Enron Corporation’s Scandal: The Apex of Corporate Fraud
An accounting scandal that shook the corporate world, Enron Corporation’s white-collar crime saw the downfall of one of the world’s most illustrious companies. Headquartered in Houston and operating expansive natural gas transference systems in North America, Enron had established itself as a robust entity before divesting its business plan to enhance profitability. Operating like a hedge fund, the entity was hailed for its innovative operational model, with its stock prices hitting a peak of $90.75 before its collapse in mid-2000 (Hosseini & Mahesh, 2016). The company’s executive had engaged in fraudulent accounting activities, concealing billions of dollars in debts through bookkeeping loopholes. The impressive financial reports generated by the company were the outcomes of a systematically institutionalized creative racketeering that has since been known as the Enron Scandal. After the revelation of the white-collar malpractices, the company’s stocks plummeted, and ultimately, Enron filed for bankruptcy. Although Enron’s collapse amplified the integral role of good corporate governance, integrity, and ethics, it occasioned profound social and economic destruction.
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Corporate Fraud at Enron
At the peak of its expansion and diversification programs in the 1990s, Enron was a financially healthy entity. However, venturing in projects such as pipeline and power plant development imposed an enormous strain on the company’s resources. Hosseini and Mahesh (2016) note that the engagements were capital–intensive, and required a long gestation period. Consequently, Enron had to raise a substantial amount of funds from the money markets, imperiling the company’s credit rating. To maintain an impressive credit score and continue operations, Enron executives devised a way to keep the spiraling debts and losses off the balance sheet by entering into fictitious partnerships and off-the-book accounting. The company’s top executives also changed their accounting system and adopted the mark-to-market approach to facilitate concealing the incurred losses and make the entity appear profitable. Coyne (2017) notes that this accounting strategy has helped create the spectacular failure of the world’s most distinguished institutions, including the Enron and the Savings and Loan crisis. The objective of the change in accounting methodology was to circumvent the consolidation rules and simultaneously increase credibility through attractive ranking by the rating agencies.
Enron’s corporate fraud was orchestrated through the prolonged veiling of the enormous debts and toxic assets from creditors and investors. To achieve this, the top management conspired to create special purpose vehicles (SPV), into which the company would transfer a portion of its rising stock in exchange for a note or cash. The fictitious entity would then use the shares to hedge an asset enlisted on Enron’s balance sheet. In turn, Enron would guarantee the SPV’s value in an attempt to minimize the apparent counterparty risk, implying that the fictitious firm would entirely be capitalized with Enron’s stocks. Consequently, the SPV’s hedging capacity was directly compromised if Enron’s share prices plummeted. In essence, Enron abused the whole concept of SPVs, and the emerging details of the white-collar fraud sent the stock prices crashing. At the time of its bankruptcy, the company’s shareholders lost an estimated $74 billion as over 20,000 employees lost their livelihoods (CNN Editorial Research, 2020). Thus, Enron Scandal was the worst corporate fraud to afflict the financial world.
Social, Economic, and Political Impacts of Enron Corporate Fraud
Enron’s fraud highlighted the multiple impacts of corporate governance failure, whose effects transcended across the social, political, and economic sectors. The meteoric fall of the share prices from more than $90 to 50 cents a share knocked out an enormous proportion of shareholders’ wealth of the economy. Additionally, numerous other entities, such as J.P Morgan Chase and Citigroup, suffered major losses owing to their contractual or debt relationship with Enron, exposing them to increased risks and uncertainties. Enron also provided employment opportunities to thousands of workers who held sizeable company stocks in retirement accounts. The white-collar fraud and the eventual collapse of the business meant that all their savings and pension benefits in billions of dollars had been lost. Moreover, the exit of one company signifies a decline in GDP, reduction of the supply of commodities and services, and shrinkage in innovation and capital investments. Thus, Enron’s corporate scandal escalated peoples’ financial instability, exposed them to economic fluctuations, and led to an increase in energy prices.
Politically, Enron’s white-collar crime elicited calls for greater governmental regulation as the company’s downfall was linked to the pitfalls that beset the free market economy. As a result, the previous free rein awarded to firms by the federal government was significantly abrogated as tighter regulatory interventions and oversight were imposed. Additionally, American legislators drafted sweeping legal provisions to entrench accurate financial reporting in publicly trading companies, and discourage the temptation of committing corporate fraud. For instance, the Sarbanes-Oxley Act of 2002 imposes punitive consequences for employees who destroy, alter, or fabricate financial reports and company executives who attempt to defraud shareholders. Moreover, Enron’s collapse was socially devastating, with severe destruction of thousands of livelihoods, disruption of families, and the monumental erosion of trust in capital markets. Pensioners and long-standing employees lost their life savings, increasing their susceptibility to poverty and economic fluctuations.
