Enron Corporation Scandal - Research Paper Example

? Enron Corporation Scandal Enron Corporation was one of the most innovative corporations in the US through the 1990s. The company had maintained its standing in the corporate arena by innovatively creating a new economy rebel that questioned the old ways of the industries and their assets towards the unrestrictive e-commerce world. The company began to expand its operations by building up power plants as well as by operating gas lines but, this company became largely known not for these businesses but because of its unique trading businesses. Apart from its core business of buying and selling off gas the company diversified into unrelated businesses such as the broad casting times for advertisers, Internet bandwidth and the weather futures (Li, 2010). The Enron Corporation was founded in the year 1985 and was one of the leading companies offering services in electricity, communications, natural gas and pulp and paper industries. The financial performance of Enron Corporation had also been uniquely impressive before its collapse in 2001 where its annual revenues showed an increase of $9 billion to over $ 100 billion from year 1995 to 2000. However at the end of year 2001 it was brought to attention and revealed that the company’s reported financial condition was sustained mainly because of the systematic, institutionalized and creative plan of accounting fraud. It has been reported by Thomas (2002), that the shares of Enron Corporation dropped from $90 per share in the mid of year 2000 to nearly less than $1 per share by the end of year 2001, this drastic decrease in the stock price of the company caused shareholders a loss of $11 billion. Thus Enron Corporation revised its financial statements for the past five years declaring a loss of $586 million only. In the December of 2001, Enron fell to bankruptcy. Also with the revelation of Enron Scandal in 2001, Arthur Andersen, one of the biggest audit and accountancy partnerships also dissolved. Enron undoubtedly was the biggest audit failure but this company that was famous in the world, also became famous for its so sudden collapse (Li, 2010). The scandal of the Enron Corporation is one of the most notorious scandals of the American corporations. It is commonly believed by economists, historians and analysts that the case of Enron is undoubtedly a case of White Collar Crime. The term White Collar Crime is used as a phrase when various interrelated and overlapping areas of law including the misappropriation, securities law, fraud, bankruptcy, money laundering, financial frauds, corruption, tax frauds, cybercrime, government frauds, bribery etc happen or occur. Hence white collar crime is not a discipline that is autonomous rather it is interdisciplinary that tends to combine individuals and professionals from various professions and disciplines which may include auditors, accountants, law enforcement, investigators and attorneys ( Gill & Scott, 2008). In view of the white collar crime Enron Corporation which was a big name in the corporate sector and was of one of those corporations that were seen to be practicing price stability, merchant bank selling and hedging of funds. However the later discovery of this information that Enron was nothing less than a giant fraud changed the course of it. The nature of fraud at the company was both classic as well as modern frauds. The charges of White Collar Crime include: 1. Involved in Ponzi Schemes The company was engaged in the Ponzi scheme, whereby the top executives of the company that were in charge of running the company became rich at the expense of its employees and the investors. This all was happening with the support of Arthur Anderson, an accounting firm – which further disclosed that the main business of Enron Corporation was selling of stocks, which was the main profit generating source for the company (Pontell). 2. Involved in Hype and Dump Manipulation Schemes Similarly Enron was also involved in the hype and dump manipulation schemes, whereby it greatly inflated its stock prices in its phony financial statements and also made false announcements about the financial health of the company that lead to the selling of shares of corporate insiders at high prices while the investors beard the loss also referred to as insider trading. Enron Corporation was also involved in the insider trading scandal. The misleading information to the public was sent so that the executives could gain profits on trading of stocks (Pontell). 