Lessons Learned from the Enron Scandal - Term Paper Example

?Running Head: Enron Scandal Insert His/her LESSONS LEARNED FROM THE ENRON SCANDAL The Enron scandal which disclosed in October 2001, led to the bankruptcy of the Enron Corporation. Enron Corporation was an American energy company which was established in Houston, Texas. This also led to the dissolution of one of world’s fifth largest audit and accountancy partnerships known as Arthur Andersen. The bankruptcy of such a big organization is regarded as the greatest setback in American history. The dissolution of Enron was the result of its own false practices illegal dealings of projects and not showing their debts on their company’s accounts. (Project 2000_25_Corporate) It was regarded as the greatest failure in terms of audit. Enron was established in 1985 by Kenneth Lay after the merger of Houston Natural Gas and Inter North. This merger created the largest gas pipeline system in America. In the 1990’s Kenneth Lay took an initiative to sell the electricity at market prices and the resulting markets helped him to sell the electricity at higher rates as a result increasing their income. Enron not only delivered natural gas but also became a market middleman for energy and brought the buyers and sellers of energy on one platform. Enron in just 15 years reached such a position where it became America’s seventh biggest company which employed 21,000 employees in more than forty countries. (Enron scandal-at-a-glance, 2002) Enron became dominant in the trading of energy contracts and financial instruments known as Derivatives. By 1992, Enron became the largest seller of natural gas in North America with earnings of $122 million. In the late 1990’s Enron was considered as the best in the world as it controlled twenty five percent of all electricity and natural gas contracts. In November 1999, Enron’s online website was established which helped the company to manage its contracts more efficiently. This website of the corporation in no time became the largest e-business site of the world. Enron also invested in physical facilities. Enron in the beginning was an insurance company. For further development of the company, Enron purchased a number of assets which included gas pipelines, electricity plants, water plants and broadband services all over the world. The company also incurred revenue by dealing in the same products and services in which it had been involved. The stock of Enron rose from the beginning of the 1990’s until 1998 by 311% which was a remarkable increase in the rate of growth. Apart from that Enron was rated as the most innovative corporation in America, in the survey of Fortune’s most Admired Companies. After many years Jeffery Skilling was hired who developed the idea of using such an accounting system which could hide debts in billions from the failed deals. Not only him but Andrew Fastow Chief Financial Officer and many other executives misguided the board of directors of the Enron company. The shareholders of the Enron Company lost 11$ billion which was as high as US$90 per share in the middle of 2000 but fell to less than 1$ at the end of Nov 2001.As a result of which the U.S. Securities and Exchange Commission started to investigate the matter. The decline of Enron started when its investors became known of the “off balance sheet” partnerships that were hiding billions of dollars of debts. One of the deals with Blockbuster Inc. which was a video rental company to provide movies on the internet was also cancelled in March. Moreover the rival company Dynegy offered to purchase the company and the deal was finalized on December 2, 2001. The Enron Company finally filed for the bankruptcy of the company. In the U.S. history Enron was the largest corporate bankruptcy until WorldCom’s was declared bankrupt the next year. Moreover there were many executives who were blamed for a number of charges and were then sentenced to prison. Moreover, Arthur Andersen the auditor of the corporation was also found guilty in a United States District court but at that time the U.S. Supreme Court rule was over and the corporation had already lost a major part of its customers and was shut down. The employees and the shareholders of the company received less than what they had lost. Due to the bankruptcy of such a big organization new laws and legislations were made to ensure the accuracy of financial reports of the public companies. One of the part of the legislation, the Sarbanes-Oxley Act stated that serious action will be taken for altering or destroying records. In addition, accountability of the companies was increased so that the companies should avoid biasness towards their clients. Although there were many reasons for the downfall of the company but the main reason was that the financial statements did not clearly show its relations with the shareholders and financial analyst. Moreover, due to the complicated and unethical practices of the company led to further downfall. In addition, the company used unfavorable accounting system to alter its balance sheet so that it could portray a suitable depiction of its performance. Enron was considered among the blue chip companies on the stock exchange. The decline of Enron started after the revelation that most of the income of the corporation was incurred from the deals with the limited partnerships which it controlled and as a result of which the most of the losses of Enron was reported in the financial statement. The firm was declared guilty in 2002 for annihilating documents relating to the company’s audit. So as a result Andersen was forced not to audit any of the public companies because the SEC did not accepted audits from convicted persons. After many years of expansion of business internationally and domestically which involved a lot of complicated projects the corporation in heavy debts. The major cause of these debts was partnerships of the shareholders with the other companies, alteration in the accounting, and illegal loans. Some of the partnerships that helped Enron to hide their debts include RADR, CHEWCO, and SOUTHAMPTON. RADR was an entity that purchased electricity-generating windmill from Enron and later sold them on profits which were transferred to the officials of Enron and their families. CHEWCO which was formed by the executives of Enron to purchase the shares of the California Public Employees’ Retirement System (CalPERS) but unfortunately it failed to meet its accounting and revenue requirements. Moreover when Enron purchased CHEWCO its price was raising which was beneficial for the investors. Southampton