Domestic Environment of Enron and Government Regulation - Case Study Example

Domestic environment of Enron and government regulation

Enron Company (ENE) was U.S service, energy, and Commodities Corporation based in Houston Texas. The company was formed in 1985 due to a merger between InterNorth and Houston Gas, which were small regional firms in America (Klimt & Yang, 2004). Therefore, the domestic environment of Enron Corporation is the United State of America. Government regulation in a domestic market is not an alternative means of protecting the consumer (Contractor, 2013). These regulations do not produce accurate information; they also do not build quality into the goods. Its main objective is to substitute fear and force for incentive as the consumer. With regard to Gresham’s law; “protections that are bad drives out good”.

Attempting to protect the consumers by force undermines the protection they get from the incentives. It contends that all firms or companies are equally suspect. Secondly, it gives a direct guarantee of safety to goods or services of all firms or corporations which comply with its arbitrarily set minimum standards. This minimum basis of regulation could become the maximum as well. In a deregulated economy, firms and companies would have to earn a position of trust.

Government regulation is illusory since it does not isolate the consumers from dishonest businessmen. Government control does not eliminate potentially dishonest people, rather it makes their activities difficult to detect. It is important to note that less government control does not mean anarchism; no government laws (Swinburn, Sacks, Hall, McPherson, Finegood, Moodie & Gortmaker, 2011).

The financial accounting system is one of the main focus of government regulation apparatus. The SEC delegated power to the FASB, and in return got power over the accounting profession. This in turn caused auditing and financial accounting to shift away from common laws, in which disclosure, judgment, and fairness are important in winning the confidence of investors. Government regulation has made financial accounting system to move toward the code law system. Let us take the scenario of Enron Corporation that had a misleading financial account because government regulation. Government regulation made Enron Corporation win the confidence of the people. The main idea here is that government regulation required disclosure; hence, it gives a false sense of security to companies, accounts and investors. Several corporation and firms can cover up in a tricky situation by saying they complied with the accounting rules (Ferris & Agness, 2012).

The solution is to minimize regulation on the financial sector as well as removing government influences on the accounting process. In this cause fraud will be punished severely, as a violation of the property rights. Less regulated companies and firms would need to compete to win the confidence of investors by providing genuine information and not by merely meeting federal and state requirements. Less government regulation will discard the false notion that the investors can trust government regulations. The free market provides the surrounding for reputable auditors; this would encourage a stronger internal control.

Global environment and government regulation

Enron was a domestic and global natural gas pipeline corporation which had about 37, 000 miles of pipe. The corporation had its wings around the globe, this included: Japan, Jamaica, Australia, South America and Europe among others. Enron first establishes in the UK as a foreign company. The company is well known for its action in India. Enron assisted Dabhol Power Company in stabilizing India’s power grid (Hoff & Stiglitz, 2011).

Some these countries had a socialist economic system (high barrier to entry for foreign investors). This would prevent foreign direct investment. For instance, when India disbanded its socialist economic system it encouraged Enron Corporation in the development of Dabhol Power Company. Some of the government regulations which may prevent a foreign company from growing include import duties, high corporate income taxes and high red tape in the licensing system. There are other regulations which do not benefit asset management or financial services at all. They are intended to protect other interest different from the corporate world, for instance, environmental regulation in the global environment (Contractor, 2013).

The Environment protection agency (EPA) usually demands that firms and companies upgrade equipments and utilize environmental technology to reduce pollution. These regulations usually produce a ripple effect, hence causing tumult in the stock market as well as instability in the financial market. Firms and corporation usually try to transfer their raised cost to their customers and consumers. However, there are environmental regulations which may increase aggregate utility as well as improving health without necessarily affecting marginal cost. An international company such as Enron may be affected with foreign politics. The policies of foreign countries may reduce the growth of international corporation in order to promote the growth of the own domestic industries (Wolk, Dodd & Rozycki, 2008). 

Soft and hard technologies

Soft technologies refer to as human factors which are a necessary adjunct of hard tools. Machines which can function without the help of human are referred to as hard technologies. Risk assessment and control group was one of the important sections of Enron’s management control system. RAC had a responsibility of managing Enron’s overall risk as well as approving all trading deals. The deal which was put together by a firm must be illustrated in a deal approval sheet (DASH), it was separately examined by analysts of RAC. Deals demanded different levels of approval from several departments (Swinburn et. al., 2011). Secondly, Enron’s performance reviews system. This system aligned staff action with the firm’s strategic goals. Code of Ethics was created to prevent different unethical behaviors. Code of Ethics does not allow abusive or disrespectful treatment (Klimt & Yang, 2004).

Corporate culture is an important part of soft technology. Culture has a great impact on business practices. Toxic corporate culture can lead to organizational decline. Hence, it is important to have a corporate culture that will result in the success of a company. For instance, transparency is one of the best corporate cultures. If Enron had been transparent with its financial statement it wouldn’t have declined (Swinburn et. al., 2011).

Political barriers

The political-legal barrier for oil, gas and energy sectors are very strong. These barriers comprise of; high resource ownership, patents, environmental regulations, copyrights with regard to proprietary technology, high resource ownership as well as high fixed operating costs. Foreign and local government compels firms within the sector to closely comply environmental regulation. These policies often need capital to comply. Enron was greatly affected by the Indian politics; for example, after BJP won the election it almost destroyed Enron’s operations in India (Contractor, 2013).

