The Enron Scandal 2001, is generally but wrongly attributed to market failures. Specifically, audit failure and poor ratings from CRAs did not reveal Enron's false accounting. As explained elsewhere, the conflict of interest among CRAs who purposely overrate the firms is due to regulation from the SEC. The common view seems to be that competition itself is the culprit. When CRAs must compete against each other, the firms will choose the CRA who offers the best evaluation. If they seek profit and do not want to lost clients, they will give the best ratings, regardless of the risk of the firms. In reality, those CRAs do not care about lost of reputation thanks to their status of NRSRO, approved by the SEC. This gives the (false) impression to investors that the opinion of CRAs is very reliable. Since the SEC bears the role of the regulator, investors may believe the market is under control, and thus become less vigilant. Since the SEC has created an inflated demand for ratings, it is not surprising that investors don't want ratings from non-NRSRO institutions. Lowenstein (
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Myths About the so-called 'Enron Fraud'
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The Enron Scandal 2001, is generally but wrongly attributed to market failures. Specifically, audit failure and poor ratings from CRAs did not reveal Enron's false accounting. As explained elsewhere, the conflict of interest among CRAs who purposely overrate the firms is due to regulation from the SEC. The common view seems to be that competition itself is the culprit. When CRAs must compete against each other, the firms will choose the CRA who offers the best evaluation. If they seek profit and do not want to lost clients, they will give the best ratings, regardless of the risk of the firms. In reality, those CRAs do not care about lost of reputation thanks to their status of NRSRO, approved by the SEC. This gives the (false) impression to investors that the opinion of CRAs is very reliable. Since the SEC bears the role of the regulator, investors may believe the market is under control, and thus become less vigilant. Since the SEC has created an inflated demand for ratings, it is not surprising that investors don't want ratings from non-NRSRO institutions. Lowenstein (