Improper Data Analysis Led to the Fall

¶ … Improper Data Analysis Led to the Fall of Enron

The downfall of the Enron Corporation in 2001 had far reaching effects that are still felt to this day. Employees, shareholders, auditors, executives, the public and many other stakeholders are still dealing with the impact of the fallout that came from the misconduct of the debt ridden company. Shareholders lost billions of dollars when the stock price plummeted. The accounting firm Arthur Anderson LLP was found guilty of obstruction of justice and is no longer able to practice as Certified Public Accountants in the United States. The lessons learned from how Enron and its accountants misused information has profound ethical and business implications for any student of data analysis in whatever field.

From a misuse of data perspective, the best place to begin with the Enron scandal is with its auditing firm, Arthur Andersen. While earning millions of dollars, this firm performed reckless audits with poor standards due to a major conflict of interest over the significant consulting fees. Furthermore, Andersen's auditors let themselves be pressured by Enron to not recognize specific billing items as the overwhelming credit weakness of the company became clear to everyone on the inside. As Enron's investments would never be profitable, accounting rules stated that they should be written-off the balance sheet, yet these accountants misused this data to trick share holders. Another way where conflict on interest overwhelmed Andersen's ability to police itself was in conflict between their Houston and Chicago offices. Andersen's Houston office, which was responsible for handling the Enron audit, regularly overruled the concerns and critical questions of Enron's decisions raised by the Chicago office. Andersen's misdeeds regarding data management were further compounded when after news of the federal investigation was announced, they shredded and deleted tons of information in a failed effort at a cover-up. These revelations led directly to the break-up of the firm (Nagy, 2005).

A number of consequences emerged from misuse of data in the Enron Scandal. First, public awareness of accounting practices grew exponentially after the Enron collapse. The tragic loss of many innocent Enron employees' life savings caused significant support for enhanced government oversight of corporate accounting practices. This manifested in the Sarbanes-Oxley Act which creates an accounting oversight board and requires certification of financial reports, and harsher penalties for securities fraud. Not all consequences were bad however. Certain industries saw a positive impact from Enron's demise. Energy companies, accounting firms and lawyers are trades that saw a positive impact from Enron's and Arthur Anderson's downfall. Other energy competitors took up part of the business that Enron lost. Accounting firms picked up the business that Arthur Anderson lost when they surrendered their licenses. Lawyers have seen an increase in their business due to the hundreds of civil suits that were filed.