The Case Analysis Of Enron

The problem

Discuss about the The Case Analysis of Enron.

This report is about the analysis of the bankruptcy of the Enron Corporation. This is an American energy company based in Houston. The bankruptcy was one of the largest bankruptcies in the world which led to the dissolution of Arthur Andersen, which was one of the largest accountancy and audit partnerships across the globe. The event was not only the biggest bankruptcy; undoubtedly it was the largest audit failure. The company is one of the most famous companies in the world but also one of the companies which fell down too fast. There were several reasons for the failure of the audit program and the bankruptcy of the company. Major reasons of the bankruptcy of the company were inefficient management, accounting fraud and conflict of interest. The company had some severe issues regarding the responsibilities from the side of the management of the company. Due to these reasons, the company has lost the high reputation in the global market and became bankrupt which became one of the most famous negative news in the world. There were some faults from the individual person and the whole management committee of the company for which the incident happened. In this report, the reasons behind the problem have been analyzed with the use of relevant theories of the organizational behavior and leadership style. After analyzing the problems some solutions have been given as the alternatives for resolving the issues. The alternative solutions are again analyzed for the selection of the best solution for handling the issues.

The problem:

Before the bankruptcy in 2001, the company was world’s leading company in the sections of natural gas services, electricity services, paper and communication services. The annual revenue of the company rose from $9 billion to $100 billion in between the year of 1995 to 2000. After the great rise in the business, the company faced the highest level of failure (Carnegie & Napier, 2013). In the last section of 2001, they revealed that the reported financial condition was sustained by systematic and creatively planned by accounting fraud. In the first section of 2000, the share price of the company was $90 per share and in the end of year, the price got down to less than $1 per share. This fall was the reason of losing almost $11 billion of the shareholders of the company. After that incident, the company changed its financial statement that they have faced lose almost $586 million. After that the company faced the bankruptcy in December 2, 2001 (Steffensmeier, Schwartz & Roche, 2013).

Major causes behind the problem and alternative solutions

One of the major problems faced by the company was the internet boom; they failed to properly analyze the recent trend of the internet regarding different kinds of new businesses. There was another problem which was regarding the type of investigation done by the executives like Mr. Skilling. He pointed out questions regarding the balance sheet of the company but did not give deep focus in the area of the open investigation of the proper documentation of the analysis of the internet information. The open investigations regarding all type of business operations and decision making process could lead the company to a better posit5on in the global market (Markham, 2015).

Another major problem faced by the company was becoming too evident in the recent years: “Wall Street’s loss of objectivity”. Investment banks were able to make more money from the investment deals and merger operations than from the broker fees. One common problem faced in this area is the conflicting loyalty regarding the analysis. The organizations may have the problem when an executive found some reports obsessive and some of the analysts found those helpful.

Truthfulness:

Lack of truthfulness from the management end of the company regarding the health of the company was one of the major reasons behind the bankruptcy. As per the executive director of Markkula Center for Applied Ethics, Kirk Hanson this was the main reason of the bankruptcy of Enron. According to him the organization had to be the best in every type of activities and should protect the compensation and reputation. There was lack of evidence regarding the announcement of rising tendency of the stock and disclose of selling the stock by the CEO. Moreover the employees were unable to learn the selling activities of the stocks within days or weeks (Markham, 2015). After the investigation of the bankruptcy of the company, the shareholders were able to learn the sale of the CEO’s stock when the sell-off would otherwise disclosed. It was a huge delay. The stock was sold to the company for repaying the amount owed by the CEO of Enron. This was qualified as an exception under the general director and officer disclosure document. This was not required to be reported until 45 days later the ending of the financial year of the company (McLean & Elkind, 2013).

In order to resolve this issue, the company should take the necessary steps at the time of announcing the sale. The shareholders should be properly informed about the actual condition of the stocks and the way of selling the stocks. Information transparency among the shareholders is a vital fact in this type of area.

Market Analysis

Another problem was the documentation or the discloser requirement. Normal director and officer disclosure was not enough for this type high risk decisions. The decision needed to be taken under proper legal documentations and the reports were required immediately.

Interest:

Conflict of interests was a major issue of the company. Beside the conflict interests, lack of independent oversight of management of Enron played an important part in the firm’s collapse. The conflict of interest happened between two roles played by Arthur Anderson. He played the role of auditor of the company but also as a consultant to the company. At the time of investigation, Enron sought to salvage the business through spinning off different types of assets (Zhang, Xiong & Shen, 2013).

The firm had narrow minded focus in the area of the earnings growth and price of the stock. Besides this recent regulatory changes focused on increasing the accounting ability and strengthening the internal accounting and control system. The existing chairman of the company Kenneth Lay who was the chief executive also, has resigned and Stephen Cooper was the new chief executive. The restructuring of the business resulted in a complex tie up business with UBS Warburg. The agreement was that they will share some of the profit amount but has not paid for the trading unit (McLean & Elkind, 2013).

