Ethical Corporate Governance: An In-Depth Analysis of the Enron Case

This report provides an in-depth analysis of the Enron case, focusing on the ethical failures and corporate governance deficiencies that led to its downfall. It examines the systematic accounting frauds, including the role of CFO Andrew Fastow and the use of Special Purpose Entities (SPEs) to hide debt and inflate profits. The report discusses the impact on the NYSE, the investigations by the SEC and US Justice Department, and the prosecution of Enron executives. It highlights the failures of the board of directors, the lack of auditor independence, and the ineffectiveness of the code of ethics. The report also explores the Sarbanes-Oxley Act of 2002 and its provisions aimed at improving corporate governance, auditor accountability, and executive liability. It concludes by emphasizing the importance of corporate governance, ethical behavior, and the lessons learned from the Enron scandal.

INDIVIDUAL REPORTT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSIONS..............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Ethical corporate governance process means the policies and processes that company
have in place for dealing with the issues concerned with how it will be administered and will be
conducting day to day business. It is essential to consider that the companies primarily exist for
creating products or services for generating profits Intention of the company must be balanced
with effective controls which ensures that firm pursues profits without crossing the line into
realms of the unethical behaviour. There are various companies who have exploited the market
positions for inhibiting the competition or for threatening the local populations. The report will
discuss the case of Enron who reported the financial condition by the systematic, institutionalised
and planned accounting frauds, in relation to the ethical corporate governance. The report will
also discuss Sabane Oxley Act, 2002.
MAIN BODY
Balance in pursuing the market opportunities to maintain accountability & the ethical
integrity is strong challenge for the enterprises. Responsibility and accountability of the business
enterprise subject to questions. Manifest failures of the business ethics and corporate governance
in world financial crisis had increased the urgency for search of governance and ethical
frameworks for the business. Corporate governance practices are concerned with having balance
in social as well as economic goals and in between communal and the individual goals.
Governance frameworks are there for encouraging effective usage of the resources and requires
answerability for the stewardship of different resources (Dibra, 2016). Objective is of aligning
interest of the corporations, individuals and the society. Ethical frameworks for the business
provides stronger base for exercising ethical reasoning and moral values.
Ethical CG policies should cover the conduct of the senior management of entity such as
board of directors, chief executive officer and other higher officials that are seen as exempted
from the normal frameworks implemented in company. It is multi – faceted with different
complexity layers. Important part of the cCG is concerned with the fiduciary duty, accountability
and audit and control mechanism.
Case Study of Enron and ethical corporate governance
Fall of the Enron in 2000s had bankrupted NNYSE and brought down firm amongst Big
5 accounting firms. It also made high shift in values for corporate governance in USA
1

Enron was big big MNC located in Houstan, USA. Enron was seventh largest company in
the list of fortune 500 companies in the world in 1999. In recent history by end of 2001, it was
biggest bankruptcy. Firm was engaged in construction business, energy as well as in allied
activities. It was progressive company having big media coverage, hard charging, high flying,
contracting and trading firm (Berglund, 2020). Share were traded on NYSE with big market
capitalisation. It earned high-level goodwill and also presented itself as the progressive company.
Corporation expanded in the traditional business for including marketplace for the
commodities and the risk management services. The Expansion allowed the company in
operating virtual market for the sellers, buyers and the transporters to involve in the transactions
(Corpoate Governance, 2019). Successful expansion made the Fortune list it as most innovative
company in 2000.
Plummet from grace of Enron began in October, 2001 when company announced $544
millions of charge against the earnings attached to the partnership transactions managed and
created by CFO Andrew Fastow & corresponding $1.2 billion decrease in the equity of
shareholders associated to the transactions (Hosseini, 2016). Prospects of Enron plunged into the
free fall when company announced of restatement of the financial statements from the year 1997
to 2001 due to the accounting errors which are made in relation to the transactions with the other
partnership managed by the employees of Enron. The accounting mistakes resulted in
overstatements of the income by $248 million and equity and understatement of reported dent of
company. Fastow received 30 million in relation to transactions between company and
partnerships. The announcement destroyed confidence of market in company and send it to
bankruptcy and gave rise to investigations by Securities Exchange Commission and US Justice
Department. Number of executives of Enron were prosecuted on charges related to fraud,
conspiracy, insider training and money laundering.
As per the reports by SEC, company entered in financial transactions designed for
keeping the assets & liabilities off from balance sheet and maintaining credit rating of company.
As per accounting rules company has to consolidate the financial statements with companies in
whom it is having majority stake (Admati, 2017). It took advantage of the accounting structure
for SPE and entered into various transactions with the SPEs setting up downfall for the company.
Chewco transaction of the Enron stood as example of the failed corporate governance
and the management oversight.
2

