The Enron Scandal, Research Paper Example

Introduction

The ENRON was the 7^th largest U.S. Company in the year 2001 that was filed for bankruptcy leaving its investors and retirees with worthless stock. It was charged with securities fraud for fraudulent manipulation of publicly reported financial results and giving false information’s to the Securities and Exchange Commission (SEC), Tesfatsion (2011). The company was established in 1985 by merger based in Houston dealing with natural gas pipeline. By the year 2001 the company had risen to be ranked the 7^th largest U.S. Company of natural gas and electricity. The ENRON Company was greatly concerned with energy brokering, electronic energy trading, optional trading and global commodity by then.

Corporate governance practices uniron were associated with the financial statements that were not accountable and transparent as much as the legal requirement is concerned. The practices of corporate governance were also marked with complex and dubious models of business operations on top of the unethical practices that resulted to the adoption to accounting limitations in an attempt to misrepresenting the earnings together with the modification of the balance sheet aimed at portraying performance depictions in a favorable way.

The Enron scandal is attributed to the steady accumulation of the values, habits as well as actions that came out control. The board of directors of the Enron Company looked at the loopholes of the already established regulation in their line of buying and selling natural gas and chooses to use that advantage in benefiting themselves, the fact that was illegal. It was geared to getting a steady income, inflating the assets values with off booking liabilities. Most of the problems were perpetuated by the executives of the company.

The compensation structure that was set in Enron together with the system of performance management was designed in a manner that could attract and retain the employees who were quite resourceful to the company. However the system setup also played a significant role in the dysfunctioning of the corporate culture in the organization. The setup had been infatuated with a short term focus of earnings for the purpose of maximizing on bonuses. The employees perceived at deals of high start volume while they disregarded the cash flow and profits quality for the purpose of coming at higher rating in the course of performance overview. Further to this there was an immediate recording of accounting results so that to be at par with the stock prices of the company. The intention of this practice was to cover the deal makers together with the executives who were given significantly huge cash bonuses in addition to stock options (Bryce, 2008).

The corporation had employed thousands of people who had affiliations right up to and including the White House itself. The financials chaos caused by the Enron scandal destroyed the life of many people and its reputation lefts its wake, questions everywhere concerning how the catastrophe happened, and who were behind it.

How the scandal was discovered

The scandal was discovered on October 22, 2001, by the Securities and Exchange Commission when a huge loss had been announced by the Enron expressing a major public sign of trouble. Enron filed for bankruptcy on the month of December 2001 after the commission started inquiring into the company’s accounting practices.

Need for the legislation

Enron Company was found to be using complex dubious schemes for energy trading. For instance, the “Death Star” energy trading strategy took advantage of the loopholes in the marketing rules dealing with the trade of energy in California. It was also found that the company was scheduling electric power transmission on congested lines in the opposite directions to demand creating a mean to collect a “congestion reduction” fee for seemingly relieving congestion on this line. The company would use routing scheme that enabled them to buy or sell energy in net terms. This was done between 1993 and 2001 when the scandal was revealed.

The company was also found to be using complex and dubious accounting schemes that would enable it to reduce the tax payments by a great margin and inflate its income and get abnormal profits. This scheme also enabled Enron to inflate its stock price and credit rating into the U.S. and it was able to hide the losses in off-balance-sheet subsidiaries. The off-balance-sheet scheme channeled a lot of money to their personal accounts, friends and families and fraudulently gave a misleading financial report to the public.

Internal controls and risk management in any organization are important features in any organization and they contribute significantly to the corporate governance of the institution. They also enhance the structure of internal control, the analysis of risk management and the process of financial reporting. The contributions of the editors in most organizations are to provide the services of consultancy together with assurance to the managers such that their companies are able to comply with the existing regulations. The resources of internal audit have in the past undergone expansion for the purpose of giving satisfaction to the high level of demand for the services in an attempt of assisting in the process of executive certifications with regard to internal controls together with financial reports (Collins, 2006).

