Analysis of Enron Bankruptcy - Research Paper Example

? Enron Paper: First Affiliation Enron Paper Introduction Enron was originally an American natural gas pipeline firm, which grew into a giant marketing and communication broker. Founded in Houston Texas in 1985, it had an approximate of 20,000 employees, and was a leading company in the production of electricity, natural gas, communications, paper and pulp, power plants and wastewater management. They later expanded in offering other services, such as wholesale business, making them worldwide suppliers of non-energy transactions. With all these ventures, they managed revenue of an estimated $101 billion by the year 2000. Enron has been named “America’s Most Innovative Company” for six consecutive years by Fortune, and was ranked among the top 100 effective firms with operations in the United States of America (Hutton 5). Enron was a among leading promoters in restructuring of energy markets which led to the emergent of its name, but the name was later changed to energy country as a result of its invention in new global market. Enron was a pioneer company in the legend of elite of workers in financial world. The company acquired miscellaneous investments to its portfolio and had the capability of obtaining returns of 200% of its investments to shareholders. By 2000, Enron had become a massive company in the industry. They opened branches in South America, India Asia and a host of other European States and countries. They extended their functions by starting occupation in additional projects that they had started, and it is when they started the online manufacturing of energy and telecommunication facilities. They further introduced services such as, risk management, consulting services, internet broadband services, and the launch of outstanding products that protected against bad weather (Hutton 5). However, in October 16, 2001, the company was involved in some fraudulent activities and this led it to bankruptcy. On December 2, 2001, in Southern District of New York, Enron Company went ahead and filed for bankruptcy after it recorded a loss of an approximated $638 million in its third quarter earnings, and chose Weil Gotshal and Manges as their bankruptcy counsel. This bankruptcy was as a result of, top executives involved in huge scandals such as, money laundering, corruption and a series of other conspiracies. To add on top of that, they lost their goodwill, investments and confidence by admitting fraud in income of about four years, which was about $586. They also admitted to have hidden $3 billion in debt to create limited partnerships. Afterwards, they faced a massive deterioration in the stock market with, is $90 per share falling to less than $1 per share in 2000. (Bhatnagar et al. 8) Employees of Enron Corporation became affected in disastrous ways, stating form unemployment to their retirement savings getting lost in the fraud. Banks also became victims of circumstances by losing millions of dollars of investments that the company had acquired as loan, due to fake earning reports. The firm was sidelined by a number of its clients and workers resulting to them quitting out of business. The report of these financial frauds were preplanned, and systematically arranged to undertake fraudulent activities. The counterfeiting of strategies, embezzling of profits and hiding increased debt diminished the company’s stock value through the fraudulent activities, they were able to gain access in borrowing extra wealth and with this, and they were boosted. The statistics revealed that top executives gave incorrect audit reports about the company’s economic conditions. In February 2002, the company was inquired by Senate Commerce Committee and they later came out of bankruptcy in November 2004 (Bhatnagar et al, 10). Accounting Problems Enron started experiencing accounting problems in late 2001 that, compounded of some of its several businesses not doing well as required. In October 2001, Enron announced a series of asset losses which included an after tax charge of $287 million for a company Azurix, a water business firm acquired in 1998. The total summed up to represent 22% of the company’s capital budgets for the three years between 1998 and 2000. To add on that, in October 2001 they sold Portland General Corporation, an electric power company it had bought in 1997 for $1.9 billion incurring a $1 billion loss over the acquisition price. The losses and write-offs raised queries on how viable Enron was able to pursue their gas trading business in other markets (Bryce, 11). Top Management Compensation The top management brass of Enron Corporation was heavily compensated using the company’s stock options. The compensation package consisted of equity interests, which they could use to acquire personal gains in a quick manner without the assurance of shareholder value over the long term. The company derived a strategy that, while putting the company’s long-term projects at risk, it became effective in driving up the share price over the short time. In 2001 the released a proxy statement which stated that within 60 days of the proxy date, the company’s executives would be awarded compensation as follows; Ken 5,285,542 worth of shares, Jeff Skilling 824, 038 worth of shares, and for directors and employees combined 12,611,385 worth of the company’s