Corporate Governance at Enron Prior Post Its Failure - Essay Example

Enron Corporation Table of Contents Introduction 3 Corporate Governance at Enron Prior to its Failure 3 Strengthening of Corporate Governance Mechanism after the Enron Case 7 Conclusion 11 11 References 13 Introduction The changing dimension of the contemporary business activities has created greater requirements for the businesses to operate ethically and legally. Contextually, companies are quite focused upon depicting themselves as better performers in comparison to that of the competitors which further augments their competitiveness in the global business arena. Taking this aspect into consideration, it can be said that the activities of corporate governance within any business holds a vital position with regard to shaping the reputation of the business within the customers, investors as well as the stakeholders. Apparently, companies in the present day scenario emphasise more on developing themselves as an improved unit both in an ethical and legal manner. Observably, business focuses more on confirming that their operational activities cause minimal negative impact on people of the external business environment (Jennings, 2010; Blythe & Zimmerman, 2005). However, with the emergence of high profile corporate breakdowns in the recent years, questions have been raised on the present rules and frameworks along with the effectiveness of the corporate governance practices amid the companies. In this regard, the corporate collapse of Enron is one of the prime example where the ineffectiveness of corporate governance practices is largely visible (KPMG, 2010; Baijal, n.d.). In order to acquire a comprehensive understanding with regard to the failure of the company i.e. Enron, this essay will highlight the corporate issues and gaps of the company prior to its downfall which ultimately resulted in its total collapse. The essay will also ensure a thorough discussion about how the laws of corporate governance have strengthened aftermath of the Enron downfall. Corporate Governance at Enron Prior to its Failure As depicted above corporate governance is one of the most vital aspects that are associated with the operations of the business units in the modem day business context. In today’s scenario the reputation of any business is largely determined by its ability to assure appreciative performance in the domain of corporate governance. However, with the increasing number of accounting fraud and failures of companies to adhere to particular legal and ethical standards in conducting business, the aspect of corporate governance has emerged as one of the major issue in the business sector today. The issue of corporate governance has mostly gathered strength especially after the collapse of Enron owing to accounting frauds in the year 2001. However, in order to depict the actual reason behind the occurrence of the Enron collapse, it will be crucial to analyse the corporate governance structure of the company prior to the accounting fraud witnessed by the company. Prior to its collapse, the company was among the market leader where it became one of the leading player in the energy sector of the world especially in the United States where it was placed amid the top 10 companies of the nation. However, owing to certain issues in the corporate governance structure of the company, later it was declared as bankrupt. Notably, the corporate governance structure of the company lacked various basic standards with regard to corporate accountability which contributed towards the fall of the company. The corporate governance of the company lacked in terms of internal control mechanism. Internal control in the domain of corporate governance is deemed to one of the major activities where legal and ethical actions are adopted to ensure the accomplishment of the business goals. Notably, internal control in corporate governance includes supervision of the board of directors, balancing the overall control of the business and deciding the remuneration of the top level management among others (Sterling, 2002). In the corporate governance structure of Enron, the internal controls of the business were quite weak as it was mainly filled with internal conflicts amid the management which further act as a gap and a major reason for its collapse. Segregating the role of the chairman and the CEO is also quite crucial in order to ensure the accomplishment of the corporate governance goals of the business. This will allow proper and continuous supervision of the business activities which was again lacked in the case of Enron. In Enron, Mr Kenneth Lay was fulfilling dual role within the business which worked against the effectiveness of the corporate goals of the business. The presence of proper auditing and accounting committees within the business is also another crucial aspect that is deemed to be mandatory in order to ensure the high level legal and ethical operations. The work of an audit committee within any particular business is not only to supervise and analyse the accounting activities of the business but it also works towards monitoring each and every operational aspects of the