Enron Corporation is one of the biggest energy producers and suppliers. It also supplies natural gas and liquids worldwide. Enron has the best natural gas transmissions systems. Before its collapse in 2001, Enron was one of the major producers of electricity, who served industrial markets and domestics. Enron also serves international markets across the world. It also served solar and wind energy worldwide. Enron also explored oil and gases internationally. Enron was a provider of risk management and financial services to its market. It also provided bandwidth services, and weather and power security. It was a much-diversified company, which was involved in innovations of its business unit (Fox 213).
Enron serves a number of markets across the world. One of the markets served by Enron was the industrial market. Due to its vast innovation and reliability in energy production, Enron was preferred by most industries to provide energy. Enron was also an international company that served countries such as Turkey, Argentina, China, and India. This was a major boost to its growth and profit. Enron served domestic markets to many people across the world. In United States, Enron provided its services to uncontrolled markets, where the household customers choose different kinds of tariffs. They moved to this markets in 1996 when they acquired Portland general, to help enter the California market.
The company operates in different market environments across the world. A good business environment is very crucial to the success of any business. There are two types of business environs under which businesses operate. One is the internal Market, and external. Many companies operate under both. Enron’s internal market consisted of its employees and its position. Its internal environment was strong during the time it rose to one of the biggest companies in the world.
Its external environments were diverse since it operated in many countries with different economic background and regulations. For it to succeed, it used acquisition and partnership to expand its business. External markets cannot be influenced by organizations and hence, it is the duty of organizations to survive well in the environment. Both environments should be assessed regularly to ensure that they are in favor of the organization.
The above graph compares the growth of Enron’s net income from 1997-2000. It shows an upward movement, which indicates the continuous growth of profits. Most of these figures were not the real ones. They were inflated.
This graph illustrates the upward trend taken by the increasing assets of Enron. These figures were not always the real ones since some assets were valued at a higher value to hide the liabilities.
An audit is an external report of a company’s operation, especially in accounts. It helps to give a report to stakeholders of an institution about the company’s financial statements. It is very importance for transparency of the company’s transactions. The audits objectives is to provide an independent review that analyses the company’s accounting policies, which in turn gives recommendations on the same. They have the duty to identify misconduct of the accounting department. It is supposed to lay down a strategy that can be adopted to solve certain problems in the accounting department. Their main objective is to verify the financial statements of a company without the influence of the management and other stakeholders (Sterling 96).
Arthur Andersen firm, conducted Enron’s audit report since 1985, and gave misleading opinions. The company was also its internal auditor. This company gave information that was untrue to the real situation. They overstated the value of certain assets in their financial reports. In addition, because they were the internal auditors too, they tended to be biased to cover up for the company’s financial position. The auditor discovered many accounting misconducts but did not reveal them. Some of them were; the increase of revenue by $613 million, which later was restated, and reduced by the same amount, causing the credit and liabilities to rise by more than $600 million. Another was the stating a high figure of what the broadband value was. The management ignored these issues, which resulted to its downfall in 2001. The company identified the misconducts of the company but choose to remain silent further contributed in worsening the situation by allowing Enron to continue using the special purpose entities for capital generation despite knowing that the company was under threat of liquidation.
Enron was involved in several accounting misconducts that led to its downfall in 2001. One of the misconducts was using special purpose enterprises for purposes of accessing capital for growth. By using these institutions, Enron was not required to show its liabilities in the balance. The SPE was to borrow money for the company and later gain interests in the partnership. Enron issued additional shares to these companies. The company was in a position to sell assets at a profit. The guidelines provided by FASB, that suggests 3% of the special entity enterprises to be owned by outsiders, helped Enron to remove its assets that were not needed to the special purposes enterprises. This helped Enron to cover up for losses that arose from these assets. When the assets depreciated, Enron had to issue more shares to these companies (Berkowitz 68).
Enron’s downfall started when they gave balance sheets that hid the real value of its liabilities. They used special entities (SPE) to cover for the parent company’s financial statements. Enron gave untrue figures to reflect on their shares as valuable, when in reality it was opposite. This caused its stock to collapse. Enron later used the SPEs to borrow money for continued growth, when they could not borrow since its share prize would go down. They continued to use the special entities to keep off the credit liability from the balance sheet.
Some of the direct implications were on the shareholders, audit firm, and the management. The shareholders had lost their share value largely. The employees had to file for their lost pensions. The management was charged with fraud, while the accounting firm was charged with obstruction of justice, when they shredded evidence. The big implication was the review of accounting ethics that aimed at solving such occurrence in future.
