Term paper_BLAW5330 - I Introduction The collapse of Enron...

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I. Introduction The collapse of Enron that used to be one of the world top ten biggest firms ranked by “Fortune Magazine” made shocking news worldwide. It was a huge corporation with wide net of business worldwide and assets of over USD 65 billion. Because of the tricky and creative accounting, it could hide billions dollars of debt off the balance sheet which is overstated by approximately USD 600 million during five years. When Enron declared its bankruptcy on December 2, 2001, the market value of Enron’s assets went down rapidly, and its stock price plunged to lower than 1 dollar from over 80 dollars. In its liquidation, Enron’s shareholders had to see that their investment almost completely disappeared, and its employees had to see that their life saving pension funds wiped out miserably. Known as one of the most innovative management of Enron turned out to be a robber with fraud and one of Big Five consulting firm, Anderson lost its major clients and got accused by its negligence in auditing Enron. Following to the case, in July 2002 the United States passed a corporate corruption bill, Sarbanes-Oxley Act of 2002. This act shows that all dishonest corporate leaders must be exposed and punished. It also made loose standard and false profit exist no longer in business world. The act added a restriction to an auditor, the restriction that accounting firms should rotate the in-charge partners on an auditing assignment every 5 years in order to prevent auditors from getting too cozy with their corporate clients. 1
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Enron’s case gives foods for thought to investors and management in decision making such as corporate governance, conflict of interest, accounting principles, auditing principles, and appropriate public disclosure. In this paper, the Enron crisis, the starting point of crisis of corporate governance, will be analyzed from the perspective of managerial moral hazard. At the same time, it will analyze Enron in the similar aspect with Korean business practice before the 1997 Asian financial crisis era. II. Brief History of Enron Enron started in 1985 as a traditional pipeline company that supplied natural gas and transformed itself into a commodities trading company of natural gas. The company had increased it revenue by guaranteeing long-tern supply to its clients at a fixed price. According to Peñalva (2002), Enron had become the leading company in its sector with a control of 20% of the market in America by 1995. During the late 1990s, Enron grew rapidly diversifying its business from its basic business such as buying and developing pipeline or power plant, and expanding it by building a wholesale or retail business around the world. During the period from 1996 to 1998, approximately 60% of Enron’s earnings were generated from business in which Enron was not engaged ten years ago, and 30% to 40% were generated from business in which Enron was not engaged five years ago.
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