Disregarding its Ethical Code. Enron had its own set of Ethical Code, but it became redundant because the top managers at the company hardly paid any heed to it. The corporate culture at the company was focused on making "deals" and increasing Enron's share value, while the "outdated, theoretical concept of ethics and morality" was kept on the back-burner.

Enron's 'ethics' was personified by Kenneth Lay's exercising of his stock options and pocketing profits, even as he was promoting Enron shares as a bargain to employees. It was also reflected in the action of some Enron executives who pressurized a brokerage company (UBS PaineWebber) to take action against a broker who advised some Enron workers to sell their shares. Other Enron employees, down the line, were therefore more likely to follow the example of its top executives in looking after their own interests and driving up the share value by whatever means, rather than adhering to the company's 'Ethical Code.'

Special Purpose Entities (SPEs). Enron was able to hide its precarious financial position and highly risky operations largely through circumvention of accounting rules in order to artificially increase earnings through Special Purpose Entities (SPEs). Although SPEs are legitimate instruments to access capital or hedge risk by using them as limited partnerships, without having to report debt on its balance sheet, Enron under Fastow's guidance made use of SPEs to "park" troubled assets that were falling in value, such as Enron's loss-making overseas energy facilities, and its broadband operation. Thousands of SPEs were used by Enron to conduct business, some of them owned by Fastow himself. As an example of the several dubious accounting practices by Enron, one of these SPEs -- the LJM partnerships, invested in another group of SPEs (known as the Raptor vehicles) to hedge an Enron investment in a bankrupt broadband company, Rhythm NetConnections. Enron issued its common stock in exchange for a note receivable of $1.2 billion for capitalization...

Enron increased its notes receivable and shareholders' equity to reflect the transaction and failed to consolidate the LJM and Raptor SPEs into their financial statements, which were a violation of the existing accounting practices.
Conflicts of Interest: Amidst serious accounting irregularities, no one was prepared to blow the whistle because of conflicts of interest of several key players. For example, Enron's auditor, Arthur Anderson was also its consultant and stood to gain from 'seeing no evil'; Kenneth Lay stood to gain from exercising his stock options before the share value fell. J.P. Morgan, while underwriting bonds for Enron, was involved in trading derivatives contracts with the company, had a substantial share in Enron stock, and was lender of billions of dollars to the firm. At the same time, J.P. Morgan, as a brokerage and investment firm was responsible for analysing Enron's stock and kept recommending the company's share as a strong buy until substantial irregularities in Enron's financial health became public. In addition, Enron's CFO, Andrew Fastow made millions in profits by doing business with the firm through secret limited partnerships.

Conclusion

As we saw in this paper, individual greed, conflict of interest, disregard for ethical business practices, obsessive focus on increasing share value, and loop holes in regulatory laws that were exploited by clever professionals were some of the reasons behind the spectacular collapse of Enron Corporation in 2001. The silver lining in the debacle is that it forced the legislature, regulators and the accounting profession to realize the need for long overdue reforms in America's corporate sector that would hopefully prevent the repeat of such scandals in future.

The rise in Enron's stock price coincided with an unprecedented bull-run on the Wall Street

The Sarbanes-Oxley Act, a comprehensive corporate reform package, was signed into law of the United States on…