Works Cited 9
Preface
Enron Corporation was American based energy, commodity and service organization that was established in 1985 by Kenneth Lay in Omaha. The company was formed by merging Intermorth organization and Houston Natural Gas. Over a period of time after its formation company shifted its focus from energy trader to energy bank by giving guaranteed quantities at fixed prices for long-term. The company was bankrupted on 2nd December 2001. Before its bankruptcy the company was one of the major operators in energy sector. It owned energy plants, gas distributors, water organizations and other subsidiaries to provide various services to customers and businesses. Enron was shortlisted by Fortune as most innovative organization in America for six subsequent years (BBC News). Enron was major energy trader in America who also acted as broker in the field.
Enron debacle was surprising and shocking for all people; people were not exactly aware about what happen to Enron that causes debacle of such giant. After its formation in 1985, company did not perform well which resulted in losses and business debt. It was essential to identify ways and innovative techniques in order to make profit and save company. Jeffrey Skilling, who was CEO of Houston Natural Gas formed various strategies and identified innovative ways to earn profit and revenue. Enron’s new strategies and innovative ways were not ethical and lawful; these strategies were grounded on dishonesty, greed and earning profit in short time. Senior management of Enron committed various frauds related with audit and accounting. Enron started dominating energy market and forecasting energy prices with accuracy which helped in generating more revenue for the organization and delivered excellent growth to Enron. Unlawful practices of Enron took the organization to new heights of success in market.
Three major component of business structure i.e. leadership, Management control and culture encouraged unethical and unlawful practices to reduce the increasing pressure of performance and profit (Free et al.). Below triangle depicts essential elements of business structure of Enron that enables fraud and unlawful practices in organization. Company fails to manage these three factors effectively.
Three above sown elements that are important an all organizations are untold in case of Enron. Leadership pressurized business units for achieving their business targets and allocated lucrative rewards if employees achieve those targets. Leadership asked to take risk and demonstrate competitive behavior. Senior management of the company implemented very strict performance system that encourages cut-throat competition among employees and they were ready to any step in order to achieve their performance goals.
Legal Issues with Enron
During 1996 J. Skilling was given role of Chief Operating Officer (COO) of Enron. Skilling established a new division called Enron Capital & Trade Resources to cater to wholesale energy market. This new division adopted various unlawful practices and generated good revenue. Enron entered into trading of coal, paper pulp, steel, and water etc. Company in year 1999 wet online and started trading in commodities. Online trading platform gained trust of various investors and investors stared considering it safe.
Company implemented mark-to-mark accounting system for trading business. According to this system all organizations with any type of outstanding with regard to energy or other commodities are needed to clear all outstanding as per prevailing market value of commodity without considering profit and losses. Enron took advantage of this system by charging investors high amount in absence of current prices of various commodities such as gas and water. Company made pretax profit of around $1.40 billion from trading in year 2000. Company also improved its credit rating by manipulating its balance sheet and audits. Company increased its earning on balance sheet by decreasing hard assets. This helped in reducing debt-to-assets, increasing return on assets, increasing ROA. Company violated business ethics and accounting principle which resulted in various lawsuits faced by the company.
Enron faced various lawsuits from investors and banks who invested their money in the company with a hope to earn profit but Company disappointed them. Bank of America, Lehman & Brothers, Citigroup, JPMorgan are few example of companies who fielded lawsuits against Enron. On Feb 2005 U.S. District court selected University of California to lead the case on behalf of various stakeholders who invested their hard earn money in Enron with good faith by becoming main plaintiff. University of California filed application against Enron and its auditing firm Arthur Andersen LLP. UC pursue the lawsuit with shared goal to recovering money of all investors (University of California).
Identification of Laws
All lawsuits faced by Enron were for security fraud. Major reasons behind Enron lawsuits are: unethical commodities trading practices, mark-to-mark accounting, formation of special purpose bodies, unethical compensation and reward practices, fraud in audit reports, and accounting frauds. All these practices improved Enron financial position on paper. Problem started when an article raised question on over-priced stock of Enron. During a conference call Skilling was asked by a Journalist can Enron show its balance sheet along with earning statement? And Skilling said thank you. After that company started facing several financial problems due to which Skilling resigned. Lay reassumed his position of Chief Executive Officer and discovered the vulnerable position of company in terms of misleading financial practices.
The major charges formed against Enron were related with financial, security and audit frauds. These charges included: money laundering, misleading trading, banking fraud, false financial statements provided to the banks, false audits, security fraud, conspiracy, wire fraud, and insider trading. All these charges are formed under three major laws that are violated by Enron. Federal government has formed laws to govern accounting, trading and other practices of organizations. Three major laws violated by Enron are:
- Federal Securities Laws
- Accounting Standards
- Federal Pension Laws
Analysis of Legal Issue
Lawsuits against Enron are analyzed on three major laws security, accounting and pension laws. University of California along with other lead plaintiff including group of Florida, NYC, Ohio, Alabama, Georgia, and Washington joined the lawsuit action. UC claimed a loss of $144.9 million according to 2.2 million shares of Enron bought by investors during the period. UC’s portfolio value that included pension fund and endowment fund was around $54 billion (University of California). University claims that it has sufficient fund to pay the pension to its staff and provide endowment support but it is important to recover money that actually belongs to people and employees of university.
Application of Laws on Case:
Federal Securities Laws: According to The Securities Act of 1933, company cannot sell securities without registering them under Securities and Exchange Commission. Company also requires making their financial information available to the public. Security Exchange Act of 1934 also made various provisions related to security registration and financial information that require disclosing to the public. These acts deal with various areas including periodical submission and updating of financial reports. Enron failed to disclose all material information required to make investment decisions by investors (Seitzinger et al.). Company also provided false financial information and reports. Company is liable to provide misrepresent facts and misleading information.
Accounting Standards: Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) developed accounting standards that need to be followed by all public traded organizations. Enron did not adhere with these standards by misquoting assets and liabilities, and modifying income statements. Enron manipulated its profit and expenditure statement. According to standards all financial statements should be certified by independent auditor. Enron involved its auditor in the fraud (Seitzinger et al.).
Federal Pension Laws: Central government pension laws and Employee Retirement Income Security Act formed rules that encourage companies to provide employee retirement plans along with their administration and fund management. Enron pension plans falls under lawsuit are 401(k), individual account and saving plan. These plans allow employees to maid some contribution of their basic salary towards pension plan and company matches their contribution with Enron stock. These plans required company to matches payment that will be provided when employees reaches the retirement age or 50 (Seitzinger et al.).
Conclusion of Legal Issue
Works Cited
"BBC News." 5 July 2006. news.bbc. 11 November 2013 <http://news.bbc.co.uk/2/hi/business/3398913.stm>.
Free, C., M. Stein & N. Macintosh. ". (2007). Management controls: the organizational fraud triangle of leadership, culture and control in Enron." IVEY Business Journal (2007).
M. V. Seitzinger, M. B. Morris and M. Jickling. "Enron: Selected Securities, Accounting, and Pension Laws Possibly Implicated in its Collapse." CRS Report for Congress. January 16, 2002.
"University of California." December 2008. universityofcalifornia. 12 November 2013 <http://www.universityofcalifornia.edu/news/enron/>.
"University of California." 15 February 2002. ucop. 12 November 2013 <http://www.ucop.edu/news/enron/art1202.htm>.