Minimizing Pressure, Opportunity, and Rationalization for Committing the Fraud
Weak internal controls, poor work ethics, and motives, commonly presented as opportunity, rationalization, and financial pressure, encompass the three components that explain the motivations behind a person’s resolve to commit white-collar crimes. Nugraha and Susanto (2019) argue that fraudsters orchestrate trickery when these elements come together. From this perspective, various measures could have been implemented to significantly downgrade the motivation and pressure for the perpetration of the fraud. Enron could have deflated the corporate pressure and demands of high financial performance from the executives to ameliorate the burden of delivering exceptional profits.
Additionally, inculcating effective ethical culture which reinforces against fraud rationalization could have helped minimize improper conduct and behavior. For instance, scheduled ethics training tailored to suit the organization, effective whistle-blowing programs, and annual employee attitudes surveys could potentially enhance the detection and deterrence of unethical temptations. In Enron’s scenario, the perpetrated fraud was executed for years and the managers had grown comfortable with abusing their authority. Instituting robust internal control mechanisms could have discouraged the temptation of the fraud, by particularly demanding an authorization of the change of the firm’s accounting system.
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The precedent of the Criminal Prosecution
Enron’s top executives were found guilty of widespread accounting fraud, conspiracy, and corruption. Jeffrey Skilling was sentenced to 24 years in prison while his other counterparts were committed to varying jail terms (Whitcomb, 2019). Considering the economic and social destruction that their actions brought, the punishment was not severe enough to dissuade corporate fraud. As a result, it did not set a precedent that could prevent or suppress the temptation by company executives to commit similar crimes in the future. Since corporate fraud can plunge populations into abject poverty and obliterate the stock market, the imposed sentence should have been more severe, and accompanied by attaching the executives’ personal property to compensate their victims. From this dimension, white-collar crime is pernicious and has the potential of affecting the economy and livelihoods more severely. Therefore, the penalty served by the Enron officials may not be an adequate deterrence to the future commission of the white-collar crime.
Punishment’s Comparison to Blue-Collar Crime
Although the public expresses varying opinions on whether a punishment is proportionate to the crime, it is generally believed that blue-collar criminals are penalized more severely than their white-collar counterparts. A distinctive characteristic of this occurrence is the public’s perception of people who commit blue-collar crimes. While blue-collar offenders often get incarcerated for long periods, white-collar culprits, whose acts punish more people at once, often get relatively reduced sentences about the extremity of their offenses.
Pickpocketing is a widespread blue-collar crime, arguably comparable to corporate fraud due to the thieves’ dexterity and the nonviolent nature of the offense. While the felony or misdemeanor often involves stealing money or items of relatively low value, the offenders get disproportionately severe sentences compared to white-collar criminals. This implies that the criminal justice system is structured in a way that it discharges more punitive penalties in blue-collar crimes. Additionally, this disparity may be influenced by the social standing of the culprits, where the blue-collar culprits are predominantly from the lower social class. On the converse, white-collar offenders are, in most instances, respected members of the society with affluence and connection, and may benefit from lax prosecutorial attitudes. In this regard, a blue-collar crime is severely punished compared to white-collar offenses.
Conclusively, Enron Corporation’s scandal represents the pinnacle of white-collar crime, which led to the bankruptcy of one of the world’s most illustrious companies and the dissolution of other associated entities. Enron’s bankruptcy destroyed billions of dollars in stock values and went down with thousands of jobs and peoples’ pension savings. Although the managers were ultimately punished for the fraud, the penalties were disproportionately low compared to blue-collar offenders, considering the severity of the executives’ actions. However, the fraud resulted in the development of legislation and regulatory policies that significantly hampered the orchestration of such crimes in the future.
CNN Editorial Research. (2020). Enron fast facts. CNN. Web.
Coyne, M. P. (2017). A historical examination of the mark to market accounting rule. Journal of Economics and Banking, (1). Web.
Hosseini, S. B., & Mahesh, R. (2016). The lesson from Enron case – moral and managerial responsibilities. International Journal of Current Research, 8(8), 37451–37460. Web.
Whitcomb, D. (2019). Former Enron CEO Jeffrey Skilling released from federal custody. Reuters. Web.