Enron Corporation was a company providing energy to the United States that supplied energy. It had its headquarters in Houston, Texas and it had around 21,000, and it majored in supplying electricity and natural gas, as well as providing communication facilities. In the year 2000, the company made revenues of $111 Billion, and it was named ‘America’s most innovative company for a continuous six years. The company was made following a merger in 1985 between Inter North and Natural Gas, a company that was based in Houston. It expanded quickly over the years with its branches being set up in foreign countries too. However, the company’s management was not able to handle the quick expansion that led it into deep debts over a short period. The shareholders were kept in the dark about the enormous loss by use of fraudulent accounting, partnering with other companies, and use of illegal loans. The people guilty parties involved in the fraudulent parties included Ken Lay and Andrew Fastow who made the decision to expand quickly. They also kept information from the public so they company could remain in business. The CEO of the company was risking facing 40 years imprisonment
The accounting firm that was involved in making the company’s books of account Arthur Anderson was also found guilty of altering financial information. This was done to show the community that the corporation was still viable, and doing well financially. Some of the main causes of the downfall were mark-to-market and deregulation. In deregulation, the government allowed for the prices of gas to be controlled by the market activities of the economy. Enron should have set the prices accordingly depending on its economic situation, and cost of factors of production. Mark-to-model is an accounting process that was used by Enron to include unmade profits right after signing a deal. Normally, profits are included in the books of accounts after they are made, and if they are projections, it should be indicated. Special purpose entities also played a chief position in the collapse of Enron and it is normally a legal entity that is set to fulfill objectives. The legal entity is mostly a limited company or even a limited partnership to meet a temporary goal. Companies use Special Purpose Entities to evade financial risks that they are exposed to in the daily running of a business. A company allows the Special Purpose Entities to control its assets and also to finance short term goals. The goals to be financed are mostly temporary and any loss suffered will be recovered by the special purpose entities, and not the company. Enron should have done proper investigation on the running of their Special Purpose Entity and its performance record. It was a substancial contributor to the downfall of the company.
Most of the fraud activities in the firm would have been avoided had people in management agreed to give honest answers on the financial situation in Enron. The top management at Enron could not make decisions by themselves without getting a word from the board of directors. The board of directors was to evaluate and calculate the risk and profitability of any partnership or venture by Enron. Evidently, they failed in that by expanding vastly and creating lots of partnership without a proper financial plan. The company’s Chief Financial Officer, Fastow on several occasions approached the board of directors with proposals of potential partnerships, which they accepted without much questioning. After the deals had been made, the management did not do much follow up too. This made it easy for some top managers to plot a conspiracy to extort money from Enron till it ran under a heavy debt. Most of the companies that went into partnership with Enron were managed by Fastow himself, and he got all proceeds from the deals. He also managed the special purpose entity that was involved in purchasing the company’s assets. Fastow managed the other partnership companies while still working for Enron.
The Financial Accounting Standards Board (FASB) stipulates that, if an investor who is not part of the company invests more than 3% of the capital needed in a partnership he becomes a full partner. Even if, the corporation owned the remaining 97% of the partnership, they do not have the authority to assert it a subsidiary. As a result, the assets that the corporation owns do not have to be included when computing and developing the balance sheet. Fastow hence created multiple partnerships because Enron did not have to the debts and assets that it had in the rogue partnerships made. Fastow succeeded in concealing millions of dollars in assets held by Enron without much suspicion. The board of directors was aware that some of the partnerships made were with companies owned by Fastow, but they did not consider it a solid deal. This was because they thought that Enron was benefiting much more from the partnerships than what than what they latter got. Enron was run by a code of ethics that was clearly stated to every employee in a 65 page booklet. The management never kept up with their professional ethics for they were to running a multi national company that country and a number of citizens depended on for income.
Enron’s financial scandal had some impacts on both the company and the livelihoods of people in America, and foreign countries. It caused an enormous loss to its investors, which was approximated to be tens of billions of dollars. The electricity trading markets especially in the United States collapse as a result of limited funding, and poor management. The corporate integrity of the huge firms, especially monopolies were questioned world wide. It was mysterious how such a big corporation would run under poor management for that long without raising suspicion from the public. Most of the Enron’s employees lost their jobs, especially those who worked directly for the company. It was estimated that around 4000 people lost their jobs, which had a significant effect on the livelihood around its place of operation. When the whole saga became public, one of the senior managers in Enron committed suicide for fear of prosecution. Employees who had retired from Enron were enjoying retirement’s benefits before the collapse of the company. However, after that they had to get jobs so as to cater for their daily needs. Their portfolios were entirely removed from the compensation scheme by the company, or its associates.
The collapses of Enron lead to the passage and signing of the Sarbanes – Oxley Act of 2002, which clearly sets some requirements in each company for internal control. The law was mainly passed to regulate companies that trade publicly from exploiting citizens and investors. The law is mandatory for any organization whether limited or unlimited. It brought about radical changes in financial practices as well as corporate governance. Enron failed immensely in corporate governance and behavior with its top leaders being responsible for its failure and losses. The Act was heavily publicized to create awareness to the managers and customers and avoid Enron similar scenarios from occurring again. Had the Act been enacted earlier Enron would not have gone deep into debts, because it would have been made public when it started its downfall. Regulatory statements are expressed in the Act, with some statements being more pertinent than others. The Act has place emphasis on the need for a company to enhance its security, especially intellectual and financial security. Financial monitoring should be done randomly on companies without much prior notice to them. As a result of the recent innovations in technology, both the government and companies can use some software to measure performance versus profitability of any company. This will lead to more transparency and reduced risks of large financial losses, as was the case with Enron. Had the Oxley act been implemented in the 1990’s, Enron would still be under operation as the accounting scandal would have been spotted early enough.
The Act suggests stiff penalties for the law breakers as a way of discouraging such cases. With a reasonable rate of transparency and accountability, Enron would have continued to be the successful energy supplier company it once was. The senior management in the company did not apply any working ethics in the running of Enron, or otherwise they would have exposed what was happening over a period of years.