Enron: Case Study 1 The purpose of this paper is to formally address the Enron scandal that came out in late 2001. It will discuss a brief introduction to how Enron came to be such a large and powerful corporation and the decisions made which resulted in its ultimate downfall. While discussing these time periods, accounting issues such as the agency and horizon problems as well as agency costs and the manner in which they affected Enron will be dissected additionally. Lastly, an analysis of these issues and recommendations given in favor of preventing types of corruption like this will be listed out in detail.
The company all starts with Kenneth Lay. Lay received a PhD in economics and was interested well ahead of the industry, in energy deregulation. He was promoted by George Bush Sr. to be named as Deregulations Ambassador at Large (Gibney, 2005). In 1990, Jeff Skilling joined Enron and turned the pipeline company essentially into an “energy bank”. This helped immensely for Enron in terms of establishing themselves as a very powerful corporation. “Enron was quickly transformed from a sleepy cash cow to a darling of Wall Street with a bounty of promising opportunities.” (Stewart, 2006). Enron’s misuse of mark to market accounting became step one of a few crucial mistakes that the company had made. “With a wave of accountants’ magic wands, Enron was authorized to record in a single year all the profit that would normally be booked over 10 to 20-year contract lives” (Stewart, 2006). This was just step one however, and the unethical activities continued from here. Another mistake made was the decision to report projected earnings with Blockbuster’s on demand service before knowing what their actual future value would hold (Stewart, 2006). Overall, Enron experienced a rapid growth and an even more rapid downfall by means of unethical business