Analysis of Enron Corporation, Essay Example

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Essay

Enron Corporation was a utilities as well as energy-trading company based in Houston City, State of Texas in the United States of America. Even though the company went bankrupt and out of operations more than 10 years ago, it made significant impacts on issues of ethical standards, which have served as lessons to the corporate world to date. Founded in 1985, Enron began as a company for linking states with pipeline, and supplying utilities with power (Fox, 2004). Vastly, it grew in subsequent years to become the largest dealer/trader in energy all over the world. Enron acquired many prestigious titles by the close of the twentieth century (Mclean & Elkind, 2004). The years that followed saw an increase in competition in the energy and power sector forcing Enron to diversify and invest internationally to maintain its market share. This resulted in heavy unprecedented losses instead of profits.

Enron failed to declare its financial position concerning its losses until October in 2001. In the years of covering up their finances, Enron hid its liabilities and overstated its revenues. Enron did not disclose risks, a necessary thing to do, to its investors. The executives misrepresented the information by disclosing fraudulent earnings through media, which encouraged purchase of Enron’s stocks by investors. Arthur Andersen (Enron’s audit company) aided Enron to cover up these frauds for over five years (Fox, 2004). The executives of Enron used manipulation and threats to silence employees who questioned the company’s financial situation. Analysts were also blocked from reporting the true picture of Enron’s financial status, as top executives were involved in massive embezzlement. They also drove stock prices up and pocketed huge amounts of money through trading stocks. When these problems started erupting, the CEO Jeffrey Skilling left in August 2001. The Chief Financial Officer, Andrew Fastow was next to resign after a USD 618 million loss in October 2001 (Mclean & Elkind, 2004). It was then that the SEC (Securities and Exchange Commission) launched a fully-fledged investigation into the company. This led to discovery of the covered up fraudulent activities of the executive board that necessitated Enron to file for bankruptcy protection with investor losses amounting to billions of dollars.

All those who took part in this nerve wrecking fraud were out on trial with Andrew Fastow (CFO Enron) agreeing to plea a bargain and 10 years in prison on January 2004 (Fox, 2004). The CEO Enron, Jeffrey Skilling, was in February the same year sentenced to twenty-four and half years in prison. As punishment to Arthur Andersen, their auditing work was stopped leading to their bankruptcy. Ethical crimes committed by Arthur Andersen include assisting Enron to cover up their financial statements in order to avoid losing them as their major client (Jennings, 2011). Arthur Andersen provided internal audit, external audit, and consultancy, which violated professional auditing and accounting standards. Independence of the auditors was also compromised due to close relationship between them (AA auditors) and executives at Enron (Mclean & Elkind, 2004). The fourth reason was AA destroying documents and papers belonging to Enron after disclosure of their scandal thus making the work of SEC very difficult. All these actions were not only unethical but also illegal.

There are important people involved in Enron scandal some of whom performed ethically while others did not. Those who chose the high road (were ethical) include Margaret Ceconi, John Olson, and Clayton Verdon among others (Jennings, 2011). The key people in decision-making are the ones who brought Enron down. First is Kenneth Lay, founder of Enron who was also its chairperson and CEO. From Enron’s fall, it is evident that Lay was a very dishonest person who lacked integrity (Jennings, 2011). It was under his leadership in 2001 that he announced certainty in the company’s future and profitability, while urging stakeholders to invest further in Enron in the full that the company was facing bankruptcy. It is ironic how in the wake of all this, he sold a great deal of his shares of stock, raising the price of stock for Enron thus accelerating the imminent collapse. Another stakeholder to this scandal was Jeffrey Skilling, the company’s President in charge of operations and CEO (February to August 2001). Skilling left the company on the brink of collapse and was unethical in failing to stop and disclose the financial situation of Enron even though he was well versed with such information. The CFO, Andrew Fastow is the third executive who was involved in manipulating Enron’s financial figures. He can be termed as most dishonest and selfish despite holding a very important and sensitive docket in the company, which he aided in bringing down (Jennings, 2011). The fourth stakeholder is David Duncan, an audit partner in charge of Enron account. He was taken in by wealth/profit at the expense of professional conduct and ethics. Another person who fits in an ethical model is Sherron Watkins (vice president corporate development). She blew the whistle on Enron’s financial position despite facing loss of job.

The culture of Enron played a significant role in the ethical scandal. Enron’s policy placed emphasis on attaining financial goals (set very high) and emphasis placed on competition (Sims & Brinkmann, 2003). Firstly, Enron developed a culture of deception occasioned by the unreasonable standards for evaluating performance and the illogical competitive environment. This caused panic among ‘non-performing employees’ who in turn ignored ethics and focused on appearing good by cheating. This became the norm for majority of employees, which is extremely unethical. Internally, the competitive environment did not work well for Enron as employees rarely communicated with each other. They were quiet with everyone fearing to speak out against incompetency by management. In fact, most of the employees barely understood their jobs for fear of asking questions. Enron placed emphasis on financials and neglected well-being of employees, which is unethical for the employers to do (Sims & Brinkmann, 2003). The company’s executives propagated a culture of fear by keeping outside parties and employees quiet. This culture of impunity suppressed doubts concerning financial decisions made by the management. The culture at Enron can be summed up as one riddled with greed and self-interest which contributed to the great scandal.

The Sarbanes-Oxley Act was enacted on 30 July 2002 as federal law in the US. The Act came in the wake of major accounting and corporate scandals in which investors suffered massive losses (Ambler et al., 2006). It seeks to provide protection to investors through improving reliability and accuracy of disclosures by corporate. Title 2 of the Act, Auditor Independence, entails limiting conflicts of interest as those occasioned in the case of Arthur Andersen employees (auditors) and Enron top management. In addition, there is a section targets disclosure of financial reports and transactions by executive officers. Investor confidence is restored where the Act provides for definition of codes of conduct for the securities analysts. This section also demands disclosure of any conflicts of interest. Fraudulent activities of all kinds ranging from tax returns, corporate fraud, conspiracies, and criminal fraud as well as the penalties for such are addressed in this Act.

References

Ambler, D. et al (2006). Sarbanes-Oxley Act. New York, NY: Aspen

Fox, L. (2004). Enron. Hoboken, N.J.: Wiley

Jennings, M. (2011). Business Ethics. USA: Southwestern Cengage Learning

Mclean, B., and Elkind, P. (2004). The smartest guys in the room: The amazing rise and   scandalous fall of Enron. New York, NY: Routledge

Sims, R., and Brinkmann, J. (2003). Enron ethics (or: culture matters more than codes). Journal of Business ethics, 45 (3), pp. 243—256

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