In the case study, it is pointed out that all through the late 1990s, Enron Corporation was nearly universally regarded as being among the country’s most innovative corporations (Li 37). The company went on building power plants and operating gas lines; however, it turned out to be well known for its exceptional trading business. Apart from buying, as well as selling, electricity and gas futures, it engaged in the creation of entirely fresh markets for such eccentric ‘products’ “as broadcast time for advertisers, weather futures, and internet bandwidth” (Li 37).
Enron Corporation was established in 1985, and being the prominent natural gas, electricity, paper and pulp, and communications corporations in the world before becoming bankrupt in 2001, its proceeds per year increased from approximately nine billion dollars in the year 1995 to more than one hundred billion in the year 2000 (Li 37). Towards the end of 2001, a revelation was made that the company’s reported financial condition was considerably sustained by systematic, institutionalized, and skillfully calculated accounting fraud. Reportedly, the decline of this company’s stock price from ninety dollars per share in mid-2000 to below a dollar per share at the end of the year 2001, made the shareholders lose almost eleven billion dollars (Li 37).
One of the causes of the bankruptcy of Enron Corporation was lack of truthfulness by the management regarding the company's health. In this regard, the company's senior executives held belief that the company had to remain to be the most excellent at whatever it carried out and they had to safeguard their reputes, as well as their compensations as being the most effective managers in the United States. Another cause is found to be conflicts of interest and absence of independent oversight of the company management by its board, which led to the collapse of the corporation. Additionally, some people have suggested that the compensation policies of this company caused a biased focus on the earnings growth and stock price. Another cause has linked the reputation of Arthur Andersen, the company’s auditor. The exposure of the accounting irregularities at this company during the second last quarter of the year 2001 made the media and regulators to focus extensively on Andersen. Indeed, the level of the suspected accounting errors, together with the role played by Andersen as the company’s Auditor and the immense media devotion, offer apparently influential setting to undertake the exploration of the impact of auditor repute on customer market prices around the failing of an audit (Li 38).
Perhaps the most important cause of the bankruptcy is the accounting fraud using ‘market to market’, as well as SPE as tools. To keep persuading the investors to engage in the creation of a steady earning condition in the corporation, the Enron traders were compelled to forecast increased cash flows and reduced rate of discount in the future on the long-term contract with the company. Apparently, the discrepancy between the calculated NPV and the initially paid value was considered as being the company’s profit. Furthermore, utilizing the company’s stock as security, the SPE, led by Fastow, the CFO, borrowed huge amounts of cash, which was utilized to balance the company’s overestimated contracts. Accordingly, the SPE allowed Enron to undertake the conversion of assets and loans with the debt obligations into income.
An important question asked in this case analysis is: who was actually morally responsible for the collapsing of Enron Corporation? From the individuals’ perspective, it is pointed out that since corporate acts come out from the actions and choices of the human individuals, it is these people who have to be viewed as the main bearers of moral responsibilities and duties (Li 38). For instance, the company’s CFO, Fastow, built private corporate institutions secretly and then took a step further to transfer the property illegitimately. In this case, the CFO breached his professional ethics and took malfeasance crime. From the corporation’s perspective, the acts of the company’s managers are attributable to the company as long as these managers act within their power. Nevertheless, the Enron’s shareholders did not realize and know this issue from the phony high stock price. Thus, the entire company was not of responsibility for such scandal (Li 39).
According to the case study, there should be a healthy corporate culture within a corporation. In the case of Enron, its corporate cultures served a significant role in its collapse. The top managers held belief that this company had to be the best at everything it undertook and the board’s shareholders, who did not engage in the scandal, had greater optimism regarding the company’s conditions. Moreover, a more complete system is required for the owners of a company to supervise the operators and executives and then obtain the notion of the operating situation of the company. Undoubtedly, more governance from the board may prevent Enron Corporation from becoming bankrupt. Indeed, the company’s board of directors ought to intently observe the management’s behavior and the manner in which they make money. Additionally, the fall of this company also had an unusually bad influence on the entire economy of the United States. In this regard, perhaps the U.S. should as well come up with better rules and regulations to control the economy.
Work Cited
Li, Yuhao. “The Case Analysis of the Scandal of Enron.” International Journal of Business and Management, 5.10, (2010): 37-41.
