Hewlett-Packard’s secret surveillance of Directors and journalists
Enron Stakeholders and its Collapse
Enron Corporation is a union that was established in 1985 by Kenneth Lay when Houston Natural Gas and InterNorth of Omaha amalgamated with an objective of dispensing natural gas to utilities. The company went bankrupt because of lack of financial transparency and accountability owing to the situation of audit failure. Under the management of Jeffrey Skilling, there was an emergence of executives, who triggered poor financial reporting and accounting ambiguity. The two instances failed to reflect the pending billions from unsuccessful ventures. Andrew Fastow, the chief financial officer then, together with the team misinformed the board of directors and audit committee.
The collapse of Enron had an effect mainly on employees, retirees, executives, banks and insurance companies. Investment efforts of people in the company were thwarted when the company suddenly failed. Shareholders lost about $11 billion when Enron stock price diminished to less than $1 by the end of November 2001. Majority of the employees were retrenched and the retirees were doomed. The company was bought off by its rival, Dynegy and the U.S Securities and Exchange Commission began to explore this predicament. However, Enron filed for its insolvency under chapter 11 of the United States Bankruptcy Code. Most of Enron’s executives were charged and incarcerated with its Auditor, Arthur Andersen found culpable in United States District Court. Most its clients withdrew from and the employees and investors did not get much from the lawsuits with the unfortunate ordeal of losing billions of retirement benefits and stock prices. The demise of Enron destabilized markets in the United States and abroad.
Factors that Contributed to the Collapse of Enron
It would be unjust to blame the company’s disintegration to the management only. Everyone involved had a role to play. All the stakeholders from the entire company and its management, banks, regulators and standard setters liable are liable to the downfall of Enron. Therefore, in this regard, the factors that led to the downfall are both external and internal factors.
Use of limited partnerships
These ‘special purpose entities’ encouraged and increase leverage and asset returns without a reflection on the balance sheet. The company upgraded the identity of the Special purpose entities’ belittling accounting standards. Enron used these entities to be financially solvent in procuring contracts with gas producers for the supplication of gas to utilities under enduring and permanent contracts. However, these entities served the purpose of manipulation of financial statements. As a result, Enron’s liabilities were kept on the low while it had a false appearance of equity and earnings. It used different methods to create a falsified facade that the company was flourishing. Enron ignored the prerequisite of independent equity investors possessing at least 3 percent of assets. These entities which were unconsolidated by Enron maintained derivative contracts that blinded investors and the board of the company. This external audit mechanism was not worthwhile since it promoted fraud. They weaved an entanglement of confusion in the handling of funds that resulted to illusory information.
Capitalism and Energy Deregulation
Capitalism refers to a social system that allows individuals to take their own initiatives and establish various ventures, independent from the government. Therefore, the individuals enjoy the advantage of being market makers and spreading the wings of their financial associations. Enron embraced this system to maintain consistency and reliability in the market. It dealt with many other companies and continued expanding, though there was a shrink in the market profits eventually. Capitalism proved to have a major setback in the role of business initiatives because many firms fell due to poor investment policies and analysis. The risks spread wide to make an observable downfall eventually.
Deregulation of electricity had a negative impact to the company’s life. Though the removal of economic regulation in the market seemed be attractive in terms of lower costs and prices and elevated innovation, it has numerous demerits. Its theory that paints a picture of economic success lacks validity in practice. It leads to the depreciation of reliability despite rise of wholesale markets. Through energy deregulation, Enron controlled supply and price with no vivid inspection, swindling consumer benefits.
Plight of investors
The external investors were not in a position to make a decision whether to invest in Enron or not. This mainly because they were unaware of the financial risks there were getting into. Their lack of knowledge was because of the selfish desires of Enron to top and maintain the financial league by off-balance sheets managed by an external audit committee. This did not reflect the company’s debts or liabilities and in turn, many and many investors flooded in Enron. The company continued to propose for loans to conceal their predicament and the result was a massive financial deterioration.
Pressure of being in the big league
Enron was a well-known corporation and its popularity was owed to the fact that it made very high earnings, putting it in the map of great and successful financial entities. Therefore, this factor caused its adamant ventures in the market. It wanted to uphold the ‘thought to be’ high financial status so it was obligated to encourage as many investors as it could while concealing its dubious accounting processes and debt situations. It wanted to maintain its status by consistently making markets; unfortunately, this was just a short-term mechanism. The executives did not calculate the probabilities of occurrence in the future. They lacked a good plan to provide long-term financial security to the stakeholders. They wanted to protect their reputation. They made poor decisions.
Vague accounting rules and standards
There was no transparency in the manner in which Enron’s accounts were handled. Before its fall, the management was overpaid at the expense of the workers while at the same time Andersen manipulated the accounts and financial statements to mask the huge debts pulling the company down. Thousands of accounting records were destroyed and therefore the employees could not realize in due time, the financial stalemate that was gradually projecting.
Enron had a vague accounting standard that did not consider long-term benefits. It was eager to increase its earnings and raise stock prices disregarding a follow up on the investment made. Enron was pressured to have consistent growth, which is usually a tall order for most corporate firms so it took the drastic measure of obscuring its liabilities. In addition, its complex business model brought about accounting limitations.
Lack of business ethics
Enron’s top management violated the rights of the employees, retirees and other investors by withholding information pertaining to the company’s debts. There was corporate irresponsibility and conflict of interests in the company. The executives did fail to monitor and maximize investor returns. Both Kenneth Lay and Jeffrey Skilling acted in an uncouth manner in their time of leadership in Enron. Its management had an exception who was the vice president, Sherron Watkins who came forward to end the unethical dealings. She had her own suspicions on the accounts and took a brave step to report the peculiar events to an independent entity. She opted for the media amid the corporation’s refusal to rectify the problems.