In several countries, the government owns a golden share. This implies that the government is intimately involved every step of the business. Other socialist countries make the interface between the company and the government seems as if the two are almost a single entity. Joint ventures, especially in foreign countries, do not always guarantee permanent relationships. Management, strategies, interest as well business environment all change over time. These transformations are usually compounded by the involvement of two or more nations (Klimt & Yang, 2004).

To operate successfully in a foreign country a company needs to make adjustments or changes. For instance, a company may operate in a market economy which private individuals own several properties and most businesses are operated by most individuals. The best economic environment for a foreign company is usually a market economy since it protects contract rights as well as private property (Swinburn et. al., 2011). International and domestic companies need to understand global and domestic environment respectively. Different countries usually have unique laws, different culture, practices, government systems as well as currencies, duties, and currencies. Therefore, individual doing business in foreign countries should always have the clear understanding of these factors. For instance, they need proper documentation before carrying out any business (Wolk, Dodd & Rozycki, 2008). 

Theories of international trade it is important to examine comparative advantages of different countries. It states that each country is relatively good at producing specific services or products. Comparatively, advantage rest on the region’s abundant factors of producing, for example, labor, capital or land. A practical example is that several countries would more likely do business in countries where raw materials are readily available. Secondly, most firms will do business in countries where there is skilled labor (Klimt & Yang, 2004).

Social-cultural factors of domestic and global environment

Social-cultural factors include lifestyle, customs, and values. These include attitude, economic status, language, politics, and law. Social-cultural factors may affect businesses, quality of life as well as health. One of the social cultural factors of U.S that affected Enron is government regulations. For instance, these regulations made the company appealing to the eyes of the investors. Another equally important factor in the domestic environment of Enron was American political system. U.S political system comprises of two parties; republican and democratic (Klimt & Yang, 2004). This political system usually affects the performance of large international companies (Enron).

A practical scenario of this is when George W. Bush became the president of U.S he pioneered Enron’s growth because chief executive of the company was his main supporters or donor. U.S capitalistic is nation indicating that several businesses are controlled by individuals (Swinburn et. al., 2011). This is quite different from India which was one of the main global environments of Enron. India had a socialistic system whereby most of the international companies’ activities were controlled by the government. In fact, India did not have a free market, this prevented several countries from getting into the market (Klimt & Yang, 2004). U.S had a huge number of skilled labors as compared to its other global counterparts. For example, when Enron Company got to Jamaica and South America, the company had to import skilled labor from United State. India is a relatively poor nation, hence, several people cannot afford some of the basic need leave alone electricity. This made the government of India subsidizes the cost of energy. Most markets of Enron (domestic and global environment) had a common law especially countries that were colonized by Britain (Ferris & Agness, 2012).

Compare and contrast two economic theories.

This part tends to compare Rostows theory of development as well as Galbraith economic theory. Rostows theory of development was pioneered by White Rostow. This theory has five stages of development. The theory focuses on ideologies of free trade. It explains that nations should encourage free trade in order to achieve greatness in terms of development. In this theory Rostow explained that government regulations should be minimized, he proceeded and said that the forces of the market should be left to control the prices as well the qualities of goods (Hoff & Stiglitz, 2011).

He asserted that the government should have some degree of regulation to protect the consumers. This regulation should be in areas such protecting the right of the people, property right as well as environmental regulations. A practical example in U.S is deregulation of the energy sector, in which the government had left the forces of demand and supply to determine the prices. Before deregulation of the energy sector the government of U.S used to set oil prices, this prevented domestic companies such as Enron from competing with other international companies in other parts of the globe (Klimt & Yang, 2004).

Nevertheless, there are still some fundamental policies that companies must comply with. For instance, before oil or gas exploration companies must have some legal documentation. The stages of development according to Rostow include traditional society; consist of an agricultural economy, low quality, and low labor productivity. The second stage is, pre-condition for take-off. Agriculture is more mechanized. Investments and savings increase with a small percentage. Foreign funding is required. The next stage is the take-off, social and political system begins to develop. Manufacturing industries increase with time. Drive to maturity; here industries become more diverse. Growth extends to different parts of the country. Age of mass consumption, in this stage out levels, grow, enabling an increase in consumer expenditure. The growth is maintained by the growth of the middle class of consumers (Ferris & Agness, 2012). .

According to Dr. Galbraith, the markets should not be made free. He stated that capitalism and free markets without regulations would not to meet the social needs of the people. Dr. Galbraith explained that massive production of consumer goods was the public sector. In fact, it deprives people of such benefits as clean streets, clean air, support for the art and good schools. According to him, politics and economic have a powerful connection and not be separated. He believed that free markets lead to excess accumulation of private wealth at the expense of public needs. His theory is very different from Rostow's economic theory of development since it advocates for more government involvement in the business sector (Klimt & Yang, 2004).

Develop strategy for success

Great government regulation led to the collapse of Enron Company. Enron Company inflated its profits or financial account by hiding behind state laws. The company failed due to too much borrowing, shaky accounting and unwillingness to provide information to investors. The leadership of Enron did not practice their code of ethics they were never transparent. I would recommend less government involvement, especially in financial accounts. Less government regulation would make several companies strive to win the trust of investors without necessarily hiding behind common laws. However, it is important to ensure that companies comply with certain policies of the land; this would help protect the interest of the public (Contractor, 2013).