Lessons Learned from the Byword of Corporate Fraud: Enron

Truth-telling is the cornerstone of corporate governance.

Enron was formed in 1985 coming from a merger between Houston Natural Gas Company and InterNorth Incorporated. At that time, the deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to flourish with its expansions and ambitious projects.

Inevitably, the company was tagged as “America’s Most Innovative Company” by Fortune for six consecutive years from 1996 to 2001. By 2000, Enron’s shares skyrocketed to an all-time high of $90.56. However, as quick as the rise was the downfall. A year later, the Wall Street darling files for bankruptcy — its stock closed at $0.26. [1]

Enron was first an innovator before a fraud. In October 1999, the company created Enron Online (EOL), an electronic trading website that focused on commodities where Enron was the counterparty to every transaction. Enron stood out from its competitors. What started as a dowdy pipeline company eventually grew into a trading platform. With Enron’s increased reliance on trading, changes in accounting procedures also came to light.

In 2001, CEO Jeffrey Skilling adopted the Mark-to-Market (MTM) accounting method that aims to provide a realistic measure of the fair value of accounts that can change over time, such as assets and liabilities of a company’s current financial situation. In MTM, the present value of anticipated revenue is assumed and the expected costs of fulfilling the contract are expensed once a contract is signed.

Although, a legitimate and widely used practice, MTM can be manipulated. The method is not based on “actual” cost but on “fair value,” which is more abstract to manage. Many believe the adoption of MTM signified the beginning of the end for Enron — management essentially permitted the organization to register estimated profits as actual profits.

CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting. [2]

Another major contributor to the Enron scandal was the accounting firm that oversaw Enron’s accounts, Arthur Andersen LLP. Anderson’s involvement was seen as a vote of approval among many market participants who beginning to questions Enron’s financial statements.

Despite Enron’s poor accounting methods, Arthur Andersen signed off on the corporate reports for years — an act of collusion with CEOs Skilling and Lay. However, many analysts soon started to question Enron’s transparency and earnings.

Mridul Kapoor “The Enron Collapse and the Theory of Moral Muteness”

Inevitably, a few months later, Enron’s stock valuation was in freefall as it descended to a 52-week low of $39.95. Enron’s downfall and the resulting financial havoc on its shareholders and employees led to signing of the Sarbanes-Oxley Act or SOX to promote the accuracy of financial reporting. The act heightened the consequences for destroying, altering, or fabricating financial statements and for trying to defraud shareholders while serving as a reminder of the fiasco that started it all. [3]

Many believe the adoption of Mark-to-Market signified the beginning of the end for Enron — management essentially permitted the organization to register estimated profits as actual profits.


There was a lot of pressure to manage the earnings after Enron’s 1997 downturn in profitability. Their genius was able to manipulate the MTM method to suit their needs. However, the fiasco soon exposed the flaws in the various types of accounting methods being used.

Regulators and the state were given a wake-up call of the lack of a standard that can adapt to the newly emerging businesses such as the energy derivatives and the price futures. Management colluded with various parties to disguise debt from the balance sheet in ways that aren’t illegal but deceptive. Enron’s culture of deceit gradually grew from top to bottom. The ethical drift that ensued within the company was inevitable.

This deception came at the cost of the employees and shareholders the most. Enron lost a total of $74 billion in the four years leading up to its bankruptcy, and its employees lost billions in pension benefits. The shareholders and employees held the brunt of the perverse incentives. They most likely lost their 401ks and retirement plans.

As a fellow employee, I can see that there are moments that challenge your perspective between what is deceptive, what is legal, and what is both. In Enron’s case, they continued to find loopholes to hide their debt which were legal in the accounting sense but, at the same time, deceptive. However, continuous patterns of deception are tantamount to fraud — this was the ruling given to the CEOs by the court in 2001.

This is where Ethical discipline comes in. Unless the company culture can foster such ethical discipline among the ranks, deception will always creep in. In Enron, the ethical drift was massive since their top management themselves are promoting such actions.

Ethics guides you, whether employee or executive, to do the right thing, the ethical thing, whether people are looking or not. I would rather have a bland work history rather than a grand one but filled with malice and deceit, more so if at the cost of others. At what moral cost is your success?

Enron’s culture of deceit gradually grew from top to bottom. The ethical drift that ensued within the company was inevitable.

Photo by Charles Forerunner on Unsplash


Companies should champion healthy Ethical Discipline — with integrity and transparency at the forefront. Both the management and its employees should religiously follow these tenets. Enron and its culture of deceit and ethical drift is the perfect example of what not to follow. Transparency should be the mandate for financial disclosures.

