Reaction Paper: Enron - The Biggest Fraud in History

Reaction Paper: Enron – The Biggest Fraud in History
As stated from the video, the story of Enron has always been one of the most controversial
scandal in the financial world. From being the 7 th largest corporation globally for years, it
collapsed within only a month – causing havoc in the stock market and loss of millions of jobs.
Due to the intricate system of Enron itself plus the well-versed executives ruling the company, it
seems that they were able to harness so much money by simply knowing the rules of finance.
Aside from this, one of the strength of Enron is its connection with powerful people like the
USA President during that time. From the video, the most significant step that pushes Enron to
greater success without actually earning profit is the Mark to Market Accounting System. With
this, the company can write the potential amount of earnings from an investment on their book
just within the day of its signing. Therefore, even though it really failed after that or did not
push through, it will still count as earnings made by the company. An example of that is their
investment on a machine factory that will be located in India. However, they did not account
the country’s poor supply of electricity thus causing the project to fail. There are still other
things that I observed during the video but let me relate them using the lessons I learned from
Chapter 1:
1. I highly appreciate the Sarbanes-Oxley Act of 2002 wherein it stated that corporate
should be transparent and must have complete disclosures of their financial reports to
protect investors. If only this was observed during the boom of Enron, people would
have immediately unmask all the frauds that the company is hiding. Even worse, the
auditors and accountants themselves where silenced within Enron or participated with
the corruption. Aside from this, executives were fully aware of what was happening -
resigning with no reason and they sold large amount of shares just before the collapse
of the company. SOX Act could have keep the executives accountable to all corruption
they made. As seen from the video, even though some of the executives were penalized
of multiple accounts of security fraud, they were still able to keep most of their money.
Unfortunately, the law, somehow, still favored the rich and the powerful.
2. Another thing that I noticed is the application of Principle 4 which stated that market
prices reflect information. This can be seen from how Enron manipulates the electricity
of California to further raise its price. The law of supply and demand can be observe
here. By limiting the supply of energy in the state, demand from it will increase
especially considering that electricity is a common necessity for all. Since it has high
demand, Enron can use this as trigger to raise their price for energy. They were able to
earn money without actually increasing their energy capacity. The only one affected
here are the thousands of residence of California who pays for it.
3. Furthermore, another principle can be observed in the Enron Scandal - the principle that
states cash flow are the source of value of any company. Cash flow refers to the
outgoing and incoming money from and to the company. This is basically the blood as it
is “moving” to keep a company alive. However, with Enron, cash flow was not properly
monitored. There were pouring amount of investors (incoming) but the money was not
properly allotted to promised investments. Unfortunately, this money went to the
pockets of the executives. Moreover, I think Enron overplayed the role of incremental
cash flow. This refers to the additional operating cash flow that an organization receives
from taking on a new project. A positive value from this one means that the company’s
cash flow will increase with the acceptance of the project. However, due to lack of
transparency and cancellation of the projects themselves, Enron was not able to
generate this incremental cash flow. They suffered millions of losses but was not still
shown on their accounting books.
4. Lastly, the principle of individuals respond to incentives were clearly shown in the video.
It is said that employees of Enron were given a score from 1 to 5 with 5 being the
lowest. Ten percent of these employees will soon be fired if they have the lowest score.
Fired up by this system, everyone worked harder – even working for 18 hours a day.
They were able to sell more investment, invite more investors, therefore creating more
earnings for the company. I believe that this is not the right way to apply incentives.
Incentives refer to rewards after accomplishing an achievement. With Enron, they were
clearly applying it the other way around. They created a space of negative pressure by
giving out punishment instead.
In conclusion, it was obvious that Enron disobeyed numerous laws including the most basic
ones. This whole scandal shows how someone can manipulate his/ her way to the top by simply
being acquiring mastery of how money works. All the executives were able to gain something
but it surely comes with higher risks. As shown on the video, their greed gained prison time in
the end. With the release of Skilling this early 2019 and the rumors of him going back to the
energy business, I also have the same sentiment as the narrator in the video. We should really
ask “why” first followed by how, where, and other investigative questions before investing our
hard-earned money.
References:
Altraide, D. (Producer). (2019, August 30). Enron - the biggest fraud in history [Video file].
Retrieved September 24, 2020, from https://www.youtube.com/watch?
v=e5qC1YGRMKI&feature=youtu.be
ScottCohnTV. (2019, March 23). Former Enron CEO Jeffrey Skilling wants back into the energy
business. Retrieved September 24, 2020, from
https://www.cnbc.com/2019/03/23/former-enron-ceo-jeffrey-skilling-wants-back-into-
the-energy-business.html
Tuovila, A. (2020, September 20). Incremental Cash Flow. Retrieved September 24, 2020, from
https://www.investopedia.com/terms/i/incrementalcashflow.asp

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