1. in 2001 Enron, the Us Energy Company, Went Bankrupt.

Jake Small

Student Reference #:

4th March 2011

WC:2418

Contemporary Economic Issues

Consider the following sequence of events:-

1. In 2001 Enron, the US energy company, went bankrupt.

2. A few months later Enron’s external auditors, Arthur-Andersen, sold its

business to other accounting and consulting firms.

3. In 2002, the Sarbanes–Oxley Act was passed in the US.

Provide an analysis of, and explanations for, these events and the links between them.

Introduction

The collapse of Enron, the failure of Arthur-Andersen and the creation of the Sarbanes-Oxley Act are all inter-related incidents. With the surge of trading commodities, managers being pressured to raise share levels for personal gain and to meet the needs of the share holders and conflict of interest between firms. Something was bound to fail and Enron was the just the beginning. Enron, once a flagship for innovation crumbled due to accountancy practices that didn’t tell the whole truth when stating the finances of the company. Arthur-Andersen provided the documents and took the punishment for it. Once the inner workings of numerous other collapses, with billions lost, the government was forced into creating laws that would tighten the accountability of managers to shareholders.

Enron: The Rise and Fall

Enron started as a merger between state-run energy monopolies (Houston Natural Gas and InterNorth) in 1985, forming a large private monopoly. Originally the energy market (a public utility) been given an obligation to serve all customers in return for guaranteed returns on their investments. Demand was assumed to be exogenous and inelastic and changes in demand were characterized as disturbances to the system. The large, central generation plants built by early utilities often had excess capacity. This led utilities (and regulators) to promote demand growth through relatively...