Investment analysts mislead them giving them false hopes yet they knew the impact it would have on them. The top management swindled funds after attracting a lot of loans, portraying selfishness and inconsideration. The executives were simply led by greed and lacked integrity in their endeavors. They fed themselves with huge incomes and the rise in their salaries was due to the company’s overall performance in the market. This means that the employees were ripped off.
In Enron, the leadership ladder lacked measures that could detect the unethical dealings. As the CEO of Enron, Kenneth Lay did not scrutinize the accounting to ensure that illegal actions had been scraped off. In stead, he failed by being inactive and lack of foresight. He did not consider employing financial experts who could have overseen the situation to give a required solution. He appeared to be hands-off whereas his main objective was to secure jobs and benefits for his employees. He was also not moved by Sherron’s observation since he did nothing about it. He was interested in the present profits and did not have contingency plans. Together with Skilling, they did not put themselves in the employees’ and investors shoes. They therefore paved the way for corruption.
Silence of employees
Despite the fact that many employees began to realize the unethical ways of Enron’s executives, they lacked the voice to speak about it. They were not courageous enough to pinpoint the costly actions and demand for their rights. Only a few people pushed the idea forward. They also did not know the role of analysts to enable them to validate their predictions. They therefore could not develop a viable forecast to prevent them from investing in the company. Only Sherron and a few whistleblowers publicized the matter. The rest were scared for future employments.
Way forward for Corporate Managers, Stakeholders and Policy Makers
Enron Corporation left a huge economic mark that many emerging and established companies should learn from in order to be successful. Corporate managers, stakeholder and policy makers must learn from its mistakes to prevent a replica of the same scenario.
The first lesson to be learnt is that accounting standards should be precise and evident. Employing and absorbing ‘special purpose entities’ to conceal financial statements on debts like Enron did, presents serious implications to the life of the company. Corporate managers, stakeholders and policy makers should ensure that accounting rules are revised and clearly stipulated. There should be well-defined financial reporters that are compatible with the balance sheet. This should counter surprise debts. The accountants and auditors should be qualified enough to promote the integrity of the audit process. They should also ensure differentiation between consulting and auditing roles. They should also advocate for a regulatory framework for the accounting field. The system handling accounts should be transparent and effective.
Secondly, investors should be trained on the role of analysts so that they are not heavily dependant on analysts’ forecasts. The ‘investor’ alert provided by the Securities and Exchange Commission in the United States, is a positive idea since it encourages investors to be vast in analyzing investment opportunities before they establish themselves in a particular company. In the Enron scenario, investors relied solely on the predictions made by the investment analyst. To their loss, the predictions proved futile and they ended up losing billions of money. The Wall Street analysts did not enlighten the investors on the problems Enron was succumbing to in the end. They thus, increased their risks because of their lack of knowledge.
Thirdly, the board of directors and audit committees should also take part in protecting the investors’ interests. They should ensure that they sustain the rapport by managing stock prices so that they can both benefit. There should be a slot for people with desirable expertise in the financial field. Their experience in corporate financial management can facilitate new ideas, which will most likely spearhead positive change in the business environment, attract, and maintain powerful investors. Enron did not protect the interests of its investors because they ended up losing after the company bottled up many debts. Financial experts will develop necessary measures to prevent forestalling of its activities.
Fourth, the stakeholders and corporate managers should avoid deregulation. Therefore, re-regulation should be adopted in corporate firms to ensure that consumers are not undermined and that they do not indulge in risky trading activities like Enron Corporation did. However, this does not mean that they should disregard innovation, reduction in prices and reliability. Financial experts will be helpful to maintain a balance that favors both sides and is conducive to the running of the company.
Sixth, stakeholders should advocate for a redefinition of business teaching and research that will accommodate developed models, theories and improved pragmatic studies on corporate management. This improved curriculum should include revised accounting, business and auditing courses. Business ethics must also be incorporated to ensure that students have a solid foundation on responsibility in the business environment and avoid unethical practices.
Seventh, corporate managers should be reputable in their leadership and avoid corruption in the firms. Executives in Enron failed to uphold their status as leaders and instead enjoyed massive incomes hurting the employees and retirees of the company. They should be good examples to the rest of the team to encourage coordination and understanding which will produce admirable outputs. The Securities and Exchange Commission has showed its efficacy in this regard by stipulating rules and their implementation. Executives and financial officers must endorse the firm’s financial statements.
Finally, business ethics should be executed in all corporate firms, implying the density of the ethical codes of conduct. Enron’s failure was due to the unethical acts of the top management. Employees should know their rights and in case of their violation, the case should be boldly forwarded to an autonomous party. This is also emphasized in the need for business school in highlighting the importance of business ethics, its advantages and implications behind disregarding ethics. Enron’s top management deprived its employees and its other investors of the knowledge huge debts it had already sank in and at the same time encouraged them to continue investing knowing what would become of them in the end. There were no financial reports and the balance sheet was devoid of valid information, which could have given them a clue. Corporate managers should apply the business ethics in the firms and the policy makers should develop policies that reflect responsibility of individuals in companies.
Bierman, Harold. Accounting/finance Lessons of Enron: A Case Study. Hackensack, NJ: World Scientific, 2008. Print.
Fox, Loren. Enron: The Rise and fall. Hoboken, N.J: Wiley, 2003. Print.
Copyright 2018 - Coaching WordPress Theme.