAST ASIA

BACHELOR OF SCIENCE IN ACCOUNTANCY

A CASE STUDY OF THE ENRON SCANDAL

GOVERNANCE, BUSINESS ETHICS,

RISK MANAGEMENT, AND INTERNAL CONTROL

MEMBERS:

Baquial, Kaye

Lim, Pablito Jr B.

Roa, Shaine A.

January 2025
 I. INTRODUCTION

The rise and fall of Enron Corporation serves as a stark example of how corporate
success can quickly unravel when ethics and transparency are compromised.
Founded in 1985 through the merger of Houston Natural Gas Corporation and
InterNorth, Inc., Enron evolved from a modest gas pipeline and oil exploration
company into the world’s largest energy trading firm within a span of 16 years. On
the 2nd of December 2001, Under the visionary leadership of Jeffrey Skilling, Enron
had climbed to 7th place in U.S. revenue rankings. However, behind its impressive
financial reports lay a web of fraudulent accounting practices designed to hide
massive debts and inflate profits. When these unethical practices were exposed,
Enron’s dramatic collapse became one of the most infamous corporate bankruptcies
in history. This case study examines the key decisions and leadership failures that
contributed to Enron's rise and subsequent fall, delves into the financial
mismanagement at its core, and explores how the scandal reshaped corporate
governance and financial regulation on a global scale.

II. CORPORATE GOVERNANCE

Corporate governance is a crucial aspect of business operations, playing a central

role in ensuring both corporate success and broader social welfare. The Enron
scandal serves as a stark reminder of the consequences of weak governance
structures and policies, demonstrating how their failure can lead to significant
corporate collapses. This case highlights the critical need for reform in corporate
governance practices at both national and international levels. In response to high-
profile corporate disasters like Enron, governments around the world have taken
proactive measures to prevent similar occurrences in the future. One notable
response was the enactment of the Sarbanes-Oxley Act in 2002 in the United States,
a direct result of the Enron collapse.

Consequently, corporate governance encompasses the systems of rules, processes,

and practices that define the relationships between investors (shareholders) and
investees (management). In Enron’s case, its management was able to manipulate
financial reporting and hide massive debts due to poor governance and a lack of
effective oversight, ultimately leading to its downfall. This case underlines the
importance of strong, transparent governance in protecting the interests of
shareholders and ensuring that companies operate with accountability and integrity.
III. AREAS OF CONSIDERATION (SWOT)

STRENGTH:
● Innovation and Adaptability: Enron was highly innovative, successfully
adapting to the changing energy market by embracing energy trading and
creating new financial products like derivatives.
● Strong Financial Performance: During its peak, Enron demonstrated
impressive financial growth, positioning itself as 7th in terms of revenue in the
United States.
● Risk-Taking Capability: Enron was bold in its willingness to take on
increased risks in pursuit of higher returns, particularly in the energy trading
and commodities markets, which initially paid off and boosted its market
position.

WEAKNESSES:
● Greed and Unethical Practices: Enron's corporate culture was marked by
greed and a desire for short-term profits, which ultimately led to fraudulent
accounting practices.
● Failure of the Board of Directors: The Board of Directors failed to effectively
monitor the company’s activities and ensure ethical practices. Their lack of
oversight contributed to Enron’s financial mismanagement and eventual
collapse.
● Conflict of Interest: Key executives, including CEO Kenneth Lay and CFO
Andrew Fastow, had significant conflicts of interest.

OPPORTUNITIES:
● Business Innovation and Growth: Enron had the potential to continue its
growth and innovation, particularly in energy trading and risk management.
● Market Expansion: Enron could have expanded into new markets, both
domestically and internationally.

THREATS:
● Increased Competition: As other companies entered the energy trading
market, competition in the industry grew. Enron faced the challenge of
maintaining its dominance amid increasing rivals in the trading and energy
sectors.
● Changes in Energy Regulations: Deregulation of the energy market and
potential changes in government policies posed a significant threat to Enron’s
business model, which relied heavily on the lack of regulation in energy
markets.
● Corporate Culture of Greed and Deception: The company’s toxic culture of
greed and deception created an unsustainable business environment, where
 employees and management were incentivized to conceal financial difficulties
rather than address them openly.

IV. PROBLEM IDEATION

The central problem affecting Enron Corporation lies in the failure of its board of
directors to provide effective oversight and challenge unethical corporate practices,
which ultimately led to its collapse. In 1999, the board allowed CFO Andrew Fastow
to create private partnerships, waiving conflict-of-interest rules and enabling
transactions that concealed debts and liabilities. This lack of scrutiny contributed to
the company’s financial manipulation, where debts were hidden, and profits were
artificially inflated, misrepresenting Enron's true financial health.

