Collapse of Enron

Enron

In his book A Conspiracy of Fools, Kurt Eichenwald details the Enron implosion, how it came about and how the main players were. For several years there had been suspicions about Enron's behavior -- most notably the company's inability to produce financial statements. The term scandal is broadly used to describe what happened to Enron, but as Eichenwald notes Enron was more a broad conspiracy to commit fraud. The company was allowed to get away with it for so long because it had become a Wall Street and political darling, an example of the effectiveness and power of market capitalism.

Enron was a company that engaged, theoretically, in energy trading. The company's business model has been described as "only vaguely understood even by its own competitors" and this is part of what had led to the belated nature of its downfall. Enron was always a house of cards, but as Eichenwald points out its political clout and unorthodox business model had allowed it to engage in questionable accounting practices for years before those practices were uncovered and the company unraveled.

Eichenwald characterizes Enron as a problematic company for a number of reasons, however, of which crime was just one. He points out that criminal activity flourished in an environment where ethics were fluid, where arrogance and incompetence dovetailed and where dozens of individuals worked the system seemingly oblivious to the fact that they were doing something wrong. As a result, the collapse of Enron became emblematic of the disappearance of ethics from the financial markets.

As a result, Enron became a key lesson on the value of ethics in accounting. Accountants often face pressures from senior management for good results, a situation that arises from the desire to meet aggressive predictions for quarterly results. The accounting department worked with management to facilitate these results, and ultimately this was one of the ethical lapses that allowed something like Enron to happen. One of the key conclusions that Eichenwald makes is that "it was Enron's tragedy to be filled with people smart enough to know how to maneuver around the rules, but not wise enough to understand why the rules had been written in the first place."