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Enron Scandal

In: Business and Management

Submitted By Arycoss
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Busicom2 – 05/02/10 Executive Summary

In 2001 fell Enron after one of the biggest scandals in the modern economy. Creative accounting, oppressive management and deceptive communication are in the heart of that affair.
The first ruse was a cheating accounting. The company used the mark to market system, but in an illegal way for they calculated the assumed profits for the next 20 years, ie long term assumed profits. Moreover, they did not declare all the expenses (only a third for the trade with the station in the North Sea) and manipulated subsidiaries, which are told independent when they belong at least 3% of their capital, to hide debts and boost earnings.
Besides, the management in Enron used the staff performance review which conducts the staff to work hard in order to be in the group of the ‘winners’. There were actually rewards for good employees, pension and savings, so that they would be interested in the good form of the firm and would not complain against the scam.
Enron also managed to corrupt some politicians, bankers, analysts by pressurizing them or by giving great advantages and funds. For instance, the Energy Regulation Board earned one million dollars. Their marketing strategy was a diversification of the production of the corruption of analysts who would promote those new products.
When the frauds were discovered by an employee and exposed to the Securities and Exchange Commission, the free fall began for Enron. The shares dropped from 90$ to 1$, the company was in bankruptcy, and was brought before a court. Many members of the Board were found guilty and punished and the Audit firm Andersen which tried to cover Enron was dissolute.
All in all, that scandal triggered new ideas of regulation systems which would try to make the situation of firms more transparent and avoid creative and cheating accounting systems. However opacity remained a characteristic of the economy and of the bank sector, as shown by the recent subprime and bank crisis. Globalization has allowed new dangerous systems and needs now an international regulation to avoid new scandals like Enron one or new collapses like Lehman Brothers one.

Sources : BusiCom 1A Sarah Williams pp10-50

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