The Enron debacle: more than a perfect storm

Reinstein, Alan; McMillan, Jeffrey J.

doi:10.1016/j.cpa.2003.08.006

Cited by 48 publications

(32 citation statements)

References 22 publications

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“…The whole emphasis of the organization was to seek to grow earnings and the stock price (Healy and Palepu, 2003). This occurred via Enron's operations in the USA's energy markets (Reinstein and McMillan, 2004) with the company later expanding into overseas energy-related transactions and other ventures such as broadband, pulp and paper (see for example, Chabrak and Daidj, 2007;Chatterjee, 2003). Thus the company was focused upon making money (Clarke, 2005) and had an underlying philosophy that those who generated profits for the firm should be compensated generously.…”

Section: Enron As An Individualist Concernmentioning

confidence: 99%

“…Previous papers discussing Enron have emphasized the great significance of agencyrelated problems at the firm (see for example; Arnold and de Lange, 2004;Cullinan, 2004;Gavious, 2007;Reinstein and McMillan, 2004). In an individualistic culture, where managers have a greater propensity to act in their own interests rather than in the best interest of investors, this agency issue is amplified.…”

Section: Accounting Auditing and The Issue Of Marginsmentioning

confidence: 99%

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Mary Douglas, risk and accounting failures

Linsley

Shrives

2009

Critical Perspectives on Accounting

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Sociology and anthropology are especially valuable in providing a critical understanding of the risk-related implications of modernity. There has, however, been relatively little discussion of the work of Mary Douglas within accounting although her pioneering writings in the area of risk have been highly influential. This paper uses Douglas' cultural theory of risk to provide an alternative perspective on the demise of Enron and Andersen. The failure at Enron is interpreted through the gridgroup model and analysed as a series of events that threaten to destabilize established cultures. Accounting is thus construed as an activity that exists on the margins of boundaries. There are two important conclusions drawn from the analysis. First, as the worldviews of both the individualist and hierarchical cultures became threatened by the ensuing crisis they collaborated to ensure their perpetuation. This also averted individuals from becoming susceptible to recruitment by subversive egalitarian groups. Second, the individualistic culture of Andersen shaped practices within the firm weakening its ability to act as a gatekeeper and therefore public accounting firms need to modify their cultures if they are to police the margins effectively.

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Section: Enron As An Individualist Concernmentioning

confidence: 99%

Section: Accounting Auditing and The Issue Of Marginsmentioning

confidence: 99%

Mary Douglas, risk and accounting failures

Linsley

Shrives

2009

Critical Perspectives on Accounting

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“…In recent times, stock price increases have been strongly linked to increasingly debt-free company accounts, giving firms an inducement to divest themselves of large debt holdings (e.g., Reinstein and McMillan 2004). For firms which continue to own significant quantities of their own shares, this results in an important source of free cash flow.…”

Section: The Tendencies and Counter-tendencies Of Financializationmentioning

confidence: 99%

Investigating the potentially contradictory microfoundations of financialization

Watson

2009

Economy and Society

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The existing academic literature on financialization points to multiple instances in which firms attempt to demonstrate the vitality of their stock market position in ways which ultimately prove to be self-harming. I demonstrate, in the first instance as a matter of immanent logic, that these actions are linked to the interplay of contradictory tendencies in the microfoundations of financialization.Under conditions of financialization, firms create additional sources of credit to capitalize their productive activities by driving their stock price into greater increases than the market average, thereby generating capital gains. Yet, the more it becomes public knowledge that the financing tricks used to inflate the stock price provide no productive benefit to the firm, the more that it would seem to create incentives for fund managers to hold portfolios that replicate the stock market as a whole. In this way, they will minimize their exposure to financial misrepresentation. Such a stance undermines financialized business models, but it does in any case conform to fund managers' basic theoretical training, which revolves around the logical demonstration that an individual stock cannot systematically out-perform the market average. I review the available empirical studies of fund manager decision-making to show that they find against the existence of a simple performativity loop operating between finance theory and fund manager behaviour. However, on many points the empirical evidence does confirm the theoretically-derived conclusion concerning the potentially contradictory microfoundations of financialization. Fund managers often do act in a way which is consistent with finance theory's core claim that an index-tracking strategy represents the only equilibrium portfolio, even if this is only rarely as a result of the direct performativity of the theory.

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“…Empirical evidence has shown that this trust inevitably encourages the inappropriate effects described above (Reinstein and McMillan, 2004). 1 In this scenario, it would be reasonable to hypothesise that controllers appointed by firms run a big risk of losing their independence as long as control is not imposed by the legislator, but is merely left to the goodwill of the firm.…”

Section: Risk Related To Inappropriate Relationshipsmentioning

confidence: 99%