Running head: CASE ASSIGNMENT 2 1
Case Assignment 2: Enron: Questionable Accounting Leads to Collapse
Liberty University
CASE ASSIGNMENT 2 2
Abstract
This paper will discuss and explore the contributors to Enron’s ultimate demise as a
company. It will analyze the corporate culture of Enron, the relationship between Enron and their
financial personnel, and the role of the Chief Financial Officer in their influences on the downfall
of the gasline pipe company.
Keywords: Enron, corporate culture, ethics, Andrew Fastow
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Case Assignment 2: Enron: Questionable Accounting Leads to Collapse
The Enron Corporation began in 1985 after the merger of two major gas pipeline
companies that was formed $150 billon energy company by Chairman Ken Lay, CEO Jeffrey
Skilling, and CFO Andrew Fastow by the 1990s (Ferrell, Fraedrich, & Ferrell, 9-2). Enron was
the seventh-largest company in the Fortune 500, but it was all a sham. After the scandal in 2001,
Enron’s downfall began as the company was forced to declare bankruptcy after hundreds of
millions of dollars of debt was discovered by bankruptcy examiner. The empire that Lay,
Skilling, and Fastow had built was all but a lie that came into the light in 2001 and faced much
backlash in the years to come when Enron faced their ultimate demise in 2007.
As the corporate world continues to grow and the industry gets more competitive, it is
crucial that companies continue to strive to make ethical and rational decisions in their financial
judgements. It may be easy to fall into the trap of corruption and greed but learning from the
previous mistakes of other industries in order to avoid making them themselves.
Bankruptcy Led by An Unethical Culture
The corporate culture of Enron contributed to its bankruptcy through the egotism and
arrogance that the company fostered. CEO Jeffrey Skilling took pride in developing a system
known as “rank and yank” where the employees were rated every month and the bottom 20
percent were fired (Ferrell, Fraedrich, & Ferrell, 9-3). This created a hostile environment in the
workplace of Enron, not only for the employees to compete with other companies but for them to
also compete with their coworkers. Chairman Ken Lay had a vision to build a company on the
values of respect, integrity, and excellence, but failed to see it through (Ferrell, Fraedrich, &
Ferrell, 9-3). He was beat out by the companies desired to be the best and most profitable in the
world. Enron aimed to foster a corporate culture that had their employees pushing limits to
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achieve the best outcome humanly possible (Raghavan, Kranhold, Barrionuevo, 2002). The
employees were encouraged to flaunt off the success of the company.
The corporate culture of Enron was to encourage every sector of their company to be the
best of the best and to show the rest of the competition in the industry. Lay’s hopes to improve
the corporate culture of the business was all a dream when the Chairman stepped in as CEO
when Jeffrey Skilling stepped down. Lay tried to hear the comments and concerns of his
employees but his efforts were in vain when confronted by Enron employee, Sherron Watkins
and refused to see her view and chose to look towards the accounting firms that were aiding in
the efforts of CFO Andrew Fastow to make the company appear more successful than they really
were to lure in investors, all the company sought was money through their greed (Emshwiller &
Kranhold, 2002).
Reckless Standards of Accounting and Law Firm
The bankers, auditors, and attorneys of Enron contributes to the company’s demise
through the use of “special-purpose entities” (SPEs) to conceal their loses by utilizing their
partnerships with different companies (Ferrell, Fraedrich, & Ferrell, 9-4). This allowed Enron to
paint the picture that their company was financially successful on the outside but is what led to
their downfall once Enron was unable to make up for the major cash shortage in October 2001.
Accusations were made that the relations between Anderson accountants and Enron employees
were too close for comfort as it was found that the companies were consistently hiring
employees from the other (Herrick & Barrionuevo, 2002). It was also found that Anderson
showed much support for the actions of Enron including aiding Enron in selecting investments,
praising the corporation in trade publications and co-sponsored an award for CFO Andrew
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Fastow (Manor, 2002). The close-knit relationship stands for concern as the accounting firm was
actively supporting a company that they knew was acting unethically.
The individuals that were hired to observe and monitor the financial business that was
being conducted at Enron, turned a blind eye as CEO Ken Lay attempted to cover up the
financial crisis that was tearing the company down. The Enron Corporation was one of the
Houston law firm, Vinson & Elkin’s, top clients. Vinson & Elkins overlooked the accusations of
the whistle-blower, Sherron Watkins, and supplied written opinion letters that allowed Enron to
establish so many deals because of the firm’s support of the legality of the deals (Ferrell,
Fraedrich, & Ferrell, 9-4e).
