The Enron Scandal - Case Study Example

The Enron Scandal Question Based in Huston, Texas, Enron was arguably the largest commodities energy and services company in the United States. Before the company became bankrupt in 2001, Enron had more than two thousand employees making it one of the largest companies in the world. Additionally, the company that had merged Huston Natural Gas Company and InterNorth in 1985 had diversified its products product and services thereby having stakes in natural gas, electricity, paper and communication among many others fifteen years later in 2000. The financial year 1999/2000, the company had claimed revenues amounting to more than one hundred billion dollars (Fox, 2003). The fortune magazine one of the most celebrated business magazine in the country named Enron as the most innovative company in the country for six successive years. Among the key individuals who fostered the rapid growth of the company included Kenneth Lay who exhibited charisma as he steered the company into rapid growth. Kenneth Lay founded the company in 1985 as he set out to operate in the lucrative energy sector. Lay sought to diversify the products and services of the company especially after he enlisted the company at the New York stocks exchange thereby having increased capital from the public who purchased the company’s shares. Kenneth Lay was also became the company chief executive officer and the chairperson of the board of governors (Collins, 2006). Both positions were fundamental since he understood the operations of the company. As the chief executive, he made decisions and implemented policies that influenced the company’s daily operations. As the chairperson, he had direct control and influence over the board of governors thereby creating a conducive environment for the company to diversify its operations into more precarious markets thereby resulting in the rapid collapse of the company (Fusaro & Ross, 2002). Jeffery Skilling was the company’s president; as such, he was mandated with making and implementing operational policies on a daily basis. He sanctioned market researches and led the company as it ventured into new markets. In liaison with Kenneth Lay among other fundamental personalities in the company, Jeffery Skilling duped the stakeholders into believing that the company was making success every financial year. Andrew Fastow was the company’s chief finance officer (Swartz & Sherron, 2004). He cared for the company’s financial flow and made investment decisions for the company. Fastow portrayed the company as successful as he often released favorable financial results to the public while the company had begun incurring losses from failing investments that Fastow, Lay and Skilling permitted such included setting up an energy company in India at a cost of twenty billion dollars. The above individuals steered the company into great success as they launched different products, which had varied success rates. Among Enron’s products were broadband services, oil, Enron online that traded on many other commodities including plastics, power and pulp among many others. The above products among many others were creative and presented success opportunities for the company (Eichenwald, 2005). The charisma and creativity of the above individuals ensured that the company made profits from the numerous products. Additionally, the three managed to present all the products and services as profitable thereby convincing the stakeholders to continue investing in the company’s stock. The intelligence of the three among many others who worked closely with them culminated in high risk products most of which never made became profitable ventures. Question 2 In 2001, differences in the management of the company succeeded in leaking a number of irregular financial operations in the company. Apparently, throughout the 1990s, Enron had colluded with its accounting company, Arthur Andersen to cover up some of the company’s investments that had perfume poorly both domestically and internationally (Bryce, 2008). With such revelations, the company’s shares began plummeting. The rapid drop in the worth of Enron’s shares was unprecedented especially owing to the fact that Enron was a blue chip company. The shares dropped from $ 90 to pennies in less than six months (Toffler & Jennifer, 2004). As investors continued to incur massive losses, the conflict became more evident as the management could not control the company’s revenue anymore. In fact, the three had duped the public into investing in the company’s shares all along. Additionally, the management consisting of Skilling, Lay, Fastow and Rebecca Mark-Jusbasche had managed in appreciating the company’s shares. When the value of the shares reached $ 90, one of the highest share value in the world, the four began selling their shares to the public. The four held more than forty percent of the company’s shares and therefore made massive profits from their investments while aware of the eminent failure of the company. Such amounted to fraud. The auditing company managed to portray the company as profitable through successive accounting malice arising from the pressure the likes of Skilling and Fastow piled on the private auditing company. The auditing company therefore played an integral role in the instant demise of the company that had reported an exceptional performance in the past several years. Enron employed strategic deceptive and fraudulent accounting practices with the view of increasing public investment. Public companies obtain their capital from the public through the sale of shares. After purchasing the shares, the members of the public anticipate dividends at the end of every financial year whenever the company makes profits. At Enron, the management compelled the auditors to portray the company positively. According to the reports, the company made profits successively. Every unique product and service the company introduced made profits thereby improving the performance of the company and public trust. Such positive portrayal increased demand for the company’s shares as members of the public sought to tap the profitable firm. This way, the manager managed to not only increase the demand for the company’s shares but also increase the value of the shares thus reaching an all-time high of $90 per share. With every year the company made profits, the shareholders expected their annual dividends. The demand for dividends increased pressure on the managers who could not obtain the money to offset such massive financial demands from the public. The managers thus continued to create new virtual products, which they sold out to the public in order to make more money to settle the rapidly accumulating debt. Consequently, the increasing share value increased the value of dividends the investors anticipated. The company thus became insolvent while the managers continued to fool the public into believing that Enron was still stable and profitable. As the managers sold off their shares to the public, the demand from the shareholders increased since