3. Involved in Tax Frauds In addition the company created unlimited partnerships so as to keep the losses off its financial books and also to keep its stock prices high. All these events coincide with the concept of white collar crime and it would not be wrong to say that Enron Scandal is an excellent example of the White collar crime as it was nothing more than a giant con (Pontell). As the cash inflows of Enron came from the investor’s money and the borrowed funds, the company needed to unload the losses without hurting its image. Hence the company made a scheme of creating bogus companies as part of Enron’s expansion program which was later called as Special Purpose Entities or SPEs, their main purpose was to absorb the losses of the fraudulent companies. Enron presented its SPEs as a part of its risk diversification strategies (Thomas C. W., 2002) 4. Enron’s Culture Apart from the fraudulent activities the culture of an organization also plays an important role in the achievement of goals of an organization. As it is the culture of an organization that tends to align the members of the organization to achieve a common goal while simultaneously conveying a lack of concern for moral character displacement? The culture of Enron was based on agency-theory principles where the important as given more to the personal gains in contrast to the adherence of rules or principles (Kulik, 2005). Similarly, Sims & Brinkmann (2003), also present their perspective that the culture of Enron also gave highest value to cleverness which tended to encourage the breaking of rules. The culture of Enron Corporation was greatly influenced by the leadership styles of Jeff Skilling who followed the cowboy capitalism structure (Gini, 2004). This leadership style put great pressure to achievements of risky and aggressive deals for the organization while giving short-term outputs and fast rewards. Those who could not cope up with fast output were eventually terminated from the company. With such a corporate environment that only accepted results through extensive risk taking, provided its people with incentives when they would commit a fraud at the risk of survival of the company. Hence the company did not accept integrity of actions and also the actions of top management were far from ethical values (Tomasic, 2009). Thus with this culture of arrogance with deep rooted internal competition and fast reward systems in terms of compensation and compensations schemes encouraged the employees of Enron to tamper its books of accounts and to create SEPs that would make the earnings and the debt levels unclear (Gore & Murthy, 2011). Hence the case of Enron as of Normalization of deviance as the all those involved in the system get accustomed to the corrupt activities thus creating normalization of deviance. Vaughan states: “People within the organization become so much accustomed to a deviant behavior that they don’t consider it as deviant, despite the fact that they far exceed their own rules for the elementary safety. But it is a complex process with some kind of organizational acceptance. The people outside see the situation as deviant whereas the people inside get accustomed to it and do not. The more they do it, the more they get accustomed” (Vaughan, 2008). Changes in the regulatory Framework The Enron Scandal shattered the myths of the regulatory environment. The regulatory system was considered to be the full proof from all kinds of violations and also representative of the laws in its entirety. The penalties that were charged on the economic crimes were set so as to make everyone refrain from indulging in any kind of fraudulent activities and to keep acts of corruption away from the corporate arena. However the emergence of the Enron case literally blew holes in the prevalent and well established regulatory framework. The model of financial reporting of AICPA lost its sanctity while the general public also lost confidence in the auditors as well as the audited statements provided by them. The situation got entirely worse that even the audit profession came under a great threat and greatly suffered (Carnegie & Napier, 2010). The SEC procedures which were considered exhaustive and fully covering every aspect needed modification and revisions. Hence there were calls to roll back the deregulatory reforms and to develop new systems to tackle such issues of frauds and to scrutinize the internal systems of the publicly held companies (Gore & Murthy, 2011). There were a lot of factors that led to the bankruptcy of Enron Corporation such as its corporate culture fostering agency-theory principles, the unreasonable expectations of the CEO and the malpractices of accounting were some of the major causes. Also the major deviations from the generally acceptable accounting principles (GAAP), misrepresentation of financial statements, the hype and dump schemes and the faulty performance of the auditors led to its collapse. In view of the Collapse of Enron Corporation, social activist Ralph Nader called for the roll back of the deregulatory reforms that were in practice in the US which is he referred to as ‘the Enron supermarket of corporate crime, fraud and abuse’. With regard to this a lot of steps were taken in the legal and regulatory environment which included (Gore & Murthy, 2011): The Securities and Exchange Commission (SEC) of US decided on formulation a disciplinary board which would investigate the alleged fraudulent companies as well as the non-compliant organizations. It was also announced by the SEC that it would form new organizations that would be out of the structure of the American Institute of Public Accountants (AICPA) that would oversee the practices of the auditors of the publicly held companies. Further to this, the AICPA also agreed to limit its non-audit services to the publicly held companies. AICPA also agreed to formulate an improved model for financial reporting and was also entrusted the responsibility to set new measures that could help in deterring