Financial Position of Enron Corporation of Houston - Case Study Example

Introduction Firms may window-dress the financial ments in order to show a rosy picture of their accounts. In such a case, the whole exercise of analyzing the statements becomes useless. Window-dressing is also done to forecast a better picture to shareholders, bankers and financial institutions. It is a rosier picture that what it actually is. “In October 2000, Enron’s financial cover was blown and the financial house of cards that Andersen helped to create collapsed in five weeks.  The implosion of Enron is the largest bankruptcy in American history.  What is so staggering, so appalling, so outrageous is that this once $50 billion company melted to nothingness during the period November 8, 2001, when it restated its earnings retroactive to 1997, to December 2, when it filed bankruptcy (Hartgraves, 2002)”. On October 16, 2001, Enron Corporation of Houston, Texas, one of the largest corporations in the world, announced it was reducing its after-tax net income by $544 million and its shareholders equity by $1.2 billion. On November 8, it announced that, because of accounting errors, it was restating its previously reported net income for the years 1997–2000. These changes reduced its stockholders equity by $508 million. Thus, within a month, Enrons stockholders equity was lower by $1.7 billion (18% of previously reported $9.6 billion at September 30, 2001) (Hartgraves, 2002). “The auditors analyze and assure that these present a fair view, acknowledging the subjective nature of some of the measures behind the accounts (Economist.com, 2002)”. Strengths The ability to respond to the needs of the customer by identifying them is the most important strength of Enron. Another added advantage or strength is the integrated approach that the company has got towards doing business at an international level. The company has also got extensive access to various physical assets. This acts as one of its strengths because this is expected to results in growth of earnings continuously. The manpower that Enron has got was also a major strength of the company. The staff of Enron took pride over the company and they gave out their best to improve the performance of the company. The environment of the company was felt to be very innovative and progressive by most of its employees. Also the company had a strong voice of the public i.e. a very good name among the investor group. This too can be attributed as one its strength. Apart from this, Enron was ranked as the seventh on the list of fortune 500 companies which gave the company vast fame as a credible company (Jeff Porter, 2005). “The company’s reputation and public perception were also considered to be its strengths (Jeff Porter, 2005).” The company has also managed to gain a competitive advantage over its competitors and also was a monopolistic energy provider. ” They also have market-making abilities that result in price and service advantages (Jeff Porter, 2005).” Weaknesses Six accounting and auditing issues are of primary importance, since they were used extensively by Enron to manipulate its reported figures and these are the major weaknesses of the company. “(1) the accounting policy of not consolidating SPEs that appears to have permitted Enron to hide losses and debt from investors. (2) The accounting treatment of sales of Enrons merchant investments to unconsolidated (though actually controlled) SPEs as if these were arms length transactions. (3) Enrons income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans. (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers. (5) Enrons accounting for its stock that was issued to and held by SPEs. (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders (Hartgraves, 2002).” Threats “Enron’s orgy of greed began in 1992 with the passage of the National Energy Policy Act which allowed power producers to compete for the sale of electricity to utilities. Enron was recklessly empowered by the Commodity Futures Trading Commission (CFTC), which issued an exemption for futures trading in energy derivatives.  This was Enron’s most lucrative business. Speculators, including Enron, used these financial instruments to drive the cost of wholesale electricity to astronomical levels.  