It was later unveiled that there was a belief that Watkins’ letters were much more than
accusations but an aide to help Jeffrey McMahon, another employee at the Enron Corporation,
that desired to have the position of CFO Andrew Fastow which is why the letters may have been
overlooked by the law firm (Emshwiller & Kranhold, 2002). When the scandal happed, Vinson
& Elkins did not admit to liability but made a payout of $30 million to Enron to settle claims of
Vinson & Elkins contribution to the corporation’s downfall.
Enron’s CFO: Fraud, money laundering, and greed
Enron’s Chief Financial Officer, Andrew Fastow, played the role of the instigator in
creating the problems that led to the company’s financial problems. Fastow faced multiple
charges including fraud, money laundering, conspiracy, and obstruction of justice (Ferrell,
Fraedrich, & Ferrell, 9-4b). Andrew Fastow and he was found guilty of wire fraud, money
laundering, and filling fraudulent income tax reports and misleading the shareholders on Wall
Street by hiding the company’s debt. At first, Fastow denied these accusations but then pleaded
guilty for two counts of conspiracy and took responsibility for orchestrating myriad schemes to
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hide Enron debt and inflate profits while stealing money from the company for his own personal
gain.
In the end, Fastow was able to receive a much lighter sentence of six years in comparison
to the original 140 that came along with the multiple charges that he was facing due to his
willingness to cooperate with the investigators. Fastow was the lead on the SPEs and the off-
balance sheets deals that left the company in ruins when they came into the light (Dahl, 2004).
Andrew Fastow defrauded the company out of tens of millions of dollars by holding
shares by ghost entities. However, through Fastow’s multiple testimonies he was able to disclose
how the company was able to get away with this scheme for so long (Ferrell, Fraedrich, &
Ferrell, 9-4b). Fastow admitted to working alongside major banks that were willing to work with
Enron in order to make the company’s financial statements appear better to investors. Fastow
was accused of hiding $1 billion in debt that led to Enron’s demise.
Conclusion
1 Timothy 6:10 states, “For the love of money is a root of all kinds of evil. Some people,
eager for money, have wandered from the faith and pierced themselves with many griefs.”
Enron was surrounded in greed as a company and this led to their downfall. The love of money
and success overpowered Chairman Ken Lay’s original hopes for the company to be prosperous
but ethical when other leaders in the company became consumed with being the most successful
corporation in the industry. Due to the oversight of the bankers, auditors, and attorneys of Enron,
the company got away with fraud for years but was left in shambles when the news came out.
The mastermind of the scheme, Andrew Fastow, admits his wrongdoing and strived every day to
encourage others to not fall into the same trap as him and to seek after ethical business skills
(Ferrell, Fraedrich, & Ferrell, 9-4b).
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References
Dahl, C. (2004). Pipe Dreams: Greed, Ego, And the Death of Enron/Anatomy of Greed:
Unshredded Truth from An Enron Insider/Enron The Rise and Fall/What Went Wrong at
Enron: Everyone's Guide to The Largest Bankruptcy in U.S. History/The Smartest Guys
in The Room: The Amazing Rise and Scandalous Fall of Enron/Power Failure: The Inside
Story of The Collapse of Enron/24 Days. The Energy Journal, 25(4), 115-134.
Emshwiller, J.R., & Kranhold, K. (2002, Jan 16). Publicized Letter to Lay Involved Struggle
Over Enron's Direction. Wall Street Journal
Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2017). Business Ethics: Ethical Decision Making and
Cases (11th Ed.). Boston, MA: Cengage Learning.
Herrick, T., & Barrionuevo, A. (2002). Were Auditor and Client Too Close-Knit? Wall Street
Journal.
Manor, R. (2002). Enron, Andersen Tightly Entangled; Experts Question Links Between Two
Firms. Knight Ridder Tribune Business News.
Raghavan, A., Kranhold, K., & Barrionuevo, A. (2002, Aug 26). Full speed ahead: How Enron
bosses created a culture of pushing limits --- Fastow and others challenged staff,
badgered bankers; Porsches, Ferraris were big --- A chart `to intimidate people'. Wall
Street Journal.