business to ensure ethical and legal practices in any business domain. However, in the corporate governance of Enron, the role of accounting and auditing committee was believed to be quite ineffective. The auditing committee of the company rather than carrying an extensive analysis and review of the business activities, involved in the evaluation of only few of the business domains which again shows their complete failure in ensuring effective corporate governance operations. This is also one of the major gaps in the corporate governance structure of Enron prior to the accounting scandal in the year 2001. It is also believed that a good corporate governance policy requires the board of directors and other top officials of the business not to take any perks other than their remunerations. In this context, it has been noted that Enron has a set of competent directors who had served other large companies prior to their association with Enron. . However, most of them have a bitter interpersonal relationship amid themselves owing to maximum conflicts of interest which again worked negatively as they were collectively ineffective in terms of delivering noteworthy results for the business. This aspect also influenced the directors to seek for external perks through compromising the integrity and wellbeing of the stakeholders and their interest along with the overall interest of the business. This was also one of the major gaps that can be identified from the corporate governance structure of the company which has further lead to its collapse (Sterling, 2002). Proper flow of information within various sections of business is another crucial component that ensures proper corporate governance results within any business. The top level management of the business should be completely aware about each and every activity of various business domains. However, in the case of Enron, the aspect of proper flow of information is within various departments of business has also worked against the results obtained from the corporate governance practices of the company. Notably, the internal communication amid the members of the business was quite weak which was major gap that contributed towards the failure of the business. This corporate governance mechanism of Enron had notable gaps which negatively impacted the company and its operations further leading to complete decline of the business (ISDA, 2002; Gopinath, 2002). Again accounting frauds within the business is also amid the primary reason for the failure of Enron. It is believed that maintaining proper accounting standards is one of the major aspects that can ensure the deliverance of quality results with regard to corporate governance. Again, it has also been noted that prior to the fall of the company, it was amid the major companies of the US in terms of revenue. However, owing to the accounting loophole that prevailed within the business of Enron contributed towards its unexpected collapse. The collapse of Enron was particularly due to the lack of appropriate accounting standards followed by the company which eventually affected its overall operation ending up with bankruptcy. (South African Reserve Bank, n.d.). Notably, the board of directors of Enron belonged or had served many noteworthy and recognised firms prior to joining the management of Enron. They were quite competent and skilled with regard to management of the operations of a big corporation like Enron. The corporate governance structure of the company was divided into various section which further includes the executive committee, the financial committee, the auditing committee and the compensation committee among others so that each of the operational domain of the business is able to ensure ethical and legal operations further living up to the expectations of its investors. However, none of the officials or the departments succeeded in demonstrating the proper execution of their roles and responsibilities. The financial committee of the company was involved in approving various big projects without proper analysis of the risk involved in the same. Correspondingly, the auditing committee of the company was involved in improper reviewing of the financial reports and statements of the company which further worked against the company (Munzig, 2003). Hence, it can be comprehended that the collapse of the corporate governance and that of the overall business of the company was a result of the failure of various divisions of the business. Strengthening of Corporate Governance Mechanism after the Enron Case Notably, after the occurrence of the Enron downfall, the issue or the aspect of corporate governance has gathered utmost attention amid the people all over the world. Post occurrence of the Enron case resulted legal authorities to emphasise more on strengthening the corporate governance mechanisms and devising standards for the companies which can ultimately reduce the amount of corporate governance collapses in the future context. A thorough analysis is highly required in order to attain a comprehensive viewpoint in this regard. Notably, in the present day business context, there are numerous regulatory norms in the