1. EnronScandal:RiskManagement,
Corporate Governance,and Ethical
Shortcomings
Introduction
It can be argued that the Enron case is one of the biggest financial scandals of all time.
These issues provide impetus for new legislation and case laws for company law. However,
there was comprehensive reaction once Enron Company collapsed with legislators coming up
with laws in the months leading up to 2002 with the intent of addressing these disasters. In the
year 2002, the United States Congress espoused and implemented the Sarbanes-Oxley Act. In
the United Kingdom, a similar reform lies in the Higgs Review of Non-Executive Directors. The
main question, however, is whether these reforms fully address the risk management, corporate
governance, and ethical shortcomings of the corporate scandals that have taken place thus far.
This paper will study, scrutinize and evaluate the events encompassing the fall of Enron
purposely and studiously to consider whether the reaction prompted by the scandal are
warranted and acceptable.
Risk Management, Corporate Governance, and Ethical Shortcomings
One of the ethical inadequacies is that of conflict of interest. The most severe instance of
this aspect was linked to the participation of the company officials of Enron in instituting and
operating of fake Special Purpose Entities (SPEs), which the company owned. For instance,
Kopper, who was part of the finance department of the firm, was in charge of the operation of
the Chewco SPE by means of a sequence of establishments and limited partnerships that he

2. supervised.1
However, this was not revealed to the board of directors. On the other hand,
Fastow was in charge of the operation of the LJM SPEs and highly participated in numerous of
the SPEs used to be included in the Raptor dealings which was also being done by personnel in
accounting and finance departments. The participation of Fastow in these dealings was
revealed to the board and it sanctioned his partaking once he was endorsed by Ken Lay who as
the CEO and Chairman of the board.2
At the same time, Arthur Andersen LLP, the auditors of
Enron did not act ethically. As is expected, an auditor should act independently in the
transactions with the company being audited. The firm was paid for auditing services and also
for being a consultant to the company. Arthur Andersen received numerous amounts of money
by helping in the organization of the SPE dealings. In addition, Vinson and Elkins who provided
legal advice to the company partook in the organization of these transactions.3
Another shortcoming was in the area of risk management. Prior to its downfall, Enron
was largely praised and acclaimed for its risk management structure. This area of finance was
vital to the company not only for its monitoring environment, but also due to its plan of business.
The company has already set out permanent assurances and obligations for the long run, which
necessitated to be hedged in planning for the unwavering variation of the prices of energy in the
forthcoming periods.4
The insolvency collapse of Enron can be credited to how it employed
special purpose entities (SPEs) and derivatives in an irresponsible and uncontrolled manner.
Since the company hedged risks with the SPEs it operated, Enron continued to sustain the risks
linked to the financial transactions.5
As a result, the company was hedging risks on itself. In
1 Li, Y., The Case Analysis of the Scandal of Enron, International Journal of Business and Management Vol. 5, No.
10; October 2010, 37-41.
2 McLean, B., Elkind, P., The Smartest Guys in the Room, New York: Penguin, 2003, p 67.
3 Deakin, S., Konzelmann, S., Learning from Enron, ESRC Centre for Business Research, University of Cambridge,
Working Paper No 274, 2003, p.2.
4 Rosen, R., Risk Management and Corporate Governance: The Case of Enron, Connecticut Law Review, 35
(1157):1171, 2003, p10-16.
5 Bratton, W. M, Enron and the Dark Side of Shareholder Value, The George Washington University Law School
Public Law And Legal Theory Working Paper No. 035, 2002.

3. addition, the board of directors of the company was well aware of the aggressive accounting
practices that were being implemented.6
The members were enlightened and notified regarding
the reason behind making use of the Whitewing, LJM, and Raptor transactions, thereafter being
alerted on the operations once they sanctioned them.7
While not all inappropriate accounting
activities were let known to the board of directors, all the operations were reliant on its decision.
Enron largely depended on the derivatives for its business operations, yet the board, which was
the decision-maker on everything, did not have a comprehensive understanding of organization
of the derivatives. This was a great risk in management because they could have avoided the
use of the derivatives if they understood what it fully entailed.8
Do the reforms made address these failures?
In reaction to both the downfall of Enron and the wide-ranging incursion of commercial
malfeasance, the Sarbanes-Oxley Act was legislated in 2002. This Act substantively has an
impact on the management officials and executives of public corporations. It mandates that the
Chief Executive Officer and the Chief Financial Officer should certify that they have appraised
the financial report and that on the basis of their understanding the financial report signifies the
material respects of the financial position of the firm.9
The Sarbanes-Oxley Act stipulates that all
substantial off-balance sheet dealings have to be revealed and publicized on all of the
company’s 10-K forms and 10-Q forms.10
This regulation was in reaction to the lack of
disclosure by Enron concerning its Special Purpose Entity transactions. This is in reaction to
6 Palepu, K. G., Healy, P. M., Negotiation, Organizations and Markets Research Papers Harvard NOM Research
Paper No. 03-38, 2003, 10-15.
7 McLean, B., Elkind, P., The Smartest Guys in the Room, New York: Penguin, 2003, p 67.
8 Gillan, S., Martin, J. D., Financial Engineering, Corporate Governance, and the Collapse of Enron, The University
of Delaware: Alfred Lerner College of Business and Economics, 2002, p.17.
9 Romano, R., The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, New York University Law
and Economics Working Paper No 3, 2004, p 1-6.
10 Goldman, A., Sigsmond, W, Business Law: Principles and Practices 8th Edition, Ohio: Cengage, 2014.