Kevin Stonestreet said, “As the dust clears and the smoke settles everything will be revealed”. Should challenges arise, the earlier we get to the root of the problem, the better. We don’t want it to snowball like Enron’s. Leaders and the management should be the first to apply this. Company culture should also allow this form of excellence and transparency to prosper

In addition to ethical discipline, Companies should choose a neutral oversight committee or any relevant governing body as a means of evaluating ourselves to improve. Companies should also hire neutral entities as auditors to prevent conflict of interest and collusion similar to Andersen’s accounting firm in cahoots with Enron.

Second, companies should hire a new class of directors to replace the current board in case of complacency and power imbalance. Insight from Malcolm Salter’s book Innovation Corrupted– The Origins and Legacy of Enron’s Collapse shares that the board seemed to be isolated from operations. They weren’t aware of the failures in risk management and procedures. There was a lack of confidence and instruction in financial transactions at the board. On top of this was the anointing of the media of CEOs Skilling and Lay as rock stars.

My take is that a power imbalance was evident within the top management. With the addition of Andersen, which was both an auditor and consultant, the lack of disciplined oversight and control lay the groundwork of the pathology of Enron. With the influx of a new set of directors, the current system could have been a challenge and the fall could have been averted. [4]

Lastly, the government shouldn’t be so keen to oblige with the requests of a company without consideration of its potential impact. In Enron, politicians of both parties took Enron’s money and did Enron’s bidding, including the president. President Bush was the number one recipient of Enron’s financial aid and he went on to fill his administration with consultants, lawyers, advisers, officers, and shareholders formerly from Enron. Lastly, he was key to the provision of unprecedented access to complete energy deregulation with no government interference.

I recommend that companies should have a culture that promotes Ethical Discipline, a board of directors that are competent, and a stand to refrain from government interference for the sake of personal gain. These three that should prevent the next Enron from rising from our country.


Parting Thoughts

Enron has become the byword for corporate accounting ever since its fated collapse shook Wall Street at its core. In the wake of every major calamity, people rush to point the finger of blame. This time, however, it took more than one finger.

What ultimately led Enron to its depths was the ill-advised union of Enron’s top executives, auditors, and board to handle the crisis enveloping the company. Enron’s top executives, albeit created a highly successful company, diverted funds into phony investments and cashed in their stocks — which inevitably bled to their deaths — all the while ensuring employees and investors the soundness of their decisions. “Never been stronger. Our growth is certain”, says Chairman Lay a year before the bankruptcy. [5]

In response to the collusion between Enron and Andersen’s public accounting firm, the SOX federal law changed the way corporate boards deal with their financial auditors. The establishment of SOX was one of the good things that came out of the fiasco and it will continue to serve as a reminder to protect investors, as well as, elevate the accounting and auditing practices worldwide.

Malcolm Salter in his book Innovation Corrupted– The Origins and Legacy of Enron’s Collapse said, “Truth-telling is the cornerstone of corporate governance.” For Enron, the leaders themselves hid from the truth in the hopes of getting out of the crisis as soon as possible — sidelining both their employees and shareholders. They orchestrated the loss of $74 billion in the four years leading up to its bankruptcy, and its employees lost billions in pension benefits. The shareholders and employees held the brunt of the perverse incentives.

CEOs Lay and Skilling deliberately forgot that everyday management and leadership is an exercise in moral deliberation and application.

Enron’s executives, as innovative and game-changing they were, weren’t leaders. They were just frauds. They took on the mantle of leadership without exercising the right way to do it. The challenge for the next generation leader is to lead with resilience, deliberation, and above all, truth.

“Everyday management and leadership is an exercise in moral deliberation.” — Malcolm Salter


1. Federal Reserve Bank of St. Louis. “Making Sense of Mark to Market.” https://www.stlouisfed.org/publications/regional-economist/january-1994/making-sense-of-mark-to-market Accessed Oct. 1, 2020.

2. Texas State Historical Association. “Enron Corporation.” https://tshaonline.org/handbook/online/articles/doe08 Accessed Oct. 1, 2020.

3. Investopedia. “Enron Scandal: The Fall of a Wall Street Darling” https://www.investopedia.com/updates/enron-scandal-summary/ Accessed Oct. 1, 2020.

4. Harvard Business Review. “New Insights from Enron” https://hbr.org/podcast/2006/08/harvard-business-ideacast-9-ne Accessed Oct. 1, 2020.

5. CNN.com/Inside Politics. “Bill Press: Who’s to blame for Enron?” http://edition.cnn.com/2002/ALLPOLITICS/01/16/column.billpress/index.html Accessed Oct. 1, 2020.

Leo is an electrical engineer, MBA Candidate, and public speaker. He writes as a hobby. Follow his page on productivity and personal finance on Facebook here.

Electrical Engineer | MBA | Public Speaker | fb.com/TheLeoInvestor