helped Enron to purchase the shares of National Westminster Bank in a limited partnership. Although Enron paid $20 million but only 1$million reached to the NatWest and the remaining money went to many other executives including three employees of the NatWest whose names were Giles Darby, David Bermingham, and Gary Mulgrew. These three British men had worked with Fastow on a specific entity called Swap Sub. When SEC was investigating these three men went to the FSA in November to negotiate with Fastow and then in June 2002, U.S. issued warrants for their arrest for the wire fraud and they were declared guilty by the court of law. Although the top level executives were aware of all the illegal practices and at last it was revealed on October 2001 that the worth of the company was actually $1.2 billion. As a result of which SEC carried an investigation which revealed that most of the illegal practices were carried out by the high executives including Arthur Andersen who was charged and declared guilty of deleting and destroying the firm’s files, emails which were related to Enron’s audit. Only a few of the employees of Andersen were involved in this scandal. As a result of which the company surrendered its CPA license on August 31, 2002 and eighty thousand of the employees became jobless. After all this happened the name of Andersen was so damaged that he could not enter in any business which was of a small scale. The Enron scandal had a very great impact on the political and financial position of the U.S. Several investors, shareholders, politicians are asking for an answer that why such a big deception could not be traced in the early stages because if this deception was traced in the early stages the U.S. economy would not have suffered such a great setback. The U.S. justice department has charged a number of executives for such a fraud and money laundering. The former chief executive and chairman Kenneth Lay has already given his resignation and his place is taken by Stephen Cooper. The main business of Enron is tied up in a very complicated deal with UBS Warburg. Although the bank has not paid for its trading unit but it will share in with the profits of Enron. A small rival company Dynegy managed to win a pipeline in U.S. after the negotiations of the merger but then it was resold to Warren Buffet. The biggest foreign investment which was made in India in the state of Maharashtra is still kept for sale. At that time George W Bush was the president who passed a very strict bill aiming at the dissolution of a firm who was involved in any kind of fraud. He also gave an order to review the rules and regulations regarding the pension because the employees of Enron had already lost billions of dollars which they had invested in their own stock. Due to its links with the Whitehouse this scandal also was politically affected. This corporation provided millions of dollars to help Mr. Bush in the election campaign of 2000. The main reason of the delay of disclosure of the company was that Enron gained political favors by providing campaign money to the politicians. Lay and Mr. Bush were known to be good friends. The code of ethics of Enron Corporation was a booklet which was published by the firm itself. After this scandal the need of proper accounting and corporate governance is required. Moreover the quality of the ethical codes of the companies should be closely examined. There many reasons for the collapse of Enron. One of them includes the two roles played by Arthur Andersen which he possibly failed to perform with sincerity and honesty. The lack of interest of the board of directors and management also led to the downfall of the organization. no company can excel in each and every thing . This was the main problem the senior executives believed that Enron should be best at everything which was not possible so in order to achieve their so called reputation they decided to hide all their failures from the company’s accounting book. One of the lessons learned after Enron’s collapse was that no political favors should be given to any of the private corporations because this will not be in the best interest of the company. The second lesson is that illegal spending on the foreign projects should be stopped. This is not required at all. All such crimes should be brought to book because further delay may worsen the situation even more. The most important lesson learned was that corruption and fraud are present when there is a lot of money involved and when there is difference of interests. For instance if every restaurant had its own health inspector to certify the government that it is meeting its health requirements or if every company has its personal tax examiners to examine its accounting books there is a huge possibility of dishonesty and cheating. It is the responsibility of the leader to provide a vision or properly define the instructions to their employees so that they could act accordingly. Discuss the important the matters and debate on it and support your suggestion with a strong reason. Now Enron is known as the Enron Creditors Recovery Corporation and this change of name took place on March1, 2007. The collapse of Enron led to unemployment of four thousand employees. Moreover, the investors lost about sixty billion dollars in a few days. Such a loss meant that the people had lost their old –age securities. The fund of the company’s employees was demolished. The trust of the common man was destroyed. The common people lost their trust on the U.S. economic system. The banks were also suspected of deceiving. The Enron scandal is regarded as a White-Collar Crime. It means a crime which is committed for personal gain and includes a lot of money. Such type of a crime is usually non-violent but has a devastating and long lasting effect on the society. The main reason of the investigation of the company was to find out usage of SPE (special purpose entities). Enron used about 500 of them in order to get benefits from them. It was the government task to control such fraud and illegal dealings if the audit committee was not able to do so. The collapse of the Enron made the investors scared of their investments. They feared that if they invest in a company which is also engaged in such false practices their investment will be lost and their fear proved to be true when they came to know about many telecommunication companies which were involved in such matters in some way or the other. From 2000 to the middle of 2002 the prices of the stocks fell drastically by 33 percent. On the other hand the stocks of technology dropped to some 70 