In this context, the restructuring was not done properly by the new chief executive. It is quite difficult to restructure an organization for a person who does not know so much regarding the operations previous operations within the organizations. The restructuring may be most successful if the person who is doing the activities is familiar with the operational environment of the organization and knows all the pros and cons. Therefore, it can be concluded that the organizational restructuring needed to be done after some time of the joining of the new CEO (Bushman et al., 2015). The new decisions required to be taken after he understood all the perspectives of the situations. The tie up business was also not profitable as the bank has not pay for the trading unit. Although they were agreed to share the profit, still was a loss as this unit was one of the main business activities of the company. In this type of cases, any business organization should understand the profit level from the business unit and should not tie up over this type of business deal.

The Enron was public listed company associated with government bodies and also manages by market pressure, under maintenance of government authorities and also regulated by private associated companies and their associates like external auditors, equity analysts and also several credit rating agencies. The external governance of the company is basically depends upon the supportive and trustworthy nature of external auditors. There are several biased auditors who are taking benefits to approved contract for the company in unethical ways. The unethical behaviour of appointed auditors of the Enron basically sell their assets at higher prices but doing manipulation to in their financial statement while showing profit of the company. Enron Company basically hides their profitability and applies for higher loan from financial institutions which is one of the primary causes for bankruptcy in the market.

Company has been shown better profitability scenario in front of market investors to generate more business fund specifically. The business traders of the company Enron has been force to forecast higher future cash flow and lower discount rates for the company Enron for long period of time. The traders company are benefited by the company in unauthorised pattern. In the actual projected long run income of the company is totally positive and inflated, which is manipulated by the organization for hiding profit from government authorities.

According to the accounting policies followed by the organization Enron required to exclude special purpose entity in the stated financial statement for that specified year of time. The independent financial parties of the company required to be controlled by special purpose entity. And also they were owns minimum 3 percentage for special purpose entity. Enron Company has been found an unethical way to hide and their collected debt from financial institutions at a lower investment grade and business investment activities (Bolton, Brunnermeier & Veldkamp, 2013).

The special purpose entities are using collateral stocks which have been traded in the market under observation of Chief financial officer of the company. The higher authorities of the company are responsible for borrowing financial support from many financial institutions within their operations period of time. They were used those allocated money for overvalued contracts of the company which is not mentioned in the financial statement declared by them. The special purpose entity which is an important part of the company to generate financial stability, but here as per financial statement Enron is unable to cover the borrowed loan and already collected loans and financial obligations from the generated income for that period of time. There are many financial observations which are responsible for transferring the stocks to special purpose entity accordingly (Guiso, Sapienza & Zingales, 2015).

The debt and assets acquired by the special purpose entity of the company were created many difficulties for the company for compensating the higher amount of financial debts, which is not declared in the annual financial reports prepared by the appointed auditors of the company. The allocated shareholder of Enron has been misguided by the authorised associates appointed by the company that debt and financial obligations for the company and their revenue and operating income is increasing accordingly within specified period of time.

Conclusion:

In conclusion it can be said that the management of the company was highly responsible for the biggest bankruptcy faced by it. The decision making error of the company was irreversible and main reason behind the error was the improper evaluation of the information. In order to get the desired level of success and hold the reputation in the global market, a business organization should follow a good corporate culture where the leaders are responsible for taking the decisions properly. If the faults found in the decision making section, then the business organizations cannot grow further. In this case, the similar thing happened to the company, they have a high level of reputation in the existing global market, but due to the improper decision making the biggest audit failure happened. Information transparency is highly required for the big business originations for achieving the success through the team work for achieving a corporate goal. The company faced the problem of lack of information transparency among the shareholders. The company required to follow the corporate objectives and should take the decision by informing all the share holders and the employees when necessary. The company followed some wrong policies and procedures regarding the business operations and the decisions were taken inefficiently by improper analysis of the internet data. The forecasting regarding the market share of the company and the stick prices were wrong, so the decisions based on the activities were also wrong. Moreover the company conducted the activities of decision making in unethical way. They hide the debt taken from the financial organizations unethically which resulted in loss of reputation of the company as well as the auditor.

The first thing which needed to be changed is the organizations culture. As a globally reputed company, Enron needs to develop a healthy corporate culture in their workplaces. The company had many shareholders who were not involved in the scandal but faced the huge loss due to the bankruptcy. The main reason behind this is that they were optimistic at the time of decision making. The corporate culture of the company should be developed in such a way where all the share holders will be active for tasking any decisions regarding the business operations of the company. In this improved corporate culture, all the relevant information will be shared to all the shareholders properly and the decisions will be taken after getting confirmations form all of them. None of the business decisions will be taken if any conflict exists among the shareholders.