Those involved in the scandal and how they were punished

Enron Company created over 3000 partnerships starting 1993 when it merged with Calpers (California PublicRretirement System) to create JEDI (Joint Energy Development Investments) fund. Enron thought that these partnerships were temporal solutions for temporal cash flow problems. It later used SPE (Special Purpose Entities) that could borrow from outside investors who could not be consolidated with the Enron’s balance sheet. The partnership maintained 3% rule which enabled it to hide bad bets that had been made on speculative assists. In November 1997, Enron created another partnership with the Chewco which was to buy out calpers’ stake in Jedi. It loaned chewco to allow Chewco be able to buy out Calprer’s stake and maintain 3% rule.

The following are blame for Enron:

• Lax accounting that was directedly Arthur Anderson (AA) Company.
• “Rogue” AA auditor David Duncan who was dismissed on January 15, 2002.
• Enron’s senior management which was involved in hiding losses in complex and dubious off balance sheet in the partnerships.
• CFO Andrew Fastow who was responsible in setting up these partnerships was committed to jail for six years on the September 26, 2004.
• Timothy Belden was sentenced to serve 2 years probation for trading the schemes on 2007.
• Jeff Skilling who was the chief executive officer helped Enron to rise very fast through his knowledge in banking and finance. He was involved in trading of energy electrical contracts and he was imprisonment for 24 years on October 23, 2006.
• Chief Executive Officer Kenneth Lay who had enlisted the assistance of Jeff Skilling a young, sharp banking and finance consultant, died on July 23, 2006 before the care could be completed.
• The media was also involved for its exaggeration and being frenzy for Enron operations.
• Stock analysts kept pushing the Ernon Company’s stock.

From the final analysis, the conspiracy of Lay, Skilling and others led to the collapse of the company due to fraud, false reporting of revenue, shoddy accounting practices and general disregard for virtually every tenet of business ethics (Collins, 2006).

Implications of this situation

This situation has brought about many lessons including showing hoe companies actually make their money and if the business is sustainable and legal. Enron has also demonstrated that there is need for significant reform in the accounting and corporate governance in the United States. It implies that the government regulations have a lot of limitations and its capacity to collect the problem.

There is need for comprehensive reforms of accounting procedures for publicly owned companies for the promotion and improvement of the quality and transparency of financial reporting by both internal and external auditors. Companies are now required to list and track performance of their material risks and associated control procedures. The chief executive officers are supposed to vouch for the financial statements of their companies for clear accountability and transparency. The audit committees must indecently of the company senior management audit the board of directors. Companies can no more offer loans to the directors of the company.

Those affected by the scandal

The collapse of the Enron company affected greatly the lives of the employees who were subjected to a hail of legal problems, pointing of fingers by many people including the politicians, and even alleged crimes. Most obvious the Enron employee who were highly skilled and well paid loss their jobs. They were forced to look for vacancies elsewhere after the uprupt collapse of Enron. On top of it many of these employees had their life savings totally invested in the Enron stock that virtually turned worthless overnight.

The United States was affected in several ways by the Enron scandal apart from the induvial employees. The scandal itself brought to light the signicance of integrity in accounting and business in general. It also led to the creation of safeguards to control such things not to happen again or not to such extent.

From the ethical point of view, the Enron scandal unveiled the most significant part of legislation that is associated with the oversight of corporate ethics. It provides guidelines and requirements for Accounting, financial disclosure, the ethical behavior of corporations and the like (McCrie, 2001).

Conclusion

Having looked at the Enron company scandal from the retrospective point of view, the scandal changed the life of very many people in the United States and elsewherew in the world. The scandal forced every organization and individuals to look at themselves and have fully realization about the impacts andconsequences of reckless greed and the breakage of laws on the idea. It is now the responsibility of every person to be vigilant enough in whichever field involved avoiding being affected by the similar if not being a victim.

References

Bryce, R., 2008, Pipe Dreams: Greed, Ego, and the Death of Enron. Public Affairs.

Collins, D., 2006, Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC.

Cruver, B., 2003, Anatomy of Greed: Telling the Unshredded Truth from InsideEnron. Basic Books.

Dharan, B. & William R. B., 2004, Enron: Corporate Fiascos and Their Implications. Foundation Press.

Cable News Network. (2002, January 20). Andersen CEO admits to mistakes with Enron. http://archives.cnn.com/2002/US/01/20/enron.ceo/index.html