Unethical accounting method questions



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The Unethical Act the Led to the fall of Enron


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Enron Corporation was an energy company based in Houston, Texas in the USA. It was formed as a meagre of two small companies Inter North and Houston Natural Gas, in 1985. The company grew over time and expanded its markets as well as profitability. Enron’s corporation is an example of a company that achieved a high level of operation and profitability, only to be faced with a dizzying and drastic fall. The company’s collapse was a shock to many, affecting thousands of individual employees, which shocked Wall Street. The corporation was declared bankrupt while at its peak with its shares at $90.75 in 2001. In 200, the company was revealed to have engaged in severe accounting fraud. It was found to have been hiding billions of debts through various accounting loopholes. The shareholders of the company filed $ 40 billion lawsuits. At the end of November 2001, the company’s stock price dropped to $1 for every share (Ahmed et al., 2020, p. xx). The company was then declared bankrupt on 2, December 2001 which was a historic fall in US history. The main reason for the falloff of the corporation was due to unethical accounting activities that the company managements engaged in over a long time duration. In this report, we will discuss the unethical activities that lead to the fall of the Enron Corporation in 2001.

The fall of the Enron

From the research, it was discovered that the company failed because of several unethical behaviours of the management, such as:

Irresponsible behaviour

The managers of the Enron Corporation acted irresponsibly as they failed to take proper insight and oversight of the company’s activities that led to the misuse of the organization uethically. Lay the CEO of the company, and some of the board members undermined the financial improprieties warning since they did not understand the total number of operation of the firm (Ahmed et al., 2020, p. xx). The managers were not concerned about the employees, which were left to do as per their wish. Immediately when the corporation collapsed, none of them rose to accept the blame that resulted in the collapse.

Greed was the primary unethical behaviour that affected the leaders of Enron, both that come from individual leaders and situational factors. Leaders used hidden losses, optimistic earnings, and other tactics to keep the stock price artificially high as it was before the collapse. Huge salaries were paid because of the lofty stock, and this enabled the insiders such as managers and employees to gain much earnings from the stock options (“Enron scandal,” 2017).  Greed was not only among the top executives but even among the employees. Large bonuses were triggered from meeting earnings to the managers across the firm. The bonuses were at times more than the salaries of the employees.

Deceit by Enron Official

The official of Enron Corporation manipulated information to protect the personal interests by deceiving the public. Both Board s and Executives claimed that they were unaware of the company’s of-the –books partnership operated and created by Kopper and Fastov. Even though Skilling and Lay were issued warning against the tactics of the accounting of the company was, they never listed or took action. After the fall of Enron, the investigating committee declared that “much that was wrong with Enron was known to the Board” (Konadu, 2020). The board members waived the conflicts specifically of the interest clause in the code of ethics of the Enron Company that could have prevented the company from forming the most troublesome partnership. Employees too followed the footsteps of top officials, in which they deceived energy regulators, hid expenses and claimed non-existent profits.

Unethical accounting method

The company engaged in market tom market accounting, which led to the company receiving the official US Exchange Commission and Securities approval by 1992. The method of accounting en the Enron firm to values their financial institution based on the “fair value” of the assets of the firm, which constantly change as markets because of market change (“Enron scandal,” 2017). Enron used the accounting method to inflate the company’s estimated profits and misled the company’s potential investors (Konadu, 2020). Moreover, the Enron Company used the particular purpose vehicle (SPV) to hide the high amount of debts to borrow fund on behalf of Enron Company. The main reason for engaging in special purpose vehicles was hiding its accounting realities rather than the operation results.

In the year 2001, Enron had used more than a hundred Special purpose vehicles to hide its high amounting debts. The unethical accounting method used by Enron was later realized at the end of the year 2001 when the investors’ confidence in the come began to decline. When the company was investigated, it was realized that it had $591 million losses and $628 million debts; this led to Enron filing for bankruptcy (“Enron scandal,” 2017).

The outcome of the fraudulent activities at the company

In the end, the company’s collapse led to a charge of the company’s executive members for involving in conspiracy, security fraud, and insider trading. Kenneth Lay, the former CEO, was convicted of six different accounts for conspiracy and fraudulent, and four accounts of involving in bank fraud; but died before he could be sentenced because of a heart attack (“Enron scandal,” 2017).

The historic collapse of Enron led to the signing of the Sarbanes –Oxley Act by President George Bush. This law was set up to protect the investor from firms accounting fraudulent activities. At that time, Enron collapse was considered the greatest ever hit in the Financial world in the US (Konadu, 2020).

Conclusion and recommendations

The top management of the company messed the company to its historical fall.  The official manipulated information as they engaged in unethical activities within and outside the organization. The company leaders were egocentric as they laid valued their interest first as opposed to the public and the company employees that led to ethical failure since they never exercised proper oversight. Several implications can be learned from the Enron collapse. It is good to integrate ethical conducts into an organization culture’s (“Avoidance of bankruptcy,” 2018).  The leaders of any organization should know their responsibilities and boundaries.  The responsibilities of leaders should be taken into consideration as we as juniors by educators to address the issues of corruption. Credibility and trust in leaders-follower relationship importance should be recognized.






Ahmed, A., Islam, M. S., & Uddin, M. K. (2020). ENRON: Fall of a creative accountant. SSRN Electronic Journalhttps://doi.org/10.2139/ssrn.1793184

Avoidance of bankruptcy. (2018). Encyclopedia Britannica. https://www.britannica.com/topic/bankruptcy/Avoidance-of-bankruptcy

The Enron scandal. (2017). Professor Robert B. Laughlin, Department of Physics, Stanford University. https://large.stanford.edu/courses/2018/ph240/smith1/

Konadu, J. S. (2020). Ethical implications of full disclosure principle on the fall of Enron Corporation. The International Journal of Business & Management8(4). https://doi.org/10.24940/theijbm/2020/v8/i4/bm2004-042









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