domain of financial reporting and corporate governance which further ensures that companies remain fair, ethical as well as legal in their approach of conducting the business activities further assuring positive results for the various stakeholders. From the review of the Enron case, it has been noted that weak accounting regulations and practices amid the operations of the company was one of the major reasons for the downfall of Enron which calls for a better set of accounting laws and principles that can effectively limit the unethical practices in the companies relative to their accounting activities. It is deemed that accounting principles such as IFRS and GAAP has been quite effective over the years. However, with the case of Enron collapse their effectiveness was questioned by many. Apart from that there are also several other instances in the recent times wherein the ineffectiveness of the financial regulations has been extensively exposed. The WorldCom accounting scandal is also an appropriate example in this regard. The primary reasons for the occurrence of the Enron and WorldCom scandals was mainly because of the complexity associated in the unethical practice adopted by the management of the companies in their financial reporting(EY, 2013). However, prior to this these issues the concerned authorities have emerged with various plans to strengthen the financial reporting practices of the business. One of the major reforms in the accounting domain after the Enron scandal was the implementation of the Sarbanes-Oxley Act. The major intentions behind framing the Act was to enhance the accountability of the companies towards their financial reporting along with augmenting the trusts of the stakeholders especially the investors towards the business units. With the legislation of the Sarbanes-Oxley Act companies are encouraged to ensure proper disclosure of the financial position in front of the stakeholders in a transparent and precise manner which was apparently missing in the case of Enron which ultimately end up with its collapse. The enactment of the Sarbanes-Oxley Act resulted in enhancing the accounting practices of companies up to a considerable extent by eliminating the gaps existing in the corporate governance (Jickling, 2003). Notably, after the emergence of the Act, companies are reported to have gained better results in terms of internal control along with effectiveness and reliability in the domain of financial reporting which were among the major reasons for the collapses of Enron. In consideration to this aspect it can be determined that the reformation after the Enron collapse can probably be effective in avoiding such issues in the future context (Rittenberg & Miller, 2005). Post occurrence of the Enron scandal was witnessed by emergence of several reforms in the domain of overall corporate governance of the businesses across the world. It has been noted that corporate governance failure was among the major reason for the catastrophic end of Enron to gain sustainability in terms of keeping the interest of the investors in intact despite of the aspect it was one of the biggest corporations of the United States during that particular period. Notably, the company had a complex mechanism in place pertaining to its corporate governance, wherein the directors and others top official of the company had weak control over the operations of the business in various areas. Contextually, post occurrence of Enron collapse impelled concerned authorities to bring about certain reforms in the areas of corporate governance mechanism of companies so that future issues regarding the same can be ignored. Again the formation of the Sarbanes-Oxley Act was also a potential reform in the domain of corporate governance practices which further limits the negative approach of the companies towards fulfilling their corporate responsibilities which serve as prominent measure for securing the interest of the investors and the other stakeholders. Notably, improper auditing was among the serious problems in the operations of Enron which ensured its complete destruction. However, post the Enron scandal, the Sarbanes-Oxley Act created a Public Company Accounting Oversight Board (PCAOB) which worked towards modifying or restructuring the auditing standards of the business units. The PCAOB also has the power to emerge with any enforcement when it comes across with any sort of unethical practices of the business units in the domain of auditing activities. This aspect further forced the companies to be fair and legal in their auditing approach which further favourably impacts the corporate governance performance of the business units (Donald & Ghoddoucy, 2006). Furthermore, according to Kenny (2003), corporate governance in the US has transformed rapidly after the Enron scandal. Accordingly, the study depicted that conflict resolution within the business is one of the prominent approaches in ensuring proper attainment of corporate governance goals and objectives. The PCAOB has direct responsibility to ensure this aspect as per the SOX policies (Kenny, 2003). Furthermore, the concerned authorities has also developed the idea of