initially the largest shareholders who included the four managers would always overlook the rise in the value of their shares thereby using the merger resources to pay dividends for the other members of the public. However, when the managers sold their forty percent to the public, the demand for actual dividends increased thereby forcing the company to admit insolvency thus the rapid collapse (Bethany & Peter, 2003). Question 3 The massive public outcry that ensued after the collapse of Enron as investors incurred loses compelled the government to enact laws that would cushion the public from unscrupulous entrepreneurs, as was the case at Enron. The House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs held public hearings as concerned members of the public aired their grievances. At the end, the two law making organs formulated and enacted the Sarbanes-Oxley Act on July 30, 2002. The act seeks to protect the public who invest in public companies by creating an organ that would monitor the actions of both the public companies and the auditing companies operating in the country (Mimi & Sherron, 2003). Arthur Anderson was a private auditing company contracted by Enron. The idea to contract an outside auditing firm was therefore a strategic public relations campaign the company employed in order to earn public trust owing to the integrity that most of such firms portray in their operations. Unknown to the public, the managers at Enron succeeded in persuading the external auditors to portray the company as profitable. The company chief finance officer pressured the auditors often contributing to the process of developing the reports. This way, the company maintained a profitable image to the public thus increasing the demand for its shares. The Sarbanes-Oxley Act thus mirrored the activities at Enron with the view of solving the auditing malpractices portrayed by the Arthur Anderson (Homburg, Sabine & Harley, 2009). The Enron case provided the lawmakers with an effective platform to address most of the fraudulent operations of public companies. The Sarbanes-Oxley Act thus addresses several features of the case with the view of cushioning the public from all the sources of operational malice, as was the case at Enron. Among the major provisions of the act was the creation of the Public Company Accounting Oversight Board (Cruver, 2003). The board develops regulations to guide the operation of the companies contracted to audit public companies. Additionally, the board reviews the auditing reports as developed by the auditing companies before a company releases such reports to the public (Salter, 2008). This way, the act creates for effective ways of mitigating any form of exploitation that may arise from a collusion existing between public companies and the private auditing firms thereby preventing a recurrence of the Enron situation. Further amendments to the act on 13 February 2002 sought to regulate the operations of the stock exchanges. Among the major changes introduced by the amendment included the demand for all companies listing at stock exchanges to have independent board of directors, the auditing firms must enjoy both independence and a high level of professionalism. Apparently, the auditors at Enron portrayed naivety thereby permitting the managers to influence the financial reports. The legislations ensure that the public have adequate information about the public companies. Additionally, such high levels of fidelity ensure that the share prices are factual and represent the actual performance and financial position of the company (Pickton & Broderick, 2005). Question 4 While the punishments given to the culpable individuals at Enron remained controversial, the legislations adopted after the collapse of the large public company sought to address the major operational pitfalls that had existed in the management of public companies in the past. The four managers consisting of Kenneth Lay, Jeffrey Skilling, Andrew Fastow and Rebecca Mark committed heinous offenses. They duped the public thereby compelling millions of Americans to incur unprecedented loses. The public rushed to purchase the company’s shares owing to the strong performance the company had portrayed through its annual financial reports. The above managers were therefore culpable and deserved punishments that are more stringent. Besides the varying jail terms that they received, the managers ought to have paid back some of the money since they had benefited directly from the unscrupulous sale of shares. The courts and the numerous public hearings should have recommended the freezing of the assets belonging to the culpable character to use the money in reimbursing the public that had invested in the stocks of the company. Despite such concerns on the punishments, the legislations adopted from the case are effective and have increased public trust on public companies. The public just as is the case with any investor makes the decision to invest in a stock owing to its profitability (Kotler & Kevin, 2010). The stock market should have therefore provided some security to the investors. The new legislations increase the security by demanding for more information about a public company. With the legislations discussed above, any company enlisting at a stock exchange must portray a level of fidelity and compliance with the laws that cushion the public from any form of frauds. Additionally the Public Company Accounting Oversight Board has increased accountability and transparency in the portrayal of public companies to the public. References Bethany. M. & Peter, E. (2003). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio. Bryce, R. (2008). Pipe Dreams: Greed, Ego, and the Death of Enron. New York: Public Affairs. Collins, D. (2006). Behaving Badly: Ethical Lessons from Enron. New York: Dog Ear Publishing, LLC. Cruver, B. (2003). Anatomy of Greed: Telling the Unshredded Truth from Inside Enron. New York: Basic Books. Eichenwald, K. (2005). Conspiracy of Fools: A True Story. New York: Broadway Books. Fox, L. (2003). Enron: The Rise and Fall. New York: John Wiley & Sons. Fusaro, P. C. & Ross, M. M. (2002). What Went Wrong at Enron: Everyones Guide to the Largest Bankruptcy in U.S. History. New York: John Wiley & Sons. Homburg, C. Sabine, K. & Harley, K. (2009). Marketing management: A contemporary perspective (1st ed.). John Wiley & Sons. New Jersey, U.S. Kotler, P. & Kevin, K. (2010). Marketing Management. Upper Saddle River: Pearson Prentice Hall. Mimi, S. & Sherron, W. (2003). Power Failure: The Inside Story of the Collapse of Enron. New York: Doubleday. Pickton, D. & Broderick, A. (2005). Integrated marketing communications (2nd ed.). London: FT Pearson. Salter, M. (2008). Innovation Corrupted: The Origins and Legacy of Enrons Collapse. Harvard: Harvard University Press. Swartz, M. & Sherron, W. (2004). Power Failure: The Inside Story of the Collapse of Enron. New York: Broadway Business. Toffler, B. & Jennifer, R. (2004). Final Accounting: Ambition, Greed and the Fall of Arthur Andersen. New York: Broadway Business. Read More