percent. Moreover a large number of firms including Worldcom Inc. and Global Crossing also were declared bankrupt because they were also engaged in some of the accounting frauds. There were two main reasons which were to be investigated one was that the executives had developed such accounting schemes which may show Enron as a highly profitable organization which it was not. This was done for the personal benefits of the executives. This practice ended up in an increase in the stock price but on the other hand it made the shareholders come under a huge risk which they were not aware of. The second most important reason of his scandal was the accounts of the executives of Enron. The top most executives claimed that they were not aware of all these illegalities as the business itself was very complicated and they could not concentrate on each and every detail of the corporation. In an interview in 2004 Kenneth Lay said that he will not take the responsibility of all the crime which has been committed because he was not fully aware of what was happening. In the same way in 2002 Jeffery Skilling also said that Enron was such a huge company so how was it possible for him to know each and every detail about the company. This shows that each executive is blaming the other and portraying themselves as innocent. All these things tell that that the interests of the managers and the owners were different which led to the collapse of the firm. The managers were just like models who were not interested in the growth and development and they lacked control. It simply meant that the managers were doing that was best for the owners of the company. Here we come to know that the trust of the company was compromised which shows that the ethical code of the company was not being followed. After the collapse of Enron, a survey was conducted which was carried out by the respondents of General Social Survey to ask the citizens how much trust or confidence they have in the people running such big organizations? The result indicated a great fall in the confidence of people in these big organizations after the scandal of Enron. The former internet chief of Enron was also sentenced to twenty seven months imprisonment. He was declared guilty for the securities which he claimed he did it three years ago. One of the corrective actions which were introduced to avoid any such scandal was to make a fair investment policy but the cost of this policy was very high so the companies registered their complaints regarding the cost. In addition to this the regulators have taken steps to ease the controlling and reporting requirements regarding the Sarbanes-Oxley (2002) accountability law of the corporations. The research by Financial Executives International trade group has shown that the cost regarding the policy has considerably declined. Another question which is bothering the companies is that will the investors still invest in such big organizations without any hesitation? Well the answer is that the investors will surely remember the Enron scandal for the rest of their life but they will make investments after thorough scrutiny. So any company which wants to establish itself has to meet all these requirements because the bars have been raised. Good governance and a strong system of check and balance can help to sort out the problems. Although we cannot say that this practice will not be repeated but it will surely help to control such a fraud to a great extent. Moreover the firms should prepare a prospectus before making any kind of investment. The firm should also keep a check on all the accounting statements, confirmations of trade. Nothing should be taken lightly especially if a letter of a brokerage firm is received which requires a signature on a copy of the prospectus and should be returned to the firm immediately. The firm should not hesitate of asking questions from the broker until it is fully satisfied. The firm should ask that whether a particular investment will be in favor of their goal. The main cause behind this scandal or fraud was greediness and a lot of money. Well these two forces are more than enough to destroy any corporation. It will not be hard to believe if a poor person commits such a crime but the top executives had done it which shocked the whole world. As a result of which a lot of people lost their jobs and pensions. The main fault was of Jeffery Skilling that he was not of the unethical accounting which was being carried on within the company. This does not mean that he was alone responsible for this illegal act but Lay equally involved. Being the leader or owner of such a big public corporation Kenneth Lay’s top most priority should have been to produce huge profits for its, shareholders which was not accomplished. Some investors got return on their investment but the others were severely got punished for their loyalty towards the company. The involvement of the private companies in Enron’s criminal practices also raised questions on the government. This scandal greatly affected the Stock Market but it was too late for the investors of Enron because the damage had already been done. In the end it can be concluded that the Enron scandal changed the lives of the people of America. This scandal cannot be forgotten by not only by the people of America but for the rest of the world. The Enron scandal has been written in the history of America and is regarded as the most destructive scandals which adversely affected the economy of the U.S. In short each and every citizen should realize his or her responsibility and be alert of any such happening. Enron scandal affected U.S. in many ways but one positive happened that it increased the height of awareness of the accounting system and business practices in general. (Engels) The Sarbanes-Oxley Act which was introduced to set guidelines for the corporations ethically. This act although does not ensure absolute elimination of such crimes but at least helps to have a control and check on such false practices. (Clardy, 2003) References Clardy, A. (2003, May). Working Paper 03-Clardy-03. Retrieved July 18, 2011, from http://pages.towson.edu/aclardy/Working%20Papers/Enron%20Working%20Paper.pdf Engels, W. (n.d.). Enron Bankruptcy. Retrieved July 18, 2011, from Scholieren: http://www.scholieren.com/werkstukken/11036 Enron scandal-at-a-glance. (2002, August 22). Retrieved July 18, 2011, from BBC News: http://news.bbc.co.uk/2/hi/business/1780075.stm Project 2000_25_Corporate. (n.d.). Retrieved July 18, 2011, from Honors US History: http://honorsushistory.wikispaces.com/Project+2000_25_Corporate Read More