Additionally, the company’s shift from tangible assets to speculative energy

derivatives and natural gas commodities trading in the 1990s exposed Enron to
higher financial risks. To sustain its aggressive expansion, Enron's mounting debt
ratio led to increased financial leverage, which in turn affected the stock price and
executives' stock options. As a response, executives began using creative
accounting to “window-dress” Enron’s financial records. One prominent accounting
practice involved the use of special-purpose entities (SPEs), which were initially
meant for legitimate corporate objectives but were manipulated to conduct off-
balance sheet transactions that hid the company’s true financial condition.

Overall, corporate governance in Enron was weak in almost all aspects. Thus, the
board of directors is composed of a number of people who lacks moral character.
Also, they are often willing to engage themselves in fraudulent activity. This was the
genuine root of the company’s corporate governance failure. These factors all
contributed to a culture of financial mismanagement, which eventually led to Enron’s
downfall.

V. DECISION CRITERIA

The decision-making criteria for addressing the collapse of Enron revolve around
ensuring strong corporate governance, financial transparency and fostering an
ethical corporate culture. These criteria are essential to prevent the recurrence of
similar issues in other organizations. Potential alternative solutions include:

 Strengthening corporate governance through more rigorous oversight,

which would reduce conflicts of interest and improve accountability, though it
may slow decision-making and increase costs.
 Implementing stronger financial controls and transparency measures to
provide accurate reporting and reduce hidden debts, at the cost of potentially
disrupting current business practices.
  Establishing whistleblower programs and reinforcing ethical standards
to foster accountability, though this could create challenges such as false
reports or retaliation.

VI. RECOMMENDATION

A strong and ethical corporate culture is essential for any company's long-term
success. In Enron’s case, a toxic corporate culture driven by excessive ambition and
a disregard for transparency contributed significantly to its collapse. Senior
executives prioritized maintaining Enron’s image of success rather than addressing
financial losses, leading to unethical practices such as concealing debts and
manipulating earnings. To prevent similar failures, companies must foster a culture
of integrity and accountability, ensuring that financial and operational risks are
managed transparently.

Stronger corporate governance is also crucial. Boards of directors must actively

supervise executives and ensure that business practices align with ethical and legal
standards. Increased oversight, stricter internal controls, and greater transparency in
financial reporting could have mitigated Enron’s fraudulent activities. Additionally, the
government should enforce stricter regulations to prevent corporate misconduct and
protect investors.

Lastly, ethical responsibility should be a priority for business leaders and financial
professionals. Managers and accountants must act in the best interest of the
company and its stakeholders by maintaining honest financial reporting and adhering
to professional standards.

VII. IMPLEMENTATION

To ensure the effective implementation of the recommended actions, a structured

plan with clear timelines and responsibilities must be established.

1. Corporate Culture Reform (0–6 months)

 Conduct company-wide ethics training for employees and

executives to promote a culture of integrity.
 Establish a whistleblower protection program to encourage
transparency and accountability.

2. Strengthening Corporate Governance (6–12 months)

 Restructure the board of directors to include more independent

members to ensure unbiased oversight.
  Implement regular board audits and financial reviews to prevent
fraudulent reporting.

3. Enhancing Financial Transparency (12–18 months)

 Enforce stricter accounting policies to ensure accurate reporting of

profits and losses.
 Require external audits by independent firms to verify financial
statements.

4. Regulatory and Legal Compliance (18–24 months)

 Advocate for stronger corporate regulations and compliance with

financial laws.
 Work with government agencies and industry regulators to establish
clear guidelines.

By following this structured approach, companies can create a sustainable and

ethical corporate environment, reducing the risk of financial mismanagement and
corporate scandals.

VIII. EVALUATION AND CONTROL

To ensure the effectiveness of the implemented reforms, continuous

evaluation and control mechanisms must be established.

 Regular Audits: Internal and external audits should be conducted

every six months to assess financial transparency and compliance with
governance policies, with findings reported to the board of directors.
 Performance and Ethics Reviews: Annual assessments should
measure improvements in corporate culture and ethical practices,
overseen by the Human Resources and Compliance departments.
 Whistleblower Monitoring System: Quarterly reports should be
analyzed to identify potential ethical violations, ensuring that concerns
are addressed promptly and confidentially.
 Risk Management Oversight: A risk management committee should
meet biannually to evaluate the company’s financial health and
operational risks, implementing corrective measures when necessary.

By implementing these control mechanisms, the organization can sustain

ethical practices, maintain financial stability, and prevent governance failures.
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