As it grew in size, the Enron octopus bought off political candidates with hundreds of thousands of dollars in campaign contribution to guarantee its success. The utter neglect of FASB, the SEC and the CFTC permitted Enron to run amuck and steal both investors and employees life savings (Audet, 2002)”. The above situation was the major threat the company faced and this resulted in the company manipulating its financial statements. Competitors of Enron were expected to take away potential partners of the company. This was expected to indirectly hinder the profits of the company. Technological threats also existed which were also expected to replace the then existing sources of energy to the two major energy sources – oil and gas. In addition to the above mentioned threats, market analysts also stated that the regulation of the energy sector could also pose a threat to the company (Jeff Porter, 2005). Also, the lack of ethical behaviour was considered as a threat to the company. Opportunities Deregulation served as one of the important opportunity that Enron took advantage of in a very widespread manner. The company took advantage of the deregulation through minor price discrepancies and made profit. “Enron’s machinations played a major role in driving up energy costs in California (Moberg, 2002).” Politicians also turned out to be opportunities as they helped in creating an environment that supported increased disinformation in the economy. Apart from the above mentioned various opportunities, the brand name that the company has got was considered to be the most important one among the various opportunities. The company was perceived by many as the provider of high quality energy. Strategy and implementation Any organization must focus on its core competencies while drawing up new strategies. Be it expansion or diversification, an organization must get into those areas that either enhance the existing core competence or develop such core competencies which complement the existing core competencies of the organizations. Enron, for instance, could have embarked on backward integration which is probably the oldest trick in the business. For Enron this could mean developing competencies in design, manufacture, instillation and erecting and testing of power generation, transmission and distribution equipment. Simultaneously the company must build in enormous cheques and balances as far as financial transactions go. These may not be earth shattering business strategies but are drawn on some of the fundamental business wisdom and knowledge. Any business organization while using advanced management tools to become aware of their positional importance in the market place but not lose sight of fundamental business wisdom and trade wisdom. In hind sight had the company relied on some of the fundamental while drawing strategies, and built in cheques and balances, probably, the story would have been possibly different today. Conclusion To standardize the accounting information, every organization would have to establish certain accounting policies based on GAAP. Accounting policies encompass the principles, bases, conventions, rules and procedures adopted by managements in preparing and presenting financial statements. There are many different accounting policies in use even in relation to the same subject. Since the task of interpreting financial statements is complicated because of the adoption of diverse policies in many areas of accounting, in formulating the GAAP the three conventions of relevance, objectivity and feasibility are followed. Accounting Bodies all over the world have tried to achieve some uniformity in the accounting policies by prescribing certain accounting standards in order to narrow the range of alternatives available to an organization in respect of collection and presentation of accounting information. Though the various accounting bodies have strived hard and arrived upon a set of standard principles, companies like WorldCom and Enron, these days are leaving no path in misusing these standards for their own convenience. References Audet, J. R. (2002). An Octopus of Greed - The enron Financial Web Corruption. Quarterly - Report.com. Center for Economic Policy Research. (2004). International Business Cycles. Economic policy Research bulletin , 12-20. Continuity Central. (2004). Financial institutions see Risk as the greates threat. UK: Portal Publishing limited. Economist.com. (2002, May 02). Badly in Need of repair. Financi & Ecoonomics: Economists.com , pp. 1-5. Gulf News. (2005, May 11). Closer Gulf adherence to accounting rules needed. Retrieved August 20, 2008, from http://www.gulf-news.com/Articles/BusinessNF.asp?ArticleID=170597 Hartgraves, G. J. (2002). Enron: what happened and what we can learn from it . Atlanta: Goizueta Business School. ICFAI Center for Management Research ICMR. (2004). Financial Accounting & Financial Statement Analysis. Hyderabad: ICFAI Center for Management Research. Jeff Porter, K. C. (2005, February 18). The enron collpase. Retrieved December 26, 2008, from Franklin College.Edu: http://www.franklincollege.edu/pwp/jporter/Enron%20Case%20Study.pdf Kay E.Zekany, L. W. (2004). Behind Closed Doors at WorldCom: 2001. New York: McGraw Hill. Moberg, D. (2002, February 1). Enronomics 101. Retrieved December 26, 2008, from In These Times: http://www.inthesetimes.com/article/1404/enronomics_101/ simon, J. (1998, May 01). Why do companies use creative accounting? Association of Chartered Certified Accountants - Articles , pp. 4-7. Strada Capital Corporation. (1999). Financial Reporting Advantages. (Strada Capital Corporation) Retrieved November 16, 2008, from Strada Capital Corporation: https://www.stradacapital.com/financial_reporting_advantages.php Read More