Solution
Robert answered on
Dec 31 2021
Running Head: THE COLLAPSE OF ENRON
Running Head: THE COLLAPSE OF ENRON
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THE COLLAPSE OF ENRON
The Collapse of Enron
Name
Institution
The Collapse of Enron
Introduction
Enron Corporation was formed in 1985 through merging of Houston Natural Gas and InterNorth of Omaha in Ne
aska. It was situated in Houston, Texas, as one of the largest global energy, commodities, and services company. The company sold electricity and natural gas, delivered commodities such as internet connection, and offered financial and risk management services to clients around the world.
By mid 2001, the corporation had approximately 30,000 employees globally. I
espective of the great reputation that the corporation worn itself in the business world, it had its own internal limitations. For instance, internally, the corporation had a decentralized decision-making and financial control structure, which made it practically impossible to achieve clear and coherent view of the organization’s operations and activities. Probably the problem was not limited to poor managerial performance, rather on all departments of the corporation. However, managers and executives are the ones to blame for lack of corporate culture, clear transparency and accountability, which led to the downfall of the corporation. If management would have conformed to business culture in its full course, and further instil corporation and accountability in every individual within the business, there could have emerged a chance of evading the tragedy.
This discourse aims at outlining a
ief history of the collapse of Enron Corporation, examining at length factors that contributed to the collapse. The discourse also examines the rise and fall of the corporation, in which it discusses business law issues associated with the rise and fall, as well as aftermath of the corporation’s collapse. In addition, an analysis is given regarding the aftermath effects of the Corporation’s collapse on employees, the public, and its stakeholders. The discourse further examines the managerial aspect and financial issues of the Corporation’s rise and downfall. An own perception in relation to the rise and fall of the corporation is outlined and a conclusion given to summarise the whole discussion.
History of the Collapse of Enron
Several years upon the formation of the corporation, Jeffrey Skilling was hired as the finance chief executive officer, who introducing staff executives that never conformed to business culture. The executive used special purpose entities (SPE), accounting loopholes, and poor financial reporting to hide billions of debts that amounted from failed projects and deals. In particular, Enron’s chief financial officer, Andrew Fastow, together with some executive officers managed to mislead the corporation’s audit committee and board of directors resulting into accounting issues that saw the corporation register high revenues.
In 1999, Enron Corporation launched its website commonly refe
ed to as Enron Online, which was a web-based trading site. This site became the biggest business site globally and about 90 per cent of the corporation’s income came from trades conducted through the website. In addition, the corporation also took an initiative of buying and selling access of high-speed internet bandwidth, which promoted the organization’s e-commerce activities. Growth for the corporation was rapid. In 2000, Enron’s annual revenues were recorded at $100 billion, making it ranked in the seventh position of the largest companies on the Fortune 500 whereas globally the sixth largest energy company. The corporation’s stock price stood at $90 US.
In 2001, things changed course in Enron. In August 2001, Jeffrey Skilling, who sti
ed the organization’s revamp announced his resignation. Additionally, the organization’s chief executive officer, Ken Lay resumed his post. Because of their departure, Enron recorded a loss of $618 million. The corporation’s stock prices, which had hit US$90 per share declined to $1 by end of November 2001, causing shareholders to incur a loss of nearly $11 billion. As a result, the United States Security and Exchange Commissioner (SEC) commenced an investigation to establish the cause of the collapse. Researches found out that Enron was the largest bankruptcy corporation in the history of United States with assets amounting to $63.4 billion.
Following the investigation, many executives at the corporation were found guilt of a variety of charges, making them sentenced to prison. Arthur Anderson, Enron’s auditor, was proved guilt at the United States District Court, but the court ruling was latter reversed at U.S Supreme Court. However, by then the corporation had already shut down.
Rise and fall of Enron Corporation
The Rise of Enron
In early 1990s, following the formation of Enron, Ken Lay helped in initiating the selling of electricity at market prices, and thereafter, the United States Congress passed a legislation that deregulated the sale of natural gas. The resultant market enabled traders such as Enron to have their energy sold at higher prices, making them thrive in the business sector. In 1992, Enron became the major dealer in North America of natural gas, in which the gas trading business formed the second largest source of income for the corporation, drawing earnings of $122 million. The creation of Enron Online, an online trading model enabled the corporation manage and negotiate its trading business.
Enron initiated a diversification strategy in an attempt to realise further growth. By the beginning of 2001, Enron had become a multinational organization that operated and owned pulp and paper plants, gas pipelines, water plants,
oadband assets, and electricity plants, internationally. In addition, the corporation also engaged in financial markets trade for the same types of services and products. As a result, the corporation’s stock rose by 311% as from the beginning of 1990s until the end of 1998, marking a significant increase in the rate of growth according to the Standard and Poor 500 index. In 1999, the stock increased by 56% and further rose to 87% in 2000. By December 31, 2000, the corporation’s stock was trading at $83.13, with its market capitalization going beyond $60 billion, a factor that indicated high expectations of the corporation’s stock market in future prospects. Following these success, Enron was ranked as the most innovative large company in the United States, making it the biggest admired company in the country.
The fall of Enron
The financial statements of Enron, which outlined its finances and operations, did not tally with those of analysts and shareholders. Additionally, its complex business model exceeded the limits of accounting, forcing it to use illegal accounting practices to modify and manage the balance sheet to present a favourable representation of its performance. However, its business practices grew out of constant accumulation of actions, values, and habits and started taking another course of action that lacked control. From late 1997 until it finally collapsed, Enron’s financial and accounting transactions reported inflated asset values, escalated cash flows, and liabilities off its books.
The merging of these issues latter resulted to the corporation’s bankruptcy. The major contributors to the bankruptcy state included Jeffrey Skilling, Ken Lay, Andrew Fastow, together with other executives. It is argued that in his last term of service in the corporation as the chairperson, Lay approved the actions of Fastow and Skilling without inquiring in details. Skilling adamantly focused on pushing the use of mark-to-market accounting practices, pressuring Enron’s executives to device new ways of hiding the corporation’s debts. Fastow, together with other executives devised off-balance-sheet mechanisms, bewildering deals, and complex financing structures that are understood by few people even up to date.
Business Law Issues in the Rise and fall and Aftermath of Enron Collapse
Sham Operation
Upon investigation, Congress parties and other federal agencies found out that Enron used sham operations to secure its top position. The purpose of these sham operations was to make investors believe that its risks and debts were removed from financial statement, hence creating phoney income. One of the major sham operations is the use of SPEs that deceived shareholders, enriching themselves. It is approximated that Enron used approximately 500 SPEs as well as thousands of other questionable partnerships to structure transactions in order to realise off-balance sheet treatment of liability and assets. It is asserted that Enron’s executives held huge personal interests in these partnerships, enabling them to realise massive personal gains.
Conflict of Interest
The objective of an audit firm is to liaise with the board of an organization in analysing the state of an organization’s finances. An audit firm is required to act as a diagnostic eye and ear of an organization’s stockholders. However, in Enron’s case, Andersen served both roles of an auditor and a consultant. This implied that Andersen had an interest in continued survival of Enron, hence had no incentives to
ing to the limelight the fraudulent record books kept by Enron. In addition, as long as money was channelled in the corporation, Andersen did not...