Abstract
We analyze the Enron case to identify the risk factors that potentially led to its collapse and specific issues relating to its aggressive accounting and high-light the lessons for independent directors. In Enron, the interactions between external stimuli, strategies, corporate culture, and risk exposures possibly created an explosive situation that eventually led to its demise. Much of the post-Enron reforms have been directed towards regulating the roles and responsibilities of executive directors and auditors. However, the role of independent directors has received relatively lesser attention. Independent directors should analyze the risks of their companies and understand the pressures that arise from market conditions and firm-specific policies and incentive structures. They also need to close the information gap between executive directors and themselves. A post-Enron era also requires independent directors to change their focus. Traditionally, independent directors have to strike a difficult balance between maximizing returns and minimizing risks. Independent directors may now have to focus on the management of risks, the design and functioning of an effective corporate governance infrastructure, and the moderation of the power bases of dominant executives. Practically, they may also have to reduce the number of independent director appointments to enable them to focus more effectively on a fewer companies.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
Notes
- 1.
Hereinafter referred to as the “Powers Report.”
- 2.
Hereinafter referred to as the “Senate Report,” p. 7.
- 3.
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, 2 March 2001, EDGARPlus(R).
- 4.
The Senate Report, p. 3.
- 5.
Details of the hedging transactions are found in The Powers’ Report, pp. 13–15.
- 6.
Securities and Exchange Commission, Litigation Release 17762, 2 October 2002.
- 7.
The Powers’ Report, p. 42.
- 8.
The Senate Report, p. 11.
- 9.
The Senate Report, p. 54.
- 10.
Hereinafter referred to as The Conference Board Report.
- 11.
The Conference Board Report, p. 9.
- 12.
The Senate Report, p. 27.
- 13.
The Senate Report, p. 28.
- 14.
The Senate Report, pp. 30–31.
- 15.
The Senate Report, pp. 14–24.
References
Chaffin, J., and S. Fidler. 2002. The Enron collapse. Financial Times, London, 9: 30.
Permanent Subcommittee on Investigations of the Committee of Governmental Affairs. 2002. United States Senate, The Role of the Board of Directors in Enron’s Collapse Report, 107–170.
Powers, Jr. W.C., R.S. Troubh, and H.R. Winokur, Jr. 2002. Report of investigation by the special investigative committee of the board of directors of Enron Corp.
Securities and Exchange Commission. 2002. Litigation Release No. 17762.
The Conference Board. 2003. Commission on public trust and private enterprise.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2022 Springer Nature Switzerland AG
About this entry
Cite this entry
Tan, P., Yeo, G. (2022). Accounting Scandals and Implications for Directors: Lessons from Enron. In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-91231-4_40
Download citation
DOI: https://doi.org/10.1007/978-3-030-91231-4_40
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-91230-7
Online ISBN: 978-3-030-91231-4
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences