Revisiting Enron

Enron logo, designed by Paul Rand

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While I was searching through Bloginization I came across an interesting post that talked about the failures of Enron and a concept called “normal accidents.” The title of this post is called Enron = normal … accident, that is.  I found this post to be interesting since this author and I sort of wrote about the same idea in certain parts of her post. I wanted to take a look at her analysis and reasoning to why Enron fell.

The first major point I received from the article talked about Enron’s coupled systems. She mentions that “tightly coupled systems, like Enron, are prone to larger and greater faults.” Personally, I cannot agree more with this argument. Having a coupled system means that information from one system is provided to, or influences the behavior of the other system. In the case of Enron, a huge conflict of interest arose from coupling its two internal and external auditing companies. In one scenario, Enron was receiving internal auditing and consulting on its financial statements by its external auditing company. In other words, the information that was being provided by the external auditor about internal auditing influenced the behavior of the external auditing. Since the external auditor was providing internal auditing and consulting services, they were not going to flag Enron for fraudulent accounting.

She then touches on a point about Enron having this “Titanic-esque” mentality about themselves, believing that nothing could sink their ship. They decided that it would be beneficial to the health of the company to start moving debt off the balance sheet. I do not see anything wrong with this practice, until they started doing it to misrepresent the true financial standing of the company. This gave a false sense of stability that tricked investors, credit agencies, and many others into thinking that Enron was still a top company. By Enron having this mentality made them think they could do whatever they want and get away with it.

The last point she touches on that was relevant between both our writings is who is at fault for Enron actually collapsing. She explains that the fall of Enron SHOULD NOT be put on the executives of Enron; however, arguing that “technological innovations” (Structured finance, market deregulation, and stock options) was the reason why Enron failed. This is the only point I argue against because without the executives there would be no technological innovations. Without the board’s oversight, there would be no technological innovations. The board and executives are responsible for the integrity of each of the company’s transactions. Whether it is deciding to enter a new deregulated market or formulate employee incentive plans with stock options, it all starts from the top to the bottom.

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5 Responses to Revisiting Enron

  1. Jordi says:

    Can you identify the author of the original post? Please try an contact him/her, ok? Alex L’s post explains how he did it (using facebook).

  2. knriggins says:

    I liked this post, and I felt it had good connections to other posts/sources. My favorite part is the point about the Titanic-esque mentality (idea that nothing could sink the ship). I feel like this describes Enron’s mentality and our former mentality about the economy. Things like AAA ratings and stellar track records have caused us to get cocky. As we’ve read in previous weeks, economists are obsessed with perfection; perfect solutions to simple issues. But things are much messier than this, and I felt like this post really drove that home.

  3. MDHarbin says:

    Enron is such a famous case it is impossible to simply ignore ANY detail. Although I like your argument, I’d always heard the company was way to focused on the ascent of the stock price rather than producing sound business deals and that is was the structured financials (bad deals) that hurt the company. I like this post, you hit most of the highlights and was a good read.

  4. Pingback: Blog Council Awards | Biz Gov Soc

  5. joshua says:

    This is a very good analysis of enron,… i personally believe that the auditing firm responsible for there book keeping need to be out of business as well because if they had done there job and blew the whistle on enron before it became too big of a catastrophe they could have made internal reforms and restructured the company to save them selves and a good portion of there employees

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