Enron: Questionable Accounting Leads to Collapse - Case Study Example

Table of Contents Particulars Page No 1.0 Introduction 2 2.0 Enron’s Corporate Culture’s Contribution to its Bankruptcy 3 3.0 Bankers, Auditors and Attorneys Contribution to Enron’s Demise 4 4.0 Role of Chief Financial Officer in Enron’s Bankruptcy 5 5.0 Conclusion 6 6.0 References 7 1.0 Introduction This report has been drafted in a systematic manner to focus on the Enron Questionable Accounting which led to its bankruptcy. The report has been bifurcated in three larger segments to answer in details the major causes and reasons which led to the one of the world’s largest bankruptcy. The segments are so designed to cover broader headings such as the corporate culture of Enron, the role of bankers, auditors and attorney in the Enron’s demise and the major role of Enron’s Chief Financial Officer in the bankruptcy of the company. Finally a conclusion is provided to ensure that the readers are equipped with both theoretical and practical understanding of the entire topic under study. 2.0 Enron’s Corporate Culture’s Contribution to its Bankruptcy A corporate culture is defined by every individual’s actions towards its working environment and society at large. The corporate culture at Enron can be classified as a dishonest and profit sheering culture. The culture at Enron is characterised with greed for money and dishonest behaviour of its employees and employer. Enron was further characterised with an overwhelming aura of pride and deep rooted belief that its staff could handle increasing risk without equal danger. Corporate officers were more neglectful to their responsibilities and were more abusive at their level towards greed and deception (Cullen, 1999). The culture here focused on making larger money for its own executives than for its investors and shareholders. For instance, the compensation plan at Enron was much more focussed on generating profits for its executives than for its shareholders. There was little or no regards for ethics or law in the corporate culture of Enron. People at all levels from top to down to individual workers had attitude of threatening and intimidating people to blow the whistle on them. Cheating and fraudulent practices were widespread within Enron and were very common and often engineered by senior accountants who used the same in booking their own pocket profits. Denial, rationalization and reputation management allowed the unethical employees to carry on theft and use of unethical practices until they were caught red-handed or exposed to the outer market. The management in Enron where imbibed with greed and ambition and often crossed the corporate culture ethics of the company which eventually led to commitment to larger frauds and ultimately the bankruptcy of Enron (Farrell, Fraedrich & Ferrell, 2010). In contrast to the same Lay should have shaped the culture of the company in such a manner that it would remain healthy even in turbulent changes. The management should have been trained not just in technical aspects to carry out their roles and responsibilities but equal importance is required to develop an ethical corporate culture. 3.0 Bankers, Auditors and Attorneys Contribution to Enron’s Demise One of the major reasons for the bankruptcy of Enron involves its relationship with its bankers, auditors and attorneys. The bankers at an early stage were aware of the financial problems at Enron, however the underwriter filing on the debt issues sold to public makes it clear that Enron without the help of its bankers could never make its schemes on investing public. JP Morgan Chase and Citibank were aware of the tax regulations however these banks issued large loans to Enron. The banks could have done this as they would then lay off much of the risk through a complex process of financial engineering. Arthur Anderson the financial auditor of the company was completely responsible for ensuring the accuracy of the internal bookkeeping and building of sound and transparent financial statements of Enron. Auditor’s report unlike any other company is the key ingredient for any investor to make an investment decision, which has been clearly violated by the auditors of Enron through the means of vague and fraudulent presentation of the financial statements of Enron. Jeffrey Skilling who has been widely regarded as the mastermind of Enron was so sure to not have committed any crime and waived off his right to self-incrimination and testified before Congress that he was not at all aware of any inappropriate financial arrangements (Talaski & Karen ,2002). The auditors of Enron were aware in the midst of August about the improprieties in the energy’s company’s accounting policies. Enron’s auditors have been extensively questioned about Anderson’s decision to stand by Enron’s financial reports until early November when the accountants of Enron forced the company to restate its five years of results and erase almost $600 million in its reported profits. Further the attorneys of Enron in the events leading to the U.S. Securities and Exchange Commission enquiry, the employees of Enron had clearly shredded many important facts and documents to prevent any indictments. 4.0 Role of Chief Financial Officer in Enron’s Bankruptcy To hide the misleading financial statements of Enron, the Chief Financial Officer, Andrew Fastow acted as the biggest culprit. He took his authority and role towards unconsolidated partnership and “Special Purpose Entities” which was later known as LJM partnership. Taking advantages of such SPE’s, the Chief Financial Officer, Andrew Fastow used the mechanism to raise funds for various needs without having to report the debts in the company’s financial statements. Andrew directly ran these partnerships and designed and moulded them to purchase the underperforming assets such as Enron’s poorly performing stocks and stakes. These transactions were although recorded as Third Party transactions in the books of accounts however these partnerships were never consolidated to wipe off the debts from its balance sheet and Enron could itself boost and did not revealed the actual number to its investors and stakeholders. The result amounted to around $1 billion of Enron debts. Andrew made about $30 million from such LJM partnerships which were disguised as gifts from family members who invested it enriching himself (Miller et al.,2000). These manipulations of the Chief Financial Officer of Enron to take off-balance sheet partnership to take on debts, hide transparency in the financial statements with inflated revenues and hiding losses while banning the employee’s stock sales contributed highly towards the ultimate bankruptcy of Enron. To further prevent degrading of Enron’s credit rating, The Chief Financial Officer of Enron, Mr. Andrew tripled the company’s staff to more than 100. He hired various banking experts giving them task of buying and selling capital risk. This in turn allowed Andrew to draft the balance sheet of Enron as debt free which in reality owned over $30 million as debts. Fastow himself made over $ 10 million as a result of it while neglecting the basic financial practices of reflecting the true cash on hand and other liabilities. He also pressurized large US Investment banks such as Merill Lynch and Citibank to invest in his funds by threatening them to lose Enron’s future business if they did not agreed upon such investments. Furthermore the analyst were threatened to get fired if they dare to provide a negative ranking to Enron’s rating in the International credit rating system. Thus the Chief Financial Officer had huge role and dishonest means in the ultimate decline and bankruptcy of Enron. 5.0 Conclusion The report provides a complete understanding of the various factors and roles of different persons which contributed highly to the ultimate bankruptcy of Enron. The corporate culture of the company has been witnessed as unethical, dishonest and lured with greed which allowed scope and advantage to its auditors, bankers, attorneys and chief financial officer to follow unethical means and fill their own pockets than looking to revive or work for the betterment of the company and its stakeholders. 6.0 References Cullen,J (1999)Managing Ethical and Social Responsibility: Challenges for Multinational Companies ,in Multinational Management .a Strategic Approach, International Thomson Publishing. Enron Arranges $1.5 Billion of Debtor-In-Possession Financing.. Enron Corp. Press Release, 3 December 2001. http://www.enron.com/corp/pressroom/releases/2002/ene/95- 120301ReleaseLtr.html Farrell, O., Fraedrich ,J and Ferrell, L,(2010)Business Ethics: Ethical Decision Making and Cases (8th edition),Houghton Mifflin. Miller, Roger and Jentz, Gaylord A (2000) .Business Law Today.. West Legal Studies in Business, 2000. Talaski, Karen.(2002) .Enron.s fall sped Kmart into tailspin.. The Detroit News 27 January 2002. Read More