Question

need a justification paragraph to the following case

Introduction

The story of Enron Corp.is the story of a company that reached dramatic heights, only to face a dizzying fall. Its collapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when it declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonders how such a powerful business, at the time one of the largest companies in the U.S, disintegrated almost overnight and how it managed to fool the regulators with fake holdings and off-the-books accounting for so long.

Enron was formed in 1985, following a merger between Houston Natural Gas Co. and Omaha-based InterNorth Inc. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO and chairman and quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corp. To head it, he appointed Jeffrey Skilling, whose work as a Mckinsey consultant had impressed Lay. Skilling was at the time one of the youngest partners at Mckinsey.

The Enron scandal was publicized in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audits and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure.

After the U.S Congress adopted a series of laws to deregulate the sale of natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling, who was initially a consultant and later became the company's chief operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an intermediary between natural - gas producers and their customers.

As the boom years came to an end and as Enron faced increased competition in the energy - trading business, the company's profits shrank rapidly. Under pressure from shareholders, company executives began to rely on dubious accounting practices, including a technique known as "mark-to-market accounting" to hide the troubles. Mark to market allowed the company to write unrealized future gains from some trading contracts into current income statements, thus giving the illusion of higher current profits.

The severity of the situation began to become apparent in mid-2001 as a number of analysts began to dig into the details of Enron's publicly released financial statements. An internal investigation was initiated following a memorandum from a company vice - president, and soon the Securities and Exchange Commission (SEC) was investigating the transactions between Enron and Fastow's SPEs.

As the details of the accounting frauds emerged, the stock price of the company plummeted from a high of $90 per share in mid-2000 to less than $1 by the end of November 2001, taking with it the value of Enron employee’s pensions, which were mainly tied to the company stock. Lay and Skilling resigned, and Fastow was fired two days after the SEC investigation started. On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection. Many Enron executives were indicted on a variety of charges and were later sentenced to prison. Arthur Andersen came under intense scrutiny and eventually lost a majority of its clients. The damage to its reputation was so severe that it was forced to dissolve itself. In addition to federal lawsuits, hundreds of civil suits were filed by shareholders against both Enron and Anderson.

The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The most important of those measures, the Sarbanes -Oxley Act (2002), imposed harsh penalties for destroying, altering or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.

Analysis

            Enron was a company that thrived use of latest technologies and had a code of ethics that prohibited managers and executives from being involved in another business entity that did business with their own company. However, the codes of ethics that was voluntary and was set aside by the board of directors and the top management. The legal structure allowed top management to enter these arrangements, that constituted a conflict of interest and while it's a fiduciary duty the managers and executives had to behave and act in the best interest of the company and its shareholders. But there was discretion for them to exercise their own business judgment regarding what was in the best interest of the company. A path filled with unethical and illegal activities was followed. Management was succumbing to greed and dishonesty by secretly exercising stock options and constructed faulty falsely financial report which enabled to hide billions of dollars of debt. Enron management abandoned the basic accounting standards of integrity and created a noncompliance that existed different than GAAP or SEC reporting standards.

Enron's chief financial offer, Andrew Fastow, was the alleged mastermind behind camouflaging an estimated one billion dollars of debt that resulted to the Enron's bankruptcy. practices. To misrepresent its true financial condition, he took the role by involving special purpose entities and unconsolidated partnerships. By concealing the debts, and presenting inaccurate financial condition he hide Enron's true financial standing. In the year 2000, Enron financially fell short and resulted to the long-awaited demise of bankruptcy. David Duncan had the responsibility of representing the interests of Arthur Andersen in Enron Company. He was acting as the head auditor thus hold the responsibility to maintain the highest professional accounting and auditing ethics, and leading his auditing team in an unbiased and responsible approach. However, he was acting negligently, and followed a complete lack of ethics throughout his involvement with Enron. Nancy Temple acted in sole interest of the client. Whistle blowing by an employee, Sherron Watkins, is termed to be an employee's moral responsibility. Sherron Watkins owed loyalty to herself as well as the investors, which is exactly why she blew the whistle at Enron. Andersen ruined their goodwill and having the charges overturned was not easy going to change how the government and the public view and rate them. The company had lost all of their credential investors. The investors shake hands with Anderson’s competitors. Without the money coming from the investors the Anderson company was not able to survive the business in the market.

Solution

            Enron’s bankruptcy scandal not only not effected Enron and its shareholders but it affected the market as well lower company’s values that were in the same industry. The scandal surrounding Enron bankruptcy has its impact on their competitors because of them being in the similar industry the thought that they too were doing the same thing that lead to the downfall of Enron. To avoid such conflict government regulations and rules are required to be updated for the new economy, not relaxed and eliminated. The government must regulate the constitution of the board of directors by including professionals such as accountants and auditors. Government can tighter regulation and monitoring on rogue board members by requiring for individual audits of the members. In certain ways, the culture of Enron was the main cause of the collapse. The company must advocate is strict adherence to proper corporate governance principles; and encourage their employees to act in the best interest for the company. A proper implemented and formulated structured control procedure also helps in minimizing the risks.

Furthermore, to limit errors and risks when auditing special projects, external auditors must ensure that the company gives detailed disclosures of the financial transactions occurred in the special projects along with detailed substantial communication that provides proper detailed description on the relevancy of the financial interest involved. Moreover, should be strict adherence to proper corporate governance principles. It will help senior leadership to act in the interest of the shareholders of the company instead of self-interest.

Answer 1

Th collapse of Enron Corporation, a US based multi national energy company in 2007 figured headline of all Global newspapers. The Enron corporation was one of the renowned natural gas and electricity transmission companies in US and it was established in the year 1985. During its 22 years of work operation, Enron faced ups and downs in business and in during its initial years of business, Enron reaped full advantages of deregulation of energy market by Federal Government of US and arbitrarily fixed natural gas and electricity prices and earned huge profits from its arbitrary pricing policy. However, post 1990s, there has been paradigm shift in energy policy of US government and there has been more entry of new companies in the US energy market that severely affected business and profits of Enron. Apart from increased business competition, misuse of code of conducts by Enron executives and managers was also main reason for business setback of Enron. However, Enron concealed the annual financial loss in its accounting book and use off balance sheet special purpose vehicles in order to hide its overall debt and mounting losses of its subsidiaries. The company did not used basic GAAP or SEC accounting procedures in preparation of its financial report. The chief financial officer of Enron, Andrew Fastow falsified the fact of one billion debt of Enron in its 1998 financial report that presented the company in healthy financial condition so that confidence of investors and consumers do not shake out from Enron. But this malpractice did not saved Enron from collapse and its accounting misdeeds was surfaced in 2000 and the share of Enron Corporation immediately sharply fell down from $90.75 to $1 per share and it ultimately resulted bankruptcy of this energy transmission company. Enron in December 2, 2001 filed chapter 11 bankruptcy in the US court and its share further fell down to below $1/ per share after that. The bankruptcy of Enron shook out investors's confidence as well as affected other stakeholders such as company employees and customers. It also affected the business of other energy transmission and distribution companies in US and forced federal government to frame strict laws for prevention audit misrepresentation and business collapse of reputed companies. To avoid the case of Enron's collapse, other companies must not hide any accounting information to external audit team and also should not engage into any non-compliant accounting procedures to hide financial loss or exaggerate the profits. The code of conducts and principles must be strictly enforced by management in a company so that no employee misuse the company code of conducts to gain undue profits.