Sources of Enron's Corporation Failure and the Agency Theory

Abstract The financial collapse of Enron Corporation in 2002 has shaken the public confidence in the US corporate governance system. The most important gatekeepers could not predict Enron's collapse before it occurred. It was discovered that Enron's senior management has employed complex creative accounting techniques to manipulate the company's financial figures and hence boost up its financial performance. However, when these financial fraud practices came to the surface, it was very late to avoid their high costs which harmed the entire US capital markets. Many articles and books were written to explain this financial scandal. Some argued that Enron's failure was due to the low quality of the accounting standards, some claimed that it was the result of limited ability of financial analysis and forecasts, and others went far to say that it was a product of an integrity and fraud culture. However, I argue that Enron's collapse was clearly the result of an agency problem and a high level of conflict of interests. Moreover, I argue that the commonly used corporate governance devices can be fake as proved by Enron's story