Enron is a company that was formed by Kenneth Lay in 1985. Its main business was in the area of energy
power service provider. It grew as a company until in the year 2003 when the company was discovered
that it is in bankruptcy. They are a lot of factors that led to the bankruptcy of the company and most of
these were fraud related in their financial statements.
Enron’s nontransparent financial statement did not depict its operations and finances with shareholders
and analysts. Unethical practices required that the company use accounting limitations to misrepresent
earnings and modify the balance sheet to portray favorable depictions of its performance.
The scandal grew out of steady accumulation of habits, value and action that began years before firaled
out of control. They did this by having income and cash flow up , asset value inflated, and liabilities off
the books. Combination of these issues later led to the bankruptcy of the company and the majority of
them were perpetuated by the indirect knowledge or direct actions of Lay.
Jeffrey skilling, Andrew Fastow, and other executive Lay served as the chairman of the company in its
last few years, and approved of the action of Skilling and Fastow although he did not always inquire
about the details. Skilling, constantly focused on meeting wall-street expectations, pushed for the use of
mark-to market accounting and pressured Enron executives to find new ways to hide its debt.
He did this by creating off balance sheet vehicles, complex of financing structures, and deals so
bewildering that few people could understand them.
Enron was audited by Arthur Andersen Company. They were accused of applying reckless standards in its
audits because of the conflict of interest over the significant consulting fees generated by Enron. In 2000,
Arthur Andersen earned 25 million in audit fees and 27 million in consulting fees (this amount accounted
for roughly 27% of the audit fees of the public clients for Arthur Andersen’s Houston office.)
Arthur Andersen methods were questions as either being completed solely to receive its annual fees or
lack of expertise in the area of properly reviewing.
1. Enron Company had shareholders, directors; management, auditors and government were the
different groups of people interested in Enron Company.
a. The conflict that was there could have been resolved if the directors of the Enron acted in
good faith through the principle of agency. They are based on the principle that since the
company places its trust in the directors they must display the utmost good faith towards the
company in their dealings with it or its behalf. In this case directors were busy looking for
ways to hide debt in its financial statements in order to meet the expectations of wall-street
rather than the shareholders.
b. Shareholders should have taken great interest in the company by not completely trusting the
directors its financial statements because the director’s works for their own interest regardless
that are employed by the shareholders. They could have find out about problem before it
accumulated to a bigger problem.
c. Auditor of the company has duties to the company and the members as the whole; even
auditor must disclose facts that harm the company. It is also criminal offence for the officer
of the company to knowingly or recklessly make statement to the company auditor’s which is
misleading and false. Auditors must conduct audit with care and skill. Ensure that only fit and
proper person is appointed as company auditors. Ensure that audit is carried out with
professional integrity. The potential conflict could have been resolved if some of this was
discovered and prevented. Auditors seemed to lack care and skill in their audit which
increased the conflict at the end because they did not find out anything wrong with the
financial statements, the was no professional integrity in their dealing because they were only
looking for fees available.
d. It could have been resolved by having clearly regulations on issues concerning company
rules, relationships between shareholders and directors on who is responsible on different
areas. Powers of shareholders and directors on profit generation and explanations on agency
theory and company governance as it is today.
2. When a company is incorporated becomes a separate legal entity. The company will have the
same attribute of a human being. It can sue or be sued, separate from its members, and members
liabilities is only limited to the shares they hold.
a. Fiduciary duties are owned to the company, not to individual shareholders.
In PERCIVAL v WRIGHT (1902) the directors purchased some shares from a member
without revealing that negotiations were in progress for the sale of all shares in the company
at a higher price. In fact no sale ever took place. The plaintiff nevertheless sought to have his
sale to the directors set aside for non-disclosure. It was held that the sale should not be set
aside since the directors owned no fiduciary duties to individual members.
b. It is not for the benefit of the company if they act in their own interest or the interest of the
third party, without also considering the interest of the company.
In RE ROITH (1967) the controlling shareholder and director of company wished to provide
for his widow without leaving her his shares. Acting on legal advice he entered into a service
agreement with the company whereby on his death she would be entitled to a pension for life.
Since the sole object of the transaction was to benefit the widow the agreement was not held
to be binding on the company.
c. If the is breach of duty is misapplication of company property, a person who receives such
property and knows of the breach holds the property as constructive trustee and must
therefore return it to the company.
d. Duties of care and skill. A director must exhibit the degree of skill which may reasonably be
expected from a person of his knowledge and experience. The director must act as a
reasonable man in regards to the knowledge and experience of the individual concerned. In
the absence of suspicious circumstances directors are entitled to trust the company officers to
perform their duties property. A director will not be liable for the acts of co-directors or other
officers unless he anticipates in the wrong, for example by signing a cheque for an
unauthorized payment.
UNIVERSITY OF EASTERN AFRICA BARATON
MALAWI ADVENTIST UNIVERAITY
LAKEVIEW CAMPUS
DEPARTMENT OF BUSINESS ADMINISTRATION
TOPIC: ENRON SCANDAL
An assignment submitted in partial fulfillment of Course: Business Law II (MGMT 342)
Submitted to: Mr. Kasoti
Submitted by: Chisomo Chimkono
I.D# 4598
Submitted Date: 02 April 2012
REFERENCE:
Internet
B. McClean and P. Elkind, The Amazing Rise and Scandalous Fall of
ENRON (Harmondsworth, Penguin, 2003).