Discuss The Mechanism For The ENRON Scandal And Contrast The Actions

Question: Write a report on ENRON scandal. discuss the mechanism for the scandal and contrast the actions? Answer: Abstract The study aims to provide an insight into the functioning of Enron and provide an evidence of the functioning that led to the great fall. The study strives to shed light on the fact that corporate governance is the need of the hour and that proper code of ethics is essential for the smooth functioning of the company. Focusing on greed and money will lead to erosion of the goodwill. The scandals that have occurred can be linked to the corporate failure and low level of governance. Enron is one of the glaring examples where we can find that corporate governance was silent and unable to provide any guidance. Moreover, the directors and auditors must act in best interest of the company. Concept of Corporate Ethics The word ethics has been framed from ethos, a Greek word meaning character. Ethics is a part of social sciences that deals with ideas and helps person discriminate between good and bad, right and wrong, just and unjust and so on. Corporate ethics is also known by the name of business Ethics. It is a type of ethics that is professional in nature and sheds light on the ethical issues that happens in the business world. It is applicable in every department of business behavior and is linked to the nature of persons, as well as total organization. Corporate ethics are present in the organization so that the business is able to frame a better relationship with the customers and helps the relationship to flourish. Ethics helps to reduce expenses of the company and creates various opportunities for companies (Albuquerque et. al, 2013). When a company follows an ethical corporate culture and decisions of the company are mad keeping in mind that it would benefit everyone, losses too much exte nt is reduced, as the company earns its dividend in a proper way. Ethics and its implementation enable reduction of losses that happens when there is misconduct and it is spotted at a very stage. This helps in reduction of amount spent on fees, legal suits, assessment, etc. related with the behaviour. The word Corporate Ethics can be traced to United States in the year 1970. Firms started emphasizing on their ethical development with the due passage of time in 1980 and 1990, in order to keep themselves away to the highest of possibilities from the corporate scams like that of the savings and loan crisis. Corporations, as well as professional organizations, specifically licensing boards, have stressed on the ethics code that sets the level of professional behavior that is expected in each and every field. The Ethical does not always mean the rights and duties between a company and its employees but it is even concerned with suppliers, customers and neighbors, its fiduciary role to its shareholders (Goergen, 2012). The problems concerned with links of various companies contain the process of take-over in hostile form and industrial espionage (Fernando, 2009). Importance of Corporate Ethics Every responsible business organization understands the needs and values of corporate ethics. Company is a legal person who means it has a separate legal entity and employees working in it cannot be clubbed as one person, therefore it needs to work in a manner which would allow them to earn profit without forgetting its responsibility towards the society. Therefore, every responsible and quality business believes in following corporate ethics. The concept of corporate ethics implies the principles and values that influence the behavior of a businessman in the working environment, heedless of the fact whether the person is an employee of the business, or the owner itself (Mulbert, 2010). When the leaders or employers of the business is able to differentiate between right and wrong, proper direction to the business is provided then the business can be set be resting on the pillars of ethics. The following points explain the need for and importance of Corporate Ethics: Safeguard of Consumer Rights : Consumer is the highest authority all the business functions. As a matter of fact, the main reason for existence of business is that it is essentially meant for satisfaction of consumer needs and desires. But it is very unfortunate that consumers are not provided due regard. The implementation of corporate ethics will enable benefitting the customers in various forms (Venezia, 2005). Strong Link with the Society: Corporate ethics is very much required to establish good relationship between business and people. The link of business with that of society depends o certain factors like link with shareholders, employees, consumers, competitors and government. Movement of Consumer: In the current scenario, the consumers have become modern in their approach and are well versed with the happenings. Now they are aware of their rights and hence the business needs to be conducted in true spirit else it will become difficult for the business to operate. Interest of industry: Corporate ethics are extremely important to protect the interests of the small scale business firms. The habit of large scale business firms is always to dominate the market and knock the small industries out of the market. Business ethics helps units of small scale to set their sight and vouch for their right if the industry sets it aims towards a proper code of ethics (Fernando, 2009). The corporate ethics play a major role in establishment of the culture of an organization. If the leader of the organization exhibits ethical behavior, and motivates employees who conduct their business work in an ethical manner by rewarding them, then the organization will start to develop ethical grounds on which they conduct business, which ultimately will result in creation of an ethical culture in the business. Apart from the obvious benefits of corporate ethics in the form of a well grown and developed culture, more dignified corporate values, and a fully satisfied customer, corporate ethics expands way farther. A company that follows and believes in proper execution of corporate ethics survives on a long run. Corporate ethics should be implemented and examined by the management, followed by the employees, and with proper attention of the customers, a business can achieve its long term objectives and goals with corporate ethics. The more