shares. In December 31, 2000 96 million of their shares outstanding under stock option plans, with 13 percent of their common shares outstanding. These factors led to the speedy decline of the corporation and all its resources (Bryce, 13). Auditing Mistakes The work of corporate audit committees comprises of them meeting a number of times in a year with the aim of conducting financial and accounting checks. They are outside managers who extensively rely on information given by internal managers of the organization and the internal and external auditors. If there is fraud in the management or the auditors do not account well for the company’s expenditure, they will not be able to notice the problem very fast. Many investors in partnership with Enron, vested a lot of trust on the company, and as a result, the company’s auditors signed off financial statements that were miscalculated hence, misrepresenting the company’s financial condition and state. The accounting methods used by Enron to restate the auditing report of the past four years earnings were in appropriate. There was participation of top-notch professionals in accounting in the meeting by the board members, but there was a possibility auditors were misled by the management since, they can only account for the figures given by the company (Bryce, 15) Management Greed and Corruption The management of Enron Company raised the company’s price share over a short period through misappropriation of accounts, which misrepresented the company’s profits to investment relations campaigns. Through such malpractices, the management managed to sell 1.75 million shares of worth more than $1 billion at a price ranging from $80-$40 down. There was contradiction, lack of transparency in Enron has published financial statements, and its financial status as it was at that moment. The misappropriation of funds and accounts was a deliberate and intentional strategy of Enron’s Corporation top management, which was a direct show of fraudulent activities and dishonesty undertaken in the company (Fox, 17). Failure by Board of Directors The Board of Directors work is to be the company’s watchdogs and ensure there is no major problem by keeping a close eye on what management is doing. Their mandate is to ensure the company’s activities are managed to the best of interest of the shareholders. It seems the board forgot what their work was about and, in turn, acted as lapdogs, since it is not clear on whether they knew what was going on or not. There are two possibilities: either the board was negligent and ignorant of what the management was doing or they played accomplices in misleading the investors (Fox, 17) Higher Stock and Bond Prices for Investment by Wall Street Enron gave large sums of consulting fees for the investment banks involved in the merger and acquisition program by Enron for the purposes of acquiring enormous wealth as the equity price went up. The financial media representing Wall Street praised the growth and success of Enron by publicizing the company is raising price in stock, without scrutinizing the company efficiently (McLean et al. 122). Sell-Side Analysts The Sell-Side analysts were considerably criticized for failing to give an early warning to the problems facing Enron. On October 31 2001, before Enron Corporation filed for bankruptcy, the recommendation list by the mean analyst, who distributed analyst recommendations, stated that on First Call for Enron it was 1.9 out of 5, where one was a “strong buy” and five recommended “Sell”. However, after the accounting problems were announced in October, 2001 several institutions, such as, UBS Warbug, Lehman Brothers and Merrill Lynch recommended or rather issued “strong buy” for Enron (Hutton, 29). A Crisis of Confidence that Management Could Do Nothing to Reverse The company started with an unraveling 20% of write-down in the company earnings, which seemed to be isolated. Investors started pulling out after they witnessed a series of write-downs that followed and the management didn’t seem to be in a position to solve the crisis. With the resignation of the company’s CEO Jeffery Skilling for what he termed “personal reasons” propelled the company to turmoil and crisis. Investors abandoned the company’s stock after it was evident the company had serious financial irregularities. The company’s equity dropped after the bank dried up its credit, and this led to their bankruptcy (Hutton, 30). Conclusion In the wake of Enron bankruptcy, it was evident that policy changes were about to follow. The changes include legislative action to be made by the federal government, and policy modifications on employee’s behavioural changes by the employers. Works Cited Bhatnagar, Sanjay, and Peter Tufano. Enron Gas Services. Boston, MA: Harvard Business School, 1995. Print. Bryce, Robert. Pipe Dreams: Greed, Ego, and the Death of Enron. New York: Public Affairs, 2003. Print. Fox, Loren. Enron: The Rise and Fall. Hoboken, N.J.: Wiley, 2003. Print. Hutton, A. The Role of Sell-Side Analysts in the Enron Debacle. New York: Harvard Business School, 2002. Print. McLean, Bethany, and Peter Elkind. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio, 2003. Print. McLean, Bethany, and Joseph Nocera. All the Devils Are Here: The Hidden History of the Financial Crisis. New York: Portfolio/Penguin, 2010. Print. Read More