The analysis system of the company needed to be updated. The system should be updated with the efficient way of utilizing the internet information and using the information properly in the decision making process of the company. The management of the company should give a deep focus in the area of the new market trend as it is changing very frequently and the way of money making. Any type of unethical business practice should be avoided by the company for keeping the reputation unscratched. The company should follow the concept of “To-good-to-be-true”. This should be followed by the board of directors of the company for following the ethical way of money making which will help them to gain profit in the business and developing a good impression in the market.

The overall case analysis of bankruptcy activities, it is shown that higher authorities of the company are properly responsible for entire unethical and unfair managerial activities. There are also several financial manipulations activities incorporated by the company in terms of market analysis, maintaining financial statement analysis and also operational activities within specified period of time. If the senior management of the company and the employees of the operational team gave proper focus on the operational and investment activities of Enron Company, these unethical activities and bankruptcy can be avoided by the organization within that specified period of time. These entire financial crisis is responsible sue to ignorance and negligence of other associated entities and stakeholders of the company specifically. As the company legally terminated by the court and also given mandatory restriction for other organization not to support this company financially and other term, it shown that unethical activities has been in a major term which was highly offensive and cannot be avoided by the legal authorities. These judicial decisions are also provided lesson for other companies in that particular economy to avoid such activities and also making them aware about the final consequences respectively.

Individual entity’s angle

According to the company’s holding policies and corporate acts can be the expected from an individual’s perspective to properly bear the moral duties and responsibility accordingly. The appointed Chief executive Jeffrey Skilling and chief financial officer Andrew Fastow has been illegally operating and transferred organizational properties from their cooperative organization. The Andrew Fastow appointed CEO, he is professionally violated corporate ethics and initiated the criminal activities within their operational period of time.

In order to develop the corporate culture as discussed in the previous section, all the board members are responsible. This culture should be developed by the interest of all the shareholders as well as the senior level of employees of the company. Meetings among the shareholders and senior level employees for the culture development and agenda should be developed in the meeting (Spillane, 2012).

The employees of the company are also responsible for the entire moral and ethical violation activities also they are carrying the unethical business after knowing the fact behind it. The appointed employees of the company are also morally responsible for these unethical acts (Northouse, 2015).

After the bankruptcy activities, the entire legal activities of the company Enron has been shown that senior management of the company was also equally responsible for improper activities and disclosures within their operational activities and others. The legal court has been taken decision that the primary and vital reasons behind the bankruptcy were their unfair and misstatement activities and they have also provided decision that no other company should provide support to Enron in professional way; otherwise legally their license will be cancelled for permanent time period. After court cases and bankruptcy Enron has been losses their organizational reputation and negative perception accordingly (Aaker & Joachimsthaler, 2012).

The corporate acts followed by the organization in terms of appointed managers and also shareholder’s higher stock activities to realize the financial stability facts of company. According to the corporate perspective, the entire entity was not responsible for this financial scandal. If the company’s appointed managers, employees and shareholders can avoid those situation by paying immediate and prompt outcome and responsiveness.

References:

Aaker, D. A., & Joachimsthaler, E. (2012). Brand leadership. Simon and Schuster.

Abdel-Khalik, A. R. (2016). How Enron Used Accounting for Prepaid Swaps to Delay its Bankruptcy for a Decade: The Untold Story. Available at SSRN 2764464.

Aven, B. L. (2015). The paradox of corrupt networks: An analysis of organizational crime at enron. Organization Science, 26(4), 980-996.

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Bushman, R. M., Davidson, R. H., Dey, A., & Smith, A. (2015). Bank CEO Materialism, Corporate Culture and Risk.

Carnegie, G. D., & Napier, C. J. (2013). Popular accounting history: evidence from post-Enron stories. The Accounting Historians Journal, 40(2), 1.

Guiso, L., Sapienza, P., & Zingales, L. (2015). The value of corporate culture. Journal of Financial Economics, 117(1), 60-76.

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Markham, J. W. (2015). A Financial History of the United States: From Enron-Era Scandals to the Subprime Crisis (2004-2006); From the Subprime Crisis to the Great Recession (2006-2009). Routledge.

McLean, B., & Elkind, P. (2013). The smartest guys in the room: The amazing rise and scandalous fall of Enron. Penguin.

Northouse, P. G. (2015). Leadership: Theory and practice. Sage publications.

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Steffensmeier, D. J., Schwartz, J., & Roche, M. (2013). Gender and twenty-first-century corporate crime: Female involvement and the gender gap in Enron-era corporate frauds. American Sociological Review, 78(3), 448-476.

Zhang, S. Y., Xiong, K. H., & Shen, K. (2013). Research on Evaluation Problem of Culture Construction of Military Industrial Enterprises–Take Corporate A as an Illustration. In Proceedings of 2012 3rd International Asia Conference on Industrial Engineering and Management Innovation (IEMI2012) (pp. 517-525). Springer Berlin Heidelberg.