a business firm follows and executes it helps them gain more trust of customers and more longevity of the business (Lubatkin, 2009). On the other hand, the business that has a faulty ethics scenario is eroded completely and it is seen from the past two decades how some of the giant corporations bite the dust. Overview of Enron Enron, a corporation which had its headquarter in Houston, and runs as one of the biggest transmission of natural gas links in North America, covering more than 36,000 miles, and is also tagged as the world largest marketer when it comes to natural gas, as well as electricity in the US. The world's biggest natural gas risk department was run by Enron (Fusaro, 2000). The company was tagged as Fortune's "Most Innovative" in the US listing for many years operating and climbed to 7th position on the Fortune 500 list in the year 2000. The insolvency in December 2001 was the biggest that is witnessed in United States history. Enron became famous because of the wrong side such as greed, corruption, etc and also due to its false statements that duped the innocent customers. More than $70 billion was eroded in capitalization fee and retirement advantages. Enron was established after an agreement between Houston Natural Gas (HNG) and Intermonth. Enron made notable moves in to electrical power sector, in production of heat and power from the waste energy, in the late 1980s. Cogeneration plants used to produce electricity as well as thermal energy from a single source. In 1989, an agreement was entered into between Enron and Coastal Corporation that allowed Enron to enhance the production of natural gas from its Big Piney field in Wyoming. In the early 1990s, Enron gained the advantages of the emergence of Inter North-Houston Natural Gas. Enron's revenue was $16.3 billion in 1985 and it declined less than $10 billion in e next 4 years although it earned revenue up to $13.1 billion in 1990. A major cause of the decline was the low price of natural gas. It also projected drastic growth in its liquid fuels business and also the oil and gas business. In the starting of the year 1991, Enron established its first ever overseas power plant in Teesside, England, which went on to become the biggest gas-fired plant in the world. In the following time period, Enron built power plants in industrial as well as in developing nations all over the world. Enron's earning from such projects was about 25 percent of entire earnings of the company leaving apart interest, as well as taxes. In the USA, states were provided the authority to remove restrictions imposed on gas and electric utilities in 1994, stressing on the fact that residential customers can select usefulness in a similar way that they selected their phone carriers. Enron's profit, after the restrictions on national electricity market were lifted, was immense, and the company spent a major chunk on advertising, as well as attempting to influence for the cause. It also employed 100 of graduates from top business schools to help the company in defining new avenues (Goergen, 2012). Lasting Effect Enron provided a strong statement about what a company and its leader can do, when their only motive is to earn profits at any cost. The Sarbanes-Oxley Act of 2002 was framed considering the impact of Enron that made strong effort on disclosure and penalties for financial scams. The FASB to a great extent enhanced its sight of ethical behavior. Board of directors could work on an independent basis that enabled them to monitor audit companies and instantly replaced bad managers (Goergen, 2012). The influence was reactive in nature, they are essential to close the void that companies have utilized in order to escape accountability. Issues and its Impact Enron emerged after merging Houston Natural Gas and InterNorth in 1985 by Kenneth Lay. After many years, Jeffrey Skilling was employed , who established a staff of executives who made the most out of accounting flaws, special purpose entities, and made poor financial statements which them conceal billions amount in debt that arose from deal that failed (Sharp, 2006). Andrew Fastow, the Chief Financial Officer and other officers did everything that included misleading the directors, audit committee and influencing auditor is such a manner that they provided a good result despite of the drawbacks. The ignorance of the issue by the audit led to the major downfall because there was a conflict between the auditors and the consultant (Douma hein, 2013). By the end of 2000, Enron fell a prey in its own trap. CEO Jeffrey Skilling used a method for concealing the financial losses of the trading sector and other workings of the company which was called mark-to-market accounting. This is used in the trading of securities, in order to determine what the actual value of the security is at the moment. This method is suitable for securities, but catastrophic for other businesses (Nzuve, 2011). As far as Enron's case is concerned, the company created an asset, for example a power plant, and quickly claims the estimated profit on its books, even considering that it had not made a single penny out of it. If power plant revenue was less than the projected amount, instead of disclosing the loss, the company would transfer these assets to an off-the-books corporation, the loss was not reported. This kind of accounting lead to creation of an illusion that the company do not require profits, and by utilizing the mark-to-market method, Enron can easi ly write off any loss without hampering the bottom line of the company (Mulbert, 2010). This ensured that the company was able to showcase a picture that was rosy and the shareholders were happy with the performance, but in short everything was false and fabricated. Even the share prices were peaking new heights but the company was running on weak fundamentals. Mark-to-market SPE The mark-to-market practice provided policies that were formulated to conceal the losses and the benefit of this method enabled the company to project more profit. The profit was inflated by dint of this method. To ensure that the losses do not impact the company, Andrew Fastow, who was made CFO in 1998, designed a crafty plan that enabled the company to look in a great position even considering the fact that the subsidiaries, was making huge losses. In order to give effect to such plan, the concept of special purpose entities (SPE) was designed. An