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1) Why was Enron such an admired company prior to 2000?

2) Why did the company fail?

3) Why were the company's internal checks and balances and incentive systems unable to prevent its demise?

4) What was missed? - Why did the external auditors and board fail to prevent Enron's failure?

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Answer 1

Perception of Enron Pre-2000

Enron was admired before 2000 due to its efficient management, high returns from its investment through proper allocation of resources, and long-term fixed price agreements with its clients (Abdel-Khalik, 2019). These agreements guaranteed stable prices of gas and decreased the possibility of fluctuations in the costs of gas in the future. The skilled labor force was attracted by Enron as the employees have knowledge about the markets. The company also motivated its staffs to feel free to shift to other valuable positions, and they were assessed on the basis of biannual feedback.

Answer 2

Reason for Enron's Failure

Enron failed due to the following reasons:

- The leaders of Enron fooled the regulators with false accounting practices and holdings
- The company utilized special purposes entities (SPEs) and special purpose vehicles (SPVs) to hide its huge toxic assets and debts from the creditors and investors
- The price of the market shares of the company went to $0.26 at bankruptcy from $90.75 at its peak (Haswell & Evans, 2018)
- The leaving of senior executives and selling of stocks at the same time also led to the failure of Enron

Answer 3

Analysis of Preventative Measures

The incentive systems and internal checks and balances of Enron failed to prevent its fall as the senior executives were leaving the company, and the stock value has already gone down. Twenty-eight credit rating firms considered the debts of Enron as junk-bond status that further led to its demise. The incentive systems of Enron drove the leaders to sort various dishonest methods like hiring new executives with attractive bonuses and rewards and high compensations as motivators to stay ahead of its competitors in the markets (MacCarthy, 2017).

Answer 4

Missed by Enron

As an external auditor of Enron, Arthur Anderson neglected to reveal the unethical actions and decisions of the company. He continued to verify the problematic financial reports of the company. The outsourcing of external auditor for its internal audit rather than of setting up a functional mechanism for internal audit also caused the collapse of the company (Michaels, 2019). Anderson validated the application of false financial reporting and questionable accounting practices. The Board of Directors of the company failed to carry its fiduciary responsibilities towards the shareholders of Enron. They also supported the criticized policies, devious transactions, and questionable plans of the company and all these lead to the failure of Enron.

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