4. Enron sanctioning and allowing the conflict of interests with its financial officials such as Fastow
and Kopper.11
It is with no doubt that the Enron scandal brings into light vital issues regarding the
contemporary path of Anglo-American entrepreneurship, above all, the aspect of deregulation in
knocking energy markets and financial markets off balance. The positive outcome that ought to
arise from the collapse of Enron should be in the governing and monitoring bodies learning the
right lessons and addressing the deficiencies that came about. However, Sarbanes-Oxley and
Higgs Acts, which have been espoused to do this exactly, do not seem to correct what can be
considered as the implicit inadequacies.12
The Act has comprehensively come up with clauses
and mandates to rectify and prevent any future occurrences such as those of Enron.13
However, even though there was fraud and an issue of conflict of interest, it cannot be
considered that these were the only or key causes of the downfall of Enron. Instead, the
analysis done above gives the impression that the collapse of Enron was a case of misconduct
and negligence of risk management. The company went under due to a general disaster in
which the business plan of the company and its book-keeping procedure were associated.
Sarbanes-Oxley and Higgs are purposed to reinforce and toughen the financial model by
asserting and mandating for resilient assurances of impartiality for non-executive managers.14
In
a couple of years after the collapse of Enron and the legislation of the Sarbanes-Oxley Act,
inadequacies in dealing with the shortcomings of corporate governance have been seen.15
This
can be perceived in the latest worldwide financial crisis where insufficiencies and disasters in
corporate governance resulted in downfall of large corporations such as the Lehman Brothers in
11 Thomas, W. C., The Rise and Fall of Enron, Journal of Accountancy,April 2002.
12 Bratton, W. M, Enron, Sarbanes-Oxley and Accounting:Rules versus Principles versus Rents, Villanova
University School of Law Public Law and Legal Theory Working Paper No. 2003-13.
13 Deakin, S., Konzelmann, S., After Enron: an age of enlightenment? Organization, 13, 2003, 583-587.
14 Higgs, D, Review of the Role and Effectiveness of Non-Executive Directors, London: HM Treasury, 2003.
15 Deakin, S., Konzelmann, S., Learning from Enron, ESRC Centre for Business Research, University of
Cambridge, Working Paper No 274, 2003, p.2.

5. the year 2008 and shortly after numerous banks in the United Kingdom and Europe as well.
These occurrences have shown that policymakers are learning the wrong lesson from Enron
and that the reforms made in the wake of the Enron scandal do not successfully address these
failures.
Conclusion
The collapse of Enron has principally been observed to originate from the prostration of
the company’s board to efficaciously monitor the activities of the supervisors and the directors
and therefore consider conflict of interests to be the ultimate origin of the scandal. This can be
argued by the fact that the non-executive managers of the various departments in Enron were
highly qualified and skilled to evaluate and assess the monitoring and corporate risks, which
emanated from the corporation’s business. William Oneill has aptly summarized the demerits of
SOX thus: “With S-OX, we’ve created a whole new system of good intentions, but the pendulum
has swung too far’’16
. he further posited that: “I believe the true issue behind Sarbanes-Oxley is
an ethical issue. We need to embed ethics in every business case so that students know they’ll
face ethical consideration in a variety of situations. They need to know that someday, someone
will ask them to do something that is unethical. At that moment in time, they will have to decide
what kind of people they want to be. They need to think of the consequences. This is something
Sarbanes-Oxley doesn’t address”17
In light of all this, it can be said that policy makers have not gained any lesson from the fall of
Enron and the policies instituted do not wholly address the insufficiencies.
16 Tricia Bisoux ‘The Sarbanes-Oxley effect’ BizEd, (July/August 2005), <
http://www.bizedmagazine.com/~/media/BizEd Magazine/Archives/2005/JulAug/JulAug 2005> accessed 5
February 2015
17 ibid

6. BIBLIOGRAPHY
Articles
Bratton, W. M, Enron and the Dark Side of Shareholder Value, The George Washington
University Law School Public Law And Legal Theory Working Paper No. 035, 2002.
Bratton, W. M, Enron, Sarbanes-Oxley and Accounting: Rules versus Principles versus Rents,
Villanova University School of Law Public Law and Legal Theory Working Paper No.
2003-13.
Deakin, S., Konzelmann, S., Learning from Enron, ESRC Centre for Business Research,
University of Cambridge, Working Paper No 274, 2003, p.2.
Deakin, S., Konzelmann, S., After Enron: an age of enlightenment? Organization, 13, 2003,
583-587.
Gillan, S., Martin, J. D., Financial Engineering, Corporate Governance, and the Collapse of
Enron, The University of Delaware: Alfred Lerner College of Business and Economics,
2002, p.17.
Goldman, A., Sigsmond, W, Business Law: Principles and Practices 8th Edition, Ohio:
Cengage, 2014.
Higgs, D, Review of the Role and Effectiveness of Non-Executive Directors, London: HM
Treasury, 2003.

7. Li, Y., The Case Analysis of the Scandal of Enron, International Journal of Business and
Management Vol. 5, No. 10; October 2010, 37-41.
McLean, B., Elkind, P., The Smartest Guys in the Room, New York: Penguin, 2003, p 67.
Palepu, K. G., Healy, P. M., Negotiation, Organizations and Markets Research Papers Harvard
NOM Research Paper No. 03-38, 2003, 10-15.
Romano, R., The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, New
York University Law and Economics Working Paper No 3, 2004, p 1-6.
Rosen, R., Risk Management and Corporate Governance: The Case of Enron, Connecticut Law
Review, 35 (1157):1171, 2003, p10-16.
1 Thomas, W. C., The Rise and Fall of Enron, Journal of Accountancy, April 2002