03-12-2012, 01:15 PM
The Enron Scandal and Moral Hazard
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• Enron, the 7th largest U.S. company in 2001,
filed for bankruptcy in December 2001.
• Enron investors and retirees were left with
worthless stock.
• Enron was charged with securities fraud
(fraudulent manipulation of publicly reported
financial results, lying to SEC,…)
• QUESTION: In what ways are security
market moral hazard problems at the
heart of the Enron bankruptcy scandal?
Brief Time-Line of
the Enron Scandal
• Enron was a Houston-based natural gas pipeline
company formed by merger in 1985.
• By early 2001, Enron had morphed into the
7th largest U.S. company, and the largest U.S.
buyer/seller of natural gas and electricity.
• Enron was heavily involved in energy brokering,
electronic energy trading, global commodity and
options trading, etc.
Bad Accounting Practices?
Generally Accepted Accounting Practices
(Prior to 2002):
•Auditing companies often consult for the
companies they audit (conflict of interest).
•Audit company partners often later accept jobs
from their client companies.
•Companies often retain the same auditing
company for long periods of time.
•Auditing companies have been allowed to police
themselves.