What was the cause of Enron’s collapse? Essay

Custom Student Mr. Teacher ENG 1001-04 10 September 2017

What was the cause of Enron’s collapse?

Enron is another company that was affected by Arthur Andersen and its own lack of ethics. Enron has been in existence since 1985 providing products and services related to natural gas and electricity. It had numerous operations in the gas industry, such as,

Transportation and Distribution, Interstate Transmission, of Natural Gas, Northern Natural Gas co., Transwestern Pipeline Company, and more. Since 1985 Enron made numerous acquisitions, purchases, and sales. It acquired Natural Gas, El Paso Energy Corporation, Portland General Corporation, and more companies, which helped Enron become the 7th largest corporation in the U.S. and therefore, published in Fortune 500 magazine. (Daily Enron.com, pp 1) In 2001, Enron was heavily involved in trading gas and electricity with its stock was worth over $80 and plunged to $0.10 a share in early 2002.

Enron’s ethics, as well as Arthur Andersen’s were the cause of Enron’s collapse. Enron participated in an unethical business behavior several times. In the 1990s, Enron set up nearly 3,000 partnership companies offshore. These 3,000 companies allowed Enron to manipulate gas prices. It did this by demonstrating locked contracts with its offshore companies for huge prices, which caused its customers to have no choice but to submit to Enron’s exaggerated energy prices. Also, Enron condensed the amount of gas supplied it had. It reported to have a less amount of gas than what they really had so this “shortage” in supply would drive the demand up and therefore, drive prices up.

Enron also used these offshore companies as a place to conceal millions of dollars in debt from public view. These companies were viewed as separate from Enron, even though Enron and its directors effectively controlled the partnership, since 3% of the money invested in these partnerships came from outside of Enron. (Puscas, pp 2) This was convenient for Enron because any debt from these partnerships did not have to be reported in Enron’s balance sheet given that they were treated separate from Enron.

Arthur Andersen was Enron’s bookkeeper and their lack of ethics permitted Enron to keep acting unlawfully. Arthur Andersen approved Enron’s financial statements although they were aware of the Enron’s scheme. Arthur Andersen did not disclose Enron’s poor financial conditions, but rather covered them saying they were good. To prove their statement Arthur Andersen and Enron acted unethically and illegally by shredding thousands of documents that would prove Arthur Andersen’s approval of Enron’s financial statements.

Sherron Watkins, a vice president of corporate development, wrote to CEO, Kenneth Lay and expressed her concern about the company’s financial conditions. Lay ignored her. This demonstrates one more time, Enron’s unethical behavior, since an ethical organization encourages whistelblowing by not ignoring does who speak up as Enron did.

Using private information Kenneth Lay sold over 16 million shares of Enron and assured its employees that Enron stock would rise in value in the next 10 years. Once again, Enron acted unethically by exploiting this information they knew unlike the public by making great profits. Kenneth Lay made over $1 billion in profits, Andrew Fastow, CFO made more than $30 million, Michael J. Kopper and ally of Fastow, made more than $10 million, and Enron’s 15,000 employees who saved over their working years in their 401(K) lost over $1 billion. (Daily Enron.com pp 2)

Enron’s unethical behavior as well as Arthur Andersen’s brought Enron to file Chapter 11 bankruptcy in December 2001 making it the biggest bankruptcy petition in U.S. history. Soon after that, fired many of its employees worldwide. In March 2002, Arthur Andersen was indicted by a federal grand jury for shredding Enron’s documents and suspends any new business dealings for Enron and Arthur Andersen.

Acting ethically was obviously Enron’s and Arthur Andersen’s problem since they did not recognized or acted on their ethical issues before they became legal problems. Enron’s acts educated corporations that having an ethics book is not sufficient, but one must act on it. The consequences of Enron’s lack of ethics, also advised corporations how they should ethically perceived to particular situations if they don’t want to be involved in scandals or go bankrupt. “Arthur Andersen and Enron have damaged their company’s reputation through a negative perception of corporate ethics.” (Berenbeim, pp 3)

Works Cited

“Enron 101,” Daily Enron.com

Darren Puscas, A Guide to the Enron Collapse: A Few Points for a Clearer Understanding, Polaris Institute, February 2002

Ronald E. Berenbeim, “The Enron Ethics Breakdown,” Executive Action, February 2002

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