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Enron's implosion in 2001 took the world capital markets by surprise and shook the investor confidence in accounting and financial reporting. It even caused the collapse of the prestigious international accounting firm of Arthur Andersen. From the most innovative corporation, Enron suddenly became the poster for executive greed and flaws in corporate governance. An event of the magnitude of Enron's collapse has serious consequences for the efficient functioning of capital markets worldwide. The purpose of this paper is to review Enron's growth, roles of its key executives, special-purpose entities and the auditors, and the prevailing corporate culture. The paper ends with the suggestions to improve corporate governance for preventing such future corporate failures.
Keywords: Enron, Enron's Implosion, Arthur Andersen, Special-purpose Entities, Corporate Governance
With the October 22, 2001 Securities and Exchange Commission (SEC) announcement of the inquiry of Enron Corporation's related-party transactions, Enron swiftly slid from its exalted position of the most innovative corporation (five years in a row per Fortune list) to the most publicly condemned large corporation of modern times. From the position of "can-do-no-wrong," Enron became a poster of executive greed, deceit at high places, abuse of accounting standards, auditor negligence, and every thing bad one can imagine in the world of high finances and corporate governance. When the going was good, with large political contributions Enron Chairman Kenneth Lay and many of his associates enjoyed the carefully cultivated favorable relations with both the Democrat and Republican politicians at high places. That political capital quickly evaporated the moment Enron's shenanigans came to light. The White House and members of the U.S. Congress distanced themselves from even a remote appearance of their past association with Enron. Its books were audited by the prestigious international public accounting firm of Arthur Andersen, LLP. Enron's implosion also led to Andersen's collapse. Its December 2, 2001 filing for bankruptcy gave Enron then the dubious distinction of the largest corporate bankruptcy filing in the U.S. history. Soon Enron became the subject of numerous Congressional, the SEC, and the Department of Justice inquiries (Bracing For A Backlash, 2002).
An event of the magnitude of Enron's collapse has serious consequences for the efficient functioning of capital markets and investor confidence worldwide. The purpose of this paper is...