Enron Company by Kenneth Lay in 1985 began its operation after the merger of two companies, Houston Natural Gas and InterNorth Company. Under Kenneth Lay as the Chief Executive Officer of the company, the company started hiring employees. The company had a significant number of 21, 000 employees and an outstanding production performance. Its headquarters was situated in Houston, Texas. After the merger of the two companies, Enron was praised for its effective strategies of penetrating the market and acquiring a significant income. Its main objective was to create market for further expansion and diversification. The company employed some measures in order to create new markets in the region. For instance, it acted as a bank for commodities. It used to buy commodities from suppliers and sell goods and services to respective customers. Enron Company could contract the sale of natural gas for the purpose of future delivery. The company engaged in futures contracts and derivatives in making the company’s profits. Use of derivatives involves contracting goods and services and selling them in a future date for a fixed price.
In 1999, the company had moved into new ventures prospecting high performance and productivity. Same year, Enron company launched a broadband service unit and the company’s trading website, Enron online. The move led to increased trading activities through its website. As a result, there was a significant improvement in the company’s sales, production capacity, and performance. Most of the company’s sales and trading activities were carried out through Enron online. In 2000, Enron company annual revenues had reached $100 billion. As a result, the company was listed seventh largest company on the Fortune 500 list. The company had its stock prices at $90 US peak. Enron Company had made quite a performance in 2000 with its revenues and profit at the highest point ever. However, hurdles began to emerge in 2001 after the company’s CEO for six months, Jeffrey Skilling, quit his job.
Andrew Fastow was the chief financial officer of the Enron Company until his replacement in 2001. Under the position of CFO, Andrew Fastow facilitated the high performance of the company in 2000. Jeffry Skilling was the company’s Chief Executive Officer for only six months starting early 2001. On August 2001, Jeffry Skilling departed from office, and Kenneth Lay resumed the position. Sherron Watkins was an employee at Enron Company acting as the vice president for corporate development. Ms Watkins presented an allegation in court for improper use of accounting methods that had contributed to the company’s collapse in 2001. Kenneth Lay was the founder and the Chief Executive Officer of Enron Company before Jeffrey Skilling took over the position in 2001.
After the Lay’s announcement of Skilling retirement in 2001, the company started going down. The stock market price drastically fell below $40 US. In August 2001, Ms Watkins presented an allegation that the top management personnel might have been involved in accounting scandals. The company’s profits were decreasing at an increasing rate following the drop of its stock market price. In October 2001, the company reported its first quarterly loss over more than four years of its operation. According to reports, the top management cadre had a significant impact on the accounting scandal in the company. The chief financial officer, Andrew Fastow, and other executive members misled the company’s board of directors into believing false information about accounting statements. The CFO had collaborated with other high ranking members of the company including Jeffrey Skilling to influence the audit committee for their own self interest.
Arthur Andersen, the accounting and audit organization in Enron Company also had a significant contribution to the fall of the company. The chief financial officer pressured the accounting and audit organization to ignore the issues in the company. As a result, the audit company was charged with fraud and corruption case against Enron Company. In October 2001, Enron Company announced the commencement of an investigation into the company’s financial with the Andrew’s partnership. After two days of investigation, Andrew Fastow was fired to create ample time and space for investigations.
The company’s financial position had drastically dropped within a year as a result of personal and self interests of the top management cadre. The Chief Financial Officer in concert with other significant stakeholders in the company was responsible for a decline in performance and profitability. According to reports, the departure of Jeffrey Skilling from office led to subsequent events of the company’s fall. Investigation by the United States Security and Exchange Commission of the Enron financial presented $591 million losses for the previous four years in the company. The company had outstanding liabilities of $628 million as at the end of 2000. The investigation results led to a further drop in the company’s stock market price to $10 US per share. This led to a significant decrease in the company’s profits and low performance. Financial reports issued by the Security and Exchange Commission made an adverse effect on the company’s profitability and financial position in the market. In November 2001, the company’s shares dropped to 26 cents per share. This led to the filing of a bankruptcy protection by the Enron Company in the following month.
Accounting and audit firms in the United States have emerged with a lot of concerns about their accounting and audit processes and practices within the region. The case of Enron Company has raised a lot of questions in regard to the integrity and professional capabilities of accounting firms in the United States. Intervention by SEC on the Enron’s Company fraud had positive effects on investors, creditors, employees, and lawmakers. As a result, the SEC chairman called upon the disclosure of all public and private companies’ current financial positions as well as quarterly and annual financial statements. The Enron Company fraud case has led to strategic reforms and practices within the auditing firms in the United States.
The board of directors in a company has a variety of responsibilities in achieving the company’s objectives. The board of directors usually forms the top most management cadre in any business entity. In Enron Company, the board of directors was obliged to look at the welfare of the stockholders and improve on the company’s performance. The company’s board of directors is responsible for implementation of various policies and practices to adhere by the company’s employees. In Enron’s company, the board of directors was responsible for maintaining the stock market prices at the top of the market and maintains a consistent profitability. The board of directors was responsible for analyzing all audit records and financial statements of Enron Company. This was, objectively, to identify and correct out any emerging issues. The board of directors was thus responsible for undertaking the necessary measures for dealing with the situation at hand.
Arthur Anderson was the accounting and auditing firm which was responsible for carrying out accounting practices in the Enron Company. This audit firm formed the top five accounting and audit firms in the world. The audit firm contributed to the collapse of the Enron Company through collaboration with the Enron’s Company top officials. The issues of the audit firm's integrity were a major question in the Enron’s scandal. According to Security and Exchange Commission report, the audit firm did not act in accordance with the stipulated GAAP principles and rules in dealing with accounting standards. The chief financial officer of Enron Company pressured the audit firm to keep silent and ignore the fraud cases. Therefore, the audit firm had a significant contribution to the collapse of Enron’s Company. As a result, the audit firm was charged with fraud case and lost its practicing license.
An outside audit firm should adhere to myriad obligations as stipulated in the GAAP rules and principles. An audit firm should work independently from any interference or connection with the hiring firm. According to reports by the SEC, Enron Company did not provide an independent conference for the Arthur Andersen audit firm to carry out its operations effectively. According to accounting principles and standards, an audit firm should carry out its operation in the hiring company independently. The chief financial officer of Enron Company pressured the audit firm to manipulate the financial statements and accounting records. An audit firm should not be blackmailed by any company official in order to act for the self interest benefit. Therefore, audit firm's independence and adherence to accounting principles should be followed to the letter.
Reference List
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