Public Company Accounting Oversight Board and independence & accountability of
auditors
The striking CG defects were in audit failure. Auditors not only failed to identify creative
accounting but also approved explicitly the book keeping practices. For preventing the audit
failures, the Sarbanes-Oxley has established Public Company Accounting Oversight Board. It is
working under the SEC oversight which is non profit corporation regulating the accounting firms
that provides audit services (Sorensen and Miller, 2017). In Sarbanes-Oxley, the public
accounting firms preparing audit report for the security issuers have to register with the PCAOB.
It has power of investigations and promulgating and to discipline the members.
SOX tool aim over accountability and independence of the auditors. Auditors are
prohibited now from giving the non auditory services to the clients. Engagement with the
auditors for consulting and auditing work has to be approved by the audit committee & the non
audit consultant services should be disclosed in periodic reports to investors. The provisions was
responded particularly for remedying criticism levels against Board of Enron for failing to prove
in the risky accounting practices. Audit committee has duty of sufficiently investigating state of
accounting practices of company. A layer was added by Sox for accountability which makes this
more likely than committee receiving such information.
Corporate responsibilities and the Executive Liability
Board of directors have fiduciary duty of providing oversight to company activities .
Board relies over management for handling daily operations for running the corporation and for
accurately reporting back to board. SOX targets reporting by management of the accurate
financial information increasing stakes for the senior officials of the publicly listed corporations.
CFO's and CEOs under SOX must certify non financial as well as financial information reported
to SEC or the criminal penalties(Solomon, 2020). Imposing the personal liability over certifying
corporate officers, it aligned interest of officers in the self preservations with the SEC's policy of
safeguarding the investors & for maintaining the efficient markets (Enron: Corporate
Governance, 2019).
An independent, active and a professionally qualified Board of company is critical for the
effective corporate governance. Company did not separated Chairman of Board and CEO role,
there was not diversification with only 1 woman in 17 seats. It also had various industry insiders
3

and the politicians that did not acted aggressively and consistently in best interest of the
company. In 1999, Board of Enron waived code of Ethics so that the Andrew Fastow could as
the general partner of new partnerships. Company had code of ethics but also suspended for the
benefits.
Lack of independence of Board and Andersen's Auditing services
The corporate governance functions for protecting the rights of its shareholders. But in
the case it failed. Result of the residual control right, discretions of the managers engaged to their
own benefits rather than the shareholder's interest. Expropriation of the fund by transfer pricing
method shows manager in the favour of self centred interests manipulating the financial
statements and abandoning the responsibilities to shareholders (MacCarthy, 2017). Use of stock
options for boosting prices also allocated costly risk takings that resulted Enron becoming hedge
funds accepting leverage bets that produce big disproportionate bonanza for the executives. The
downside problem was only for shareholders. It could not be denied that the executives stock
options would be aligning the shareholder and management interests that are restricted by the
funds in company are not able to draw the attention of the shareholders related to issues of fear
of getting replaced.
Technologies that are used for comprehending the ecompanies in the balance sheet
created transactions difficult and complicated to understand by the investors and did not allowed
them in looking further in financial position of the firm (Eckhaus and Sheaffer, 2018). Lastly,
unethical behaviour institutionalised in the Enron caused code of ethics of company
insignificant. It was proved that company did not followed code of conduct, ethics and
governance.
CONCLUSION
Corporate governance is organisational arrangement through which company represents
as well as serve interest of the investors. It includes everything from boards to executives
compensation schemes and bankruptcy laws. Systems of checks and the balance which supports
corporate governance is required to function effectively. Enron highlighted the essential
functions of the board, auditors and the disclosures and ethicality of the management. Corporate
governance could not prevent the unethical activities by the senior management. For
strengthening the corporate governance values Sarbanes Oxley was introduced.
4

REFERENCES
Books and Journals
Dibra, R., 2016. Corporate governance failure: The case of Enron and Parmalat. European
Scientific Journal. 12(16).
Berglund, T., 2020. Liquidity and Corporate Governance. Journal of Risk and Financial
Management. 13(3). p.54.
Hosseini, S.B., 2016. The Lesson from Enron Case-Moral and Managerial
Responsibilities. Journal of Current Research. 8(08). pp.37451-37460.
Admati, A.R., 2017. A skeptical view of financialized corporate governance. Journal of
Economic Perspectives. 31(3). pp.131-50.
Sorensen, D.P. and Miller, S.E., 2017. Financial accounting scandals and the reform of corporate
governance in the United States and in Italy. Corporate Governance: The International
Journal of Business in Society.
Solomon, J., 2020. Corporate governance and accountability. John Wiley & Sons.
MacCarthy, J., 2017. Using Altman Z-score and Beneish M-score models to detect financial
fraud and corporate failure: A case study of Enron Corporation. International Journal of
Finance and Accounting, 6(6). pp.159-166.
Eckhaus, E. and Sheaffer, Z., 2018. Managerial hubris detection: the case of Enron. Risk
Management. 20(4). pp.304-325.
Online
Enron: Corporate Governance. 2019. [Online]. Available through :
<https://academy.candriam.com/enron-why-corporate-governance-matters/>.
Corpoate Governance. 2019. [Online]. Available through :
<https://www.academia.edu/18825832/Corporate_Governance_Enrons_case_>.
5