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The Collapse of Enron - Essay Example

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Summary
This essay "The Collapse of Enron" focuses on positive and normative accounting theories to examine the factors that lead to the collapse of the Enron Corporation. Capital market efficiency could not be made the culprit in the Enron Scandal. It is just a theory…
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The Collapse of Enron
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There were implications of the nonworking of the capital market to reflect the different factors that could have brought the prices of Enron’s stock price. This could be dramatized in the loss to trust of the investors in the reliability of the financial statement of all other companies which are listed on the stock exchanges. This fact was confirmed by surveys. It was found also that there are kinds of asymmetry of information that may prevent the efficient operation of capital markets. It could be the "moral hazard" type and the adverse selection type, which were both analyzed to have caused the demise of Enron.

It was also further found that there could be perspectives in the choice of accounting policy that could affect the very life or the probability of success of a corporation. One is under the efficient perspective of positive accounting theory; where management would be encouraged to work first for the firm and the stockholders before their own. Such perspective has also it's grounding in a cost-effective accounting system that would promote accountability with the company’s assets. On the other hand, there is the other perspective, which is called the opportunistic perspective of positive accounting theory.

It was found theoretically that the efficiency perspective was the very opposite of the opportunistic perspective and therefore its adoption could actually prevent the operation of the latter. What happened then in Enron was that there was the adoption of the opportunistic perspective. Such adoption was evidenced in the design of the compensation system of the company executives as well as in the retirement system of the employees. Enron was virtually in a situation where the executives will have to choose between committing fraud or taking risks because of their (executives) tendency to rather make themselves rich before the company under the opportunistic perspective of accounting theory.

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