the frauds The biggest change that was brought was the enactments of the Sarbanes-Oxley Act; this cat was passed on 30 July, 2002 as a Federal Law for Public Company Accounting Reform in the US in reaction to the increased number of fraudulent and accounting scandals in the corporations. The Sarbanes-Oxley act re-examined the business practices keep in view the happenings at Enron and changed and revised clauses in order to control the corporate frauds and deceits in future Thus it led to the consideration of white-collar crimes as grave crimes and the domain of penalties under it were also enhanced (Gore & Murthy, 2011). Conclusion The discussion on the Enron Scandals provides very useful insight to the fact that the it adopted the position of fraud minimalist and no significant role of material fraud was reflected in this case. The very fact to ignore the potential control of frauds as an outcome of free market forces, or the policies that are intended to regulate in the best possible way could lead to some very damaging financial cases. Also the failure to recognize and acknowledge the fraud as a social phenomenon provides room to those who want to seek advantage of it in two ways i.e. as there is no effective mechanism to control frauds, those who want to take advantage of this opportunity tend to engage in different crimes. The second reason that the inability to control potential fraudulent activities unless an incident occurs, also tends to encourage individuals to break the laws, as the control procedures would take time to be controlled hence the culprits would be able to escape the legal framework because of the sudden tensions that would be built in the justice capacity (Pontell) There have been many victims of the Enron Scandal; the biggest victim was the vice chairman of the company who committed suicide as a result of the revealing of the Scandal. Apart from this, there were nearly 4,500 individuals who lost their jobs and careers due to the reckless acts of a few individuals but they too paid the price. The old adage “Lessons learned hard are learned best” describes the position of these individuals. However there have been some former employees of Enron Corporation that have become resentful by the way they had been treated by the best in business corporation (Thomas C. W., 2002). The accounting scandal of Enron was complex combination of involvement and of political power. The leaders of the Enron Corporation were not guided by the invisible hand of free enterprise that would satisfy their self-interests and hence did not compete in systems that required business ethics. Connivance and corruption gave encouragement to the officials of Enron Corporation to manipulate schemes and carry them out because their source of guidance was morality’s invisible hand (Cantoria, 2011) The lesson that is learned from the Enron Scandal is that the policy that are often ignored yet are inevitable that are provided as a result of this scandal is that the prevention and reforms in the legal frameworks should be proposed in every respect, whether it is directed at the financial institution, corporate governance, deposit insurance, security market or accounting these cannot assume away the problems of assets that have no control frauds, accounting abuses or clear values. The public policies that analyze white collar crimes if do not explicitly recognize the potential in controlling the fraud devastations, would tend to be ineffective but it would definitely serve as a blue print for such financial disasters of future (Pontell). Works Cited Cantoria, C. S. (2011). A Detailed Look at the Enron Accounting Scandal. Brighthub. Carnegie, G., & Napier, C. (2010). Traditional accountants and business professional: Portraying the accounting profession after Enron. Accounting, Organizations and Society, Vol. 35, No. 3,, 360-376.  Gill, J. D., & Scott, M. (2008). The Legal Environment and White Collar Crime. The Institute for Fraud Prevention. Gini, A. (2004). Business, ethics, and leadership in a post Enron era. The Journal of Leadership and Organizational Studies, Vol. 11, No. 1, 9-15. Gore, A., & Murthy, G. (2011). A CASE OF CORPORATE DECEIT: THE ENRON WAY. Revista Cientifica Electronica Ciencias Gerenciales / Scientific e-journal of Management Science, 18 (7). Kulik, B. (2005). Agency theory, reasoning and culture at Enron: In search of a solution. Journal of Business Ethics, 59(4), 347-360. Li, Y. (2010). The Case Analysis of the Scandal of Enron . International Journal of Business and Management, Vol. 5, No. 10, 37-41. Pontell, H. N. (n.d.). WHITE-COLLAR CRIME AND MAJOR FINANCIAL DEBACLES IN THE UNITED STATES. 128TH INTERNATIONAL TRAINING COURSE VISITING EXPERTS’ PAPERS . Sims, R., & Brinkmann, J. (2003). Enron ethics (or: culture matters more than codes). Journal of Business Ethics, 45(3), 243-256. Thomas, B. C. (2002). Called to Account. Retrieved from Time.Com: http://www.time.com/time/business/article/0,8599,263006,00.html Thomas, C. W. (2002). The Rise and Fall of Enron. Journal of Accountancy. Tomasic, R. (2009). Corporate collapse, crime and governance-Enron, Andersen and Beyond. SSRN Working Paper Series, 1-20. Vaughan, D. (2008, May). The Challenger Launch Decision. (B. Villeret, Interviewer) Read More