Enron: an examination of agency problem'' by Arnold, B. and de Lange, P. (Critical Perspectives in Accounting, 2004) are an article that deals with the Enron collapse in America. The essay places a perfect anatomy between the collapse and the Titanic catastrophe. It was said that the main cause of the catastrophe was an iceberg that was on their way. However, the real problem lied with the people in management. They initiated a fast speed for the ship in a highly vulnerable location in a bid to prove their abilities. This led to the deaths of numerous people. The same happened in the Enron collapse as the article explains.

Evaluation and Analysis

Enron Corporation, which was based in Europe, was responsible for the employment of 20,000 people. Its collapse had a significant effect on the economy of America. The article points out that the occurrence of more significant and public collapses such as World Com and Nortel prompt the investigation of the agency flaws that led to the Enron collapse. The control; system of the corporation, the principals, were overcome by greed. The article mentions greed and brings its out as the value of the interests of the principals’ interests over those of the agency. This is whereby; the owners are interested in an increase of investment returns. On the other hand, the managers have a wide range of psychological and economic interests which they put first in their list of priorities. This resulted in the making of decisions that did no favor the corporation but the individuals who were involved.

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Market hypothesis should be based on efficient and adequate information. However, this does not mean that the process should be as slow as was observed in the period of the Enron collapse. The article reveals that the relationship of the managers and the stakeholders had failed. However, the market could not see and predict the demise of Enron. The company made high risk deals that led to its collapse at the period. However, in any business organizations, risks have to be taken. The higher risk of the business, the higher the profit, as well a loss, margin. Therefore, the engagement in high risk deals may not be a main cause of the collapse. However, if there were sufficient market hypotheses made at the time, some of the risky deals could have been foregone.

The article has also dealt with the agency theory. It predicts that the relationship between the stakeholders and managers should be well defined. It is the stakeholders who should determine what should be done. The role of the managers should be the execution of the commands of the stakeholders. The article predicts that the main cause of the fall was entrusting the managers with the duty of making decisions in the corporation. The managers end up taking care of their own interests, as in the decisions on capital investments, leading to the bankruptcy and demise of the corporation (Arnold 2004). The article also reveals that the enduring of opportunistic managers also caused the collapse. This is a real argument since such managers only make decisions for their personal gain. However, the alternative would be close monitoring, working with contracts and many other methods. All these are extremely costly and can affect the profitability of a company. Therefore, this is a problem that is difficult to alleviate as shown by the article.


The essay above clearly shows the stand revealed in the article. The main cause of the Enron collapse is the poor relationship between managers and the stakeholders. However, there are shortcomings of the article which have been noted. The bottom line is that the cause for such weighty collapses is organizational. Most of the flaws and mistakes come from the leadership. Therefore, this can be a starting point in preventing the occurrence of such collapses.

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