ENRON SCANDAL 1. Stock market crash: - Reason: The collapse of the U.S. stock market in 1987 was heralded.

Many people suspect that the effective functioning of the U.S. Securities and Exchange Commission (SEC) has triggered the formation of new stock bubble. SEC prevented fraudulent interception and remote market disruption risk effectively. SEC gave investors all the necessary information but they cannot alter the consideration and decision. Investors did not care to the real value of that business, but to the image and approach to the public, and along with those unofficial comments about business. A short message and obscure about the potential of the product expected to grow in the future may made investors rushed to buy shares. Or in other words, it is the rumor based investment habits. - Black Monday: refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average dropped by 508 points to 1738.74 (22.61%) The portfolio insurance played a major role in this crash. 2. ENRON: - Background: Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. It was operated during the SEC has the strong impact in the financial sectors, and 2 years before the Stock Market Crash. Enron was the nation's seventh largest corporation, valued at almost seventy billion dollars. - Reasons: Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. The Act confuses financial accounting with tax accounting. There are myriad differences between financial accounting and tax accounting and no one, other than the proponents of the bill, contend that they should be the same. Stock options exercises enhance tax receipts. Proponents of the Act complain that Enron reduced its tax liability by claiming $600 million in tax deductions from the exercise by its employees of stock options. However, every dollar of tax deduction from stock options exercises translates into a dollar of taxable income to the employee. Employees pay tax at higher rates than corporations. The tax paid by the employee more then offsets the deduction claimed by the company, enhancing tax receipts. Stock options tax deductions would not have reduced Enrons reported earnings by one-third. The accounting rules require the use of an economic model called Black-Scholes to estimate the current value of stock options. For the three years 1998-2000, stock options grants would have reduced Enrons reported earnings by 7.5 percent. This impact of stock options grants on reported earnings was displayed in footnotes to Enrons income statements.

When Skilling joined the company, he demanded that the trading business adopt mark-tomarket accounting. Enron became the first non-financial company to use the method to account for its complex long-term contracts In total, by 2001, Enron had used hundreds of special purpose entities to hide its debt Even though Enron extensively relied on derivatives for its business, the company's Finance Committee and board did not have comprehensive backgrounds in derivatives to grasp what they were being told. Enron's audit committee did not have the technical knowledge to properly question the auditors on accounting questions related to the company's special purpose entities. Consequences: twenty thousand employees lost their jobs. Investors lost some 60 billion dollars within a few days; for many it meant losing their old-age security. The pension fund for the company's employees was obliterated. Citizens trust in the American economic system was destroyed. Losses on the financial market amounted to the worst stock value loss in peaceful times. Banks were suspected of collusion. The auditing firm Arthur Anderson lost its accreditation. The rules for company financial reporting were drastically sharpened: Sarbanes-Oxley Act (2002). The close ties of the company's founder, Kenneth Lay, to US President George W. Bush Lay was an important financial supporter of Bush came under sharp criticism. Recommendation Practice I: Provide education for managers to increase awareness of the importance of (a) sustaining process and developmental integrity capacity as a strategic management asset and (b) of accountability for developing judgment integrity by balancing management and ethics competencies. Practice II: Expand the scope of managerial accountability to include system integrity capacity development, including the regular implementation of transparent economic, social, and environmental accounting systems. Practice III: Expand the scope of managerial fiduciary duties to include institutionalized stakeholder democratic participation in corporate governance. While it is impossible to guarantee that Enron-like disasters will not occur in the future, the three positive practices and the proposed remedies are one way to reduce the likelihood of their occurrence.