developing corporate code of ethics within business units which should be equally adhered by each and every department of business irrespective of their hierarchical position within the business. Hence, it can be comprehended that all the changes that has been made after the Enron scandal were intended towards ensuring complete supervision over the approach of the companies towards their operations in the domain of accounting and corporate governance which were among the root cause for the downfall of Enron (Inside Counsel, 2014). However, the effectiveness of these changes in avoiding future corporate frauds can be questioned owing to the fact that various corporate collapses has been recorded even after the Enron scandal and the changes made as per the SOX and other reforms. Conclusion From the overall analysis of the paper it can be comprehended that corporate governance has become one of the major part of the modern day business operations. It will be crucial to mention that in order to sustain in the global market, companies are required to assure that their operations causes less negative impact on its stakeholders. Companies that fail in this regard will certainly get adversely affected from the same. This can be better understood from the case of Enron’s collapse in the year 2001. Owing to certain illegal and unethical practices in the corporate governance domain, the company was unable to live up to the expectations of the investors which further led to its bankruptcy. Notably, there were various gaps in the corporate governance practices of the company including lack of internal control, conflicts amid the directors and ineffective auditing practices along with unethical approaches in financial reporting which has further derailed the operations of the business of Enron. However, after the case of Enron several reforms has been ensured in the domain of corporate governance and accounting practices that has further enhanced the operations of the businesses up to a considerable extent. However, its effectiveness in avoiding future corporate collapses is a topic of extreme debate. Hence, it can be concluded that corporate governance is indeed an important matter of concern for businesses operating across the world. It is thus, crucial to learn lesson from the collapse of Enron to mitigate any possibility of recurrence of corporate governance issues faced by Enron in the future. References Blythe, J. & Zimmerman, A. S., 2005. Business-to-business Marketing Management: A Global Perspective. Cengage Learning EMEA. Baijal, M., No Date. Role of Financial Reporting & Disclosures in Corporate Governance. IICA. [Online] Available at: http://www.iica.in/images/Knowledge_IICA_Reserch_and_publications.pdf [Accessed April 25, 2014]. Donald, E. & Ghoddoucy, S., 2006. Corporate Governance and Sarbanes-Oxley "Post-Post-Enron" an interview with Professor Thomas Joo of UC Davis School of Law. Business Law Journal. [Online] Available at: http://blj.ucdavis.edu/archives/vol-6-no-2/Corporate-Governance-and-Sarbanes-Oxley-Post-Post-Enron.html [Accessed April 25, 2014]. EY, 2013. Boards Revisit Disclosure, Transition And Effective Date In The Revenue Project. Home [Online] Available at: http://www.ey.com/Publication/vwLUAssets/IFRS_Developments-Issue_52/$FILE/Devel52_Revenue_Feb_2013.pdf [Accessed April 25, 2014]. Gopinath, C., 2002. Corporate Governance Failure at Enron. Business Line. [Online] Available at: http://www.thehindubusinessline.in/2002/03/04/stories/2002030400110900.htm [Accessed April 25, 2014]. ISDA, 2002. Enron: Corporate Failure, Market Success. International Swaps and Derivatives Association, pp. 1-24. Inside Counsel, 2014. 8 Ways SOX Changed Corporate Governance. Home [Online] Available at: http://www.insidecounsel.com/2012/01/01/8-ways-sox-changed-corporate-governance?page=8 [Accessed April 25, 2014]. Jickling, M., 2003. Accounting Reform After Enron: Issues in the 108th Congress. Congressional Research Service, pp. 1-4. Jennings, M., 2010. Business: Its Legal, Ethical, and Global Environment. Cengage Learning. Kenny, P., 2003. Corporate Governance in the U. S.: Post-Enron. German Law Journal, Vol. 04, No. 1, pp. 53-59. KPMG, 2010. Better Business Reporting: Enhancing Financial Reporting. Home [Online] Available at: http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/DownloadableDocuments/Enhanced%20Financial%20Reporting%20-%20web%20version.pdf [Accessed April 25, 2014]. Munzig, P. G., 2003. Enron and the Economics of Corporate Governance. Home [Online] Available at: https://economics.stanford.edu/files/Theses/Theses_2003/Munzig.pdf [Accessed April 25, 2014]. Rittenberg, L. E. & Miller, P. K., 2005. Sarbanes-Oxley Section 404 Work. Downloads. [Online] Available at: http://www.theiia.org/bookstore/downloads/freetomembers/0_2009_sox404_benefits.pdf [Accessed April 25, 2014]. Sterling, T. F., 2002. The Enron Scandal. Nova Publishers. South African Reserve Bank, No Date. Enron Corporate Governance Issues. Attachments. [Online] Available at: https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/4695/Annexure_D1.pdf [Accessed April 25, 2014]. Read More

 

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