Question

What opportunities allowed Enron's management to commit the fraud?

Answer 1

Enron Corporation was born in the midst of a 1985 recession when Houston Gas Company's Chairman, Kenneth Lay, orchestrated a merger with Internorth Inc. The new company, which posted a $14 million loss in the first year, consisted of $12.1 billion in assets, 15,000 employees, the nation's second largest pipeline network, and a colossal debt mountain. Enron was a modern natural gas corporation operating in the regulated energy economy with all the conventional trappings of a highly leveraged, "old economy" company. During his early years, teetering on the brink of bankruptcy, Enron had to fend off a violent attempt to take over.

SAS No. 99 (Consideration of Fraud in a Financial Statement Audit) issued by the Auditing Standards Board at an individual level indicates that there are three conditions in the occupational fraud triangle that are generally present when fraud occurs. These conditions include an incentive or pressure to commit fraud (personal financial issues or unrealistic performance goals), an opportunity to commit fraud (weaknesses in internal controls), and an attitude that allows the individual to rationalize the fraud. While the fraud triangle focuses on fraud mechanisms at individual level, such as localized money instances or other appropriations of property

The fraud triangle shows that Enron's most important lessons are the way a corporate culture led by CEO Skilling tackled a complex and widely praised array of management controls and the importance of carefully integrating the core concepts of governance, organizational culture and organizational control within organizations. Organizational fraud is only possible if these three variables are designed in a way that allows corruption–and even fosters it–and does not avoid lack of enforcement. The linkages presented in the diagram above provide important, but largely untold, insights into Enron's demise to managers in other organizations.