SPE can be used to conceal any assets through which a company is incurring losses or business ventures that have suffered losses, this method had the advantage that the unsuccessful assets can be kept away from the books of the company. Special Purpose entity was created to give effect to the scandal. The SPE was another tool and concept that was used in an effective manner to give effect to the scandal without any element of doubt (Butle r, 2009). Bankruptcy Enron, by mid of the year 2001, was under big difficulties. There were many retirements, the CEO Ken Lay had retired in February, which made Skilling the new CEO of Enron and that August, Jeff Skilling resigned from his new post for personal reasons. After few days, Enron changed administrators of the pension plan, that prevented employees from selling the shares and kept the freezing period of 30 days. After strong investigation by SEC, it was brought to notice that Fastow created SPE and was fired from the company for such a fraud. Enron made huge loss amounting to $591 million and its debts piled up to $628 million, by the end of 2000. To avert such a catastrophic Dynegy a company that made an announcement of a merger with Enron resisted and backed out of the offer and it proved to be the final blow for Enron . By December 2, 2001, bankruptcy was filed by Enron. The company was unable to stem the progress and ultimately the entire scenario was brought to the forefront that leads t o bankruptcy. The fall of Enron was a big shock for the people and the financial world. It led to huge erosion of the wealth and led to many studies for the cause of the collapse. It is therefore, of utmost necessity to shed light on the shortfalls of Enron so that any future collapse can be averted. The company incurred immense losses and that can be attributed due to poor ethical ground and weak governance. The greed and lust for money led to such unethical practices (Brealey et. al, 2011). The collapse of Enron also provides strong evidence on the need for strong corporate governance because had there been strong corporate governance this would not happen at all. The Board of Directors did not pay heed to any of the happenings and hence there was a major downfall. The collapse could have been averted at the beginning if there was strong code of conduct and management in force (Needles Powers, 2013). Enron will always be a glaring example for misconduct for years to come and will also be noted for the scandal that was done, as a typical example of greed, success, lust and also the way the scam was managed and put to effect that duped the innocent shareholders and erode the entire wealth (Mallin, 2011). It was one of the biggest scandals that shook the financial world and shed light on the drawbacks of ethics and governance. Ongoing Impact of Enron Scandal Enron Corporation is a big name in one of the greatest corporate scandals that have taken place around the globe. Enron Corporation was an American company that has its listing on NSE having business interest in energy and commodities having its base at Houston, Texas. It was often called the darling of the Wall Street as it was a favorite among the shareholders who used to deal in the New York stock exchange. It is said that the company used to employ around 10000 people and was also named as the Americas most innovative company quite a number of times. But at the same time its fall was no less dramatic such was the impact that even today its consequences can be felt, at the same time it also acted more of a boon than a curse upon the shareholders keeping in view the long term implications (Weeks Nantel, 2004). Enron used various deceptive and fraudulent activities in order to cover its misdeeds in the financial statements and its management showed the financial reports in such a m anner as if the company was in a very healthy position, this practice influenced their stock prices considerably there by resulting in huge cash inflows (Manoharan, 2011). But after the scandal came in open it become a nightmare for the American economy, the share price of Enron Corporation which touched to a new high of ninety dollars was merely reduced to a dollar thereby eroding billions of dollars of the investors in a few days, large number of people lost their jobs due to the closure of the company, the peoples trust in the American economic system which was believed to be very strong was shattered and the American economy began to slip (Horngren, 2013). At that time Enron Corporations scandal was the biggest bankruptcy in the corporate world which was latter broken by WorldCom and then surpassed by the Lehmann brothers, the scandal brought a lot of changes in the way the businesses were done it led to the introduction of the Sarbanes and Oxley act which focused more on the disclosures and transparency in the financial reporting system, the act dealt with strictness with the top level management of the companies such as the promoters, board of directors, the CEO and CFO as they were made to certify that whatever happened in the company were done in the best interest of the shareholders and in fully within their power and scope thus making them accountable for the operations of the business, it also led to the introduction of GAAP (Generally accepted accounting policies) and it stated that all companies must follow the principles set in GAAP and those who doesnt deal with such policies will be punished (Clarke, 2010). The act also dea lt strictly with the auditors and it was made mandatory for the companies to have a proper internal control in check which will assure the shareholders and the investors regarding the accuracy and transparency of the financial statements and the disclosures made in it (Davies, 2012). The aftermath of the Enron scandal witnessed a huge change in the code of ethics and governance. Strong efforts were made to check the fraudulent practices, but still some of the scams happened leading to loss of wealth. Ultimately in 2009, the corporate governance was framed that and Sarbanes Oxley Act was formulated to act as a strong check. Various other amendments have been done in the scope of ethics and corporate governance so as to stop any activities that will dupe the innocent customers (Clarke, 2010). The major emphasis was on the process of disclosures is that everything is crystal clear. 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