Tarun Aswani

Smartest Guys in the Room Essay

The Enron scandal took a toll not only on the victims within the corporation, but on
business and ethical operating procedures in general. At first, this scandal being with
suspicious trading on oil market stocks. Enron founder, Ken Lay, wholeheartedly denies
knowledge of these gradings after Enrons reserve funds are depleted. This was the beginning
on a slippery slope of wrongdoings by Lay. To cover up for himself, he cleared house of the
illegal traders and hired a new CEO in Jeff Skilling. With this I believe that Lay was trying to
outsmart the employees, investors, and auditors into thinking that the illegal threat was now
removed and with the new hire of Skilling, Enron would be able to redeem itself.
In retrospect, the hire of Skilling further regressed Enron from being an ethical and
profitable company. The illegal accounting practices ad Darwinian corporate environment led to
the beliefs that anything and everything make outsiders believe Enron was profitable was fair
game. This mentality leads to aggressive investments in failing business such as broadband
technologies and trading weather commodities. However, due to Skilling illegal accounting
practices, Enron still shows profits, which are actually nonexistent.
In our earnings management handout we can relate this information of accounting
manipulation back to the Enron scandal in the Smartest Guys in the Room. In the simplest
forms of manipulation, sales are overstated, which in the Enron scandal, this was done by the
mark to market accounting practices. Another form of manipulation described in the earnings
management handout was understanding cost and hiding debt. Enron hid their overwhelming
debts by receiving money from shell companies. This in turn made Enron look as if they were
turning a profit. Enron is a classic case, by definition, or earnings management. The CEO and
his board uses its effort to make reported earnings higher rather than attempting to maximize
value by its efforts in operational policy, financing policy and dividend policy.