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Enron and Risk Analysis Theory

“Enron: The Smartest Guys in the Room” is considered to be a documentary film about the collapse of the greatest world corporation; it was presented to the public in 2005, demonstrating a closer look at the criminal traits of the company’s executives and depicting one of the greatest business scandals in the USA. Risk analysis theory applied to the Enron Company’s collapse criticism demonstrates the idea that ‘risk management’ appeared to be vital for such a corporation for several reasons: the significant role of financial distress costs, considerable debt levels carried by the company, internal financing maintenance, and the importance of contract performance. For this reason, all the staff grades and top management were divided into three categories: risk seekers, risk neutrals and risk averters.

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Risk management appeared to be of crucial importance for Enron Corporation; the company was lauded for the complicated tool of developed risk management strategies through its business planning. White-collar criminals are shown to be risk seekers, preferring the riskier choice for the reason of financial gains; business operations on the world market turned into the ‘risk game’ of high stakes. Three executives and players strived to be culpable; nevertheless, illegal transactions, which had brought huge benefits at the initial stages, resulted in the total collapse of the financial giant.

Millions of people were deprived of their workplaces and the opportunity to support their families. Specialists have identified that three top players of Enron Corporation developed indirect manipulation by their employees, involving them in financial crimes. It is necessary to underline the fact that criminals’ operations made the staff unintentionally become risk neutrals, remaining indifferent to the risks portrayed by the company’s chiefs, and risk averters, those, who were against any risky operations.

‘People who did right just by doing their jobs rightly’ (Enron, 2005)The film provides interviews of the shareholders and executives of the company; one of the interviews was carried out with Sherron Watkins, former, Enron Vice President. He stressed, that many people working for Enron treated the executives’ criminal operations differently; some considered them to be negative and unacceptable, some employees admired heroically made decisions leading to considerable profits. Nevertheless, it was manipulations carried out as a part of risk management system.

It is necessary to underline the fact that Enron collapse can be also related to creditor confidence loss. It was a fuss inside the company. The interviews highlighted stealing within internal company’s business through the example of Andy Fastow. His investments were used by the executives for reaching their financial goals and filling business holes; finally, the part of blame for corporation collapse was put on him.

The board of directors was completely aware of high risk management; no actions were taken to prevent the executives’ practices. They took the position of risk neutrals, demonstrating indifference and indirectly supporting financial crimes. The analysis of Enron collapse on the basis of risk management theory highlighted the following conclusions to be made: trading operations appeared to be first class; partnerships created internal credit risks damaging financial planning; the role of downside costs was significant. Mistakes promotion started with aggressive HR management planning, building the team work on manipulations, making the staff play according to the top players’ rules.

References

‘Enron: The Smartest Guys in the Room’. (2005).

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StudyCorgi. (2022, April 5). Enron and Risk Analysis Theory. Retrieved from https://studycorgi.com/enron-and-risk-analysis-theory/

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StudyCorgi. 2022. "Enron and Risk Analysis Theory." April 5, 2022. https://studycorgi.com/enron-and-risk-analysis-theory/.

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