Due to the many misconducts of Enron accounting, the Sarbanes-Oxley Act of 2002 came up with rules to help protect the interests of stakeholders of companies. Some of the standards set were as follows; disclosure of financial statements should be in full. It was set that provision of off-balance sheet clarifications be made. This was to help in disclosing all liabilities that are not covered in the balance sheet. It also stated that reports released annually should include a management’s report about the internal controls. It also set requirements that companies should disclose of any ethics they hold during financial reporting, and should disclose them in case they change. It required the company to disclose its team in the audit committee. Their names should be stated too. The standards rule that management and directors should not influence the independent external auditor in any way. Statements should be prepared to justify that the audit reports are true to the financial position of the company (Clarke 434).
To help eliminate such problems of frauds, the Sarbanes-Oxley Act of 2002 set way of penalizing those who did not abide to the set standards. Auditors shall be allowed to retain some documents for a period of seven years. If documents are destroyed in circumstances such as those of Arthur Anderson’s case, where they shredded papers to hide evidence, will serve a sentence of 20 years in prison. Penalties for fraudsters of securities were increased to 25.
To avoid such problems in the future, these several recommendations could go a far way in preventing such frauds. Companies should disclose all ethics or assumptions of their business for transparency. The board of directors’ majority should be independent to ensure that biasness is dealt with, and directors not involved with management should hold regular meetings to discuss on the issues of the company. If a company is listed, it is necessary for them to have commissions of corporate governance, which should be made up of non-managerial directors. The independent directors should not be allowed to posses shares of the listed company even indirectly or any benefits from the company except his due remuneration. Listed companies should have internal auditors who are independent from the external auditors. Shareholders should be the ones to approve any returns preparation offered.
In the Enron case, it was very difficult to prevent the misconducts of the company. However, they could have done it if they had not made the misconduct of not revealing all the information required. There were a no of ethical issues that were crossed, which caused its demise later on. In the case of Enron, the auditor assisted in crossing the ethical lines, which made it hard for accountants to deal with. The assisting of Andersen in forming the special entity enterprises contributed highly in the misconducts continuation. It is evident that Enron was forced to continue with the special entities to keep hiding its liabilities, to try to keep its share value higher.
When the management was informed that its accounting misconducts would ruin it, it did not take the consideration seriously, which made it harder and harder as time went on. This demise could have been controlled if disclosure of the liabilities was correct since stakeholders could have been in a position to act accordingly before it was too late. Another reason it was to hared for the accountants to prevent this, was the fact that the internal stakeholders were interested in their own self-gain other than the responsibility to the shareholders. This trigged them to continue with the misconducts, which favored them, as they were later charged with fraud. The diversity of the company was so intense that coming up with a way forward for all the business units was a challenge. Too many special entities and partners posed a problem to the continuity of the company.
Independent accounting bodies usually set out accounting ethics for all people and institutions in a country. Different countries have different standards set, but are related closely with other countries. It is the duty of accountants and auditors to follow them too strictly without using them for self-gain of the company, but rather for giving the true position of the company. In Enron, some of them were crossed. The ethical issues crossed were; lack of disclosure of the off-balance sheet liabilities, which misled all the stakeholders into believing that the company was doing well. Financial statements are supposed to provide the stakeholders with a report of the company’s financial position without hiding any material that could cause a threat to the company (Pizzigati 45).
To the accounting and audit professions, I would suggest that they should be aware that they are supposed to be royal to who they serve. They should remember that stakeholders trust them to provide truthful information of the company. Shareholders are the owners of companies and should be provided with the whole truth only. I would suggest that auditors and accountants should be independent from the company’s list of employees to ensure that management does not influence them. In addition, they should adopt the standards set by Sarbanes-Oxley Act of 2002 to ensure transparency is adhered to.
In conclusion, it is important to note that the business environments under which a company exists can influence its decisions greatly. Enron’s internal environment, management, had a contribution in its downfall. From the case, the main cause of its downfall is accounting misconduct, which occurred within the accounting and auditing departments. This highlights that accounting ethics should not be crossed since its consequences are fatal to the business.
.Berkowitz, Arthur. Enron: a professional’s guide to the events, ethical issues, and proposed reformsBoston, MA: CCH Inc., 2002. Print.
Clarke, Thomas. International corporate governance: a comparative approach East Greenbush, NY: Routledge, 2007. Print.
Fox, Loren. Enron: the rise and fall. Hoboken, NJ: John Wiley and Sons, 2003. Print.
Pizzigati, Sam. Greed and good: understanding and overcoming the inequality that limits our lives: Washington D.C: The Apex Press, 2004. Print.
Sterling, Theodore. The Enron scandal. Wilmington, DE: Nova Publishers, 2002. Print.