Difficulties of Airline Industry - Essay Example

COLLAPSE OF ENRON AND WORLDCOM Enron's Collapse To stay in the present marketing world a company should have good support services. The competition among companies is high and they to stay at the top they are using aggressive marketing strategies. The operational management and the Human Resource (HR) departments have a bigger role to play in the development of the respective companies. The quality of the product should always be of high standard. The financial activities of the company should be checked from time to time so that any fraud committed can be easily detected. Let us look at two companies Enron and WorldCom that have collapsed due to mismanagement of funds. Enron Corp. was the result of merger between Houston Natural Gas and Internorth. There was a shift to unregulated energy trading markets from regulated transportation of natural gas. Enron was a Fortune 500 company and was in #7 in 2001 was deleted from New York Stock Exchange. According to the mangers of Enron who reviewed the accounts of the company, during California energy crisis Enron has kept undisclosed reserves of up to $1.5 billion in trading profits. Enron came under fire from politicians of price gouging. The hidden reserves would have doubled the Enron's reported profits. It is also reported that Enron manipulated reports on reserves to have steady profit growth to Wall Street and credit rating agencies. The executives also claimed that the reserves were held back and used to fulfil the political and financial ends. In 1990 Enron reported its total revenue as $10 billion and in the next subsequent ten years it grew by $101 billion. It emerged as one of the fast growing companies in the United States. The main reasons for its collapse is not due to the core energy operations but the company's new ventures in dot com sector and investments Internet and communication business. According to investigators of the security of exchange commission gone into investigate the case, have interviewed witnesses to come to a conclusion that the methods or practices violated the laws for doctoring quarterly earning refers to start cookie jar reserves. The existence of Enron reserves puts strange twist to it. The executives of Enron inflated profits and concealed losses with official balance sheet. Partnership in this scenario of reports that Enron has shown wrong accounts in December 2000, the company filed for bankruptcy protection but interviews with more than a dozen ex-Managers and Executives revealed that the Enron many a time paid the profits on trading to meet the needs of politicians and financiers. The major portion of the gains were Shown on paper only on long term contracts only had it been the cash that could have put off liquidity crisis that led to its collapse. As per one of the former Executives, before a few months of Enron bankruptcy, the reserves were depleted. It is common to use reserves to manage profits through it is unlawful. The former long time chairman and company's president chief executive were aware of the reserves and felt them proper. Judy Leon, Skilling's spokes woman said that Skilling did have any knowledge of unlawful and illegally activity with the reserve account. Further she said that many kept in credit reserves to save the Enron form the risk as California facilities could be bankrupted by the crisis, which may lead to situations where they cannot pay their debts. Slowly the Enron's activities came into light when the then CEO Jeffrey Skilling resigned in August 2001 from his position without giving any proper reason. This was the starting phase of its collapse. In October Enron incurred first quarterly in four years that was up to $1 billion because of poor business performance. In November 28 2001 Enron's debt was downgraded to below investment grade by the bond rating agencies. The Justice Department was handed over the Enron's case and it conducted a criminal investigation and the case was brought to the Senate and the House, which held hearings that were concerned with Enron's fall. The banking companies that were involved in investment banking and commercial banking with Enron suffered heavy losses due to Enron's collapse. It was a major blow to the banking sector. Due to Enron's involvement in unregulated markets there was a little knowledge on Enron's profits on derivative activities. The company's financial statements were also not known. Due to above mentioned reasons Enron filed for Chapter 11 bankruptcy on December 2nd, 2001. WorldCom's Collapse When Enron, which was one of the top Fortune 500 companies, filed for bankruptcy in December 2nd 2001, the news came as a jolt to many of the investors. When the dubious account activities and scandal in Enron were revealed it came as a shock to the investors. US president George W. Bush had assured them by terming Enron's case as a rotten apple in the healthy corporate system. Despite of president's assurances many high profiled companies collapsed. WorldCom's main business was electronic commerce and Internet and it was ranked as the second largest telecom company in the whole US. During its 15 existence WorldCom acquired many companies and reached to a commanding position where only a few companies had reached can stand up to the situation. The fast growth in WorldCom was due to the efforts of former WorldCom chief executive officer (CEO) Mr. Bernard Ebbers. Because of his innovative ideas and contributions WorldCom reached to a commanding position. The companies it acquired were UUNET, MCI and CompuServe. WorldCom expanded its business to more than 65 countries very rapidly; due to boom in Internet in 1990's little thought was given to the fundamentals of the company. When Securities and Exchange Commission (SEC) sought an explanation from WorldCom in March 2002, slowly the scandal came to light. When credit rating agencies like Standard & Poor's, Moody's and Fitch downgrade WorldCom rating to a new low the company announced immediate job cuttings around the world. The CEO of the company Ebbers resigned after when SEC revealed that WorldCom had lent about $340 million to him as loans that he used to buy his own shares. The credit rating agency Standard & Poor's downgraded WorldCom credit rating to below investment grade that brought down company's status to a junk status. The result was its removal from S&P index and Nasdaq halted the company's trading of stocks of WorldCom Group and MCI Group. SEC filed a suit against WorldCom on charges of securities fraud in the district court of New York. It also charged that the company's profits were used for personal use by the high ranked officers and the company misled the agencies regarding its reported earnings. Further investigation revealed that the reported earning and financial statements of the company had deviated from actual earnings. It was major blow to the investors as the share prices of the company fell. Most of the investing banking companies had to suffer due to the WorldCom's collapse. In July WorldCom filed for Chapter 11 bankruptcy. Reference David Barboza. (2002) THE ENRON COLLAPSE. [online]. New York Times. Available from: < http://www.sfgate.com/cgi-bin/article.cgi'file=/chronicle/archive/2002/06/23/MN8189.DTL --> > [Accessed 4 May 2006]. Mark Jikling. (n.d) THE ENRON COLLAPSE: An Overview of Financial Issues. [online]. Available from: < http://fpc.state.gov/documents/organization/9267.pdf. > [Accessed 4 May 2006]. Dennis Moberg and Edward Romar. WorldCom. [online]. Santa Clara University. Available from: < http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html --> > [Accessed 4 May 2006]. V. SRIDHAR. (2002) The WorldCom collapse. [online]. The Hindu. Available from: < http://www.hinduonnet.com/fline/fl1915/19150810.htm --> > [Accessed 4 May 2006]. Read More