Company and Situation
In the period following the late 1990s, Thomas (2002) mentions that Enron Company was regarded as one of the outstanding, as well as, most innovative companies in the American state. The entity continued with its bid of building new power plants and operating other gas lines. It was also well-known for its unique methods of trading. However, all these prospects came tumbling down when it admitted to having misrepresented its incomes and that the company’s value of equity was less than the one stated in the balance sheet. In this light, the following paper will conduct research regarding the rise and fall of Enron consequently giving recommendations.
The critical incidents leading to the current status of Enron Corporation is the inefficient accounting system that it applied in its operations as mentioned by Fox (2003). This is because the entity would set up a project e.g. a power plant and after that make a claim of profits regarding the anticipated proceeds in the books of account even though no profits had been achieved. Besides, the company did not take up the losses from its projects but instead transferred them to an off-the-books company where the losses would in fact not be reported. This means that the contributing factors alluded to the fact that Enron Corporation thought it would simply write off its losses without hurting the bottom-line of the company’s operations.
The challenges facing Enron Corporation can be said to have emanated from both the internal, as well as, external processes of the business. Worth noting is that it is these inefficiencies that culminated to illegal reporting to advance a positive image of the firm while in actual sense it was underperforming. Besides, it has been alleged that the officials of the corporation knowingly ignored the indications of internal warnings concerning the accounting irregularities in spite of accruing huge amounts in the stock market gains. Such occurrences in the procedures of Enron Corporation would have easily prevented.
Strengths, weaknesses, and alternatives
Strength- Enron Corporation only employed a workforce that had the best qualities. This made the working environment very busy, innovative and also progressive.
Weakness- the powerful, as well as, massive greed imminent in Enron Corporation was its largest destroyer. Worth noting is that Enron underwent several unlikely scenarios.
The alternative- a primary alternative of the Enron Corporation resulted from its brand name that was indeed big and was vastly known as a formidable force in the energy sector. As a result, it could take these advantages to carrying out its expansion.
A primary value creation function of Enron was to create better value for the shareholders so that their stakes in the company increases. It is because of this aspect that Enron misquoted its books of account to depict a favorable trend in its operations thus gaining the shareholders' favor. It also sought to create better value for its clients mainly in the energy sector. To amicable solve the challenges that Enron faced, it could take up certain courses of actions significant for its operations. Healy & Palepu (2003) notes that setting and following tighter rules and policies would ensure that the methodologies of its operations are in line with the set standards. Besides, practicing more transparency in its dealing would have made the shareholders keep abreast with the happenings of the firm.
The constraints imminent here would be the possible interference from different powerful forces within the corporation and even in the American government. It should be remembered that Enron enormously financed the United States campaign systems. In spite of these constraints, diligently following the aspirations of the firm would not have permitted any misappropriations.
Implementations
The organizational change at Enron Corporation followed a pattern that suited a dynamic entity. It commenced its operations as a pipeline organization with its gradual evolution into a production, marketing, operation and a finance company. (Salter, 2005, p. 34) The company had an effective reward system that consisted of multiple benefits and bonuses. It is because of this aspect that several people with MBAs from the best learning institutions e.g. Harvard had wanted to work for the entity. The company notably promoted a hierarchical system of leadership within its systems. As a result, the roles of the employees were well defined. This is vivid from Watkins concerns upon the departure of Skilling from the company. Lastly, it is the conflicts of interests within the management of Enron Corporation that culminated to its downfall. Essentially, its financial conflicts have become a point of references in today’s business challenges.
Recommendations
Firstly, the issue denotes a need to have a better system and mechanism of financial disclosure. Besides, the case depicts that the Financial Accounting Standards Board that has been tasked with making rules in this sphere needs to put up the standards, as well as, rules that are more forthright and can be easily understood by everyone.
Secondly, the case made an illustration of the need of having more responsibility in public service and not the creation of more laws. The Private Securities Litigation Reform Act that came into law in 1995 would have in fact checked the behaviors leading to the Enron scandal. More responsibility in public service would counter this gap.
Thirdly, there is a need for amending and not banning every non-audit work. This is because of the recent calls to eliminate all services by audit firms that are non-auditory. However, these non-audited services have a close link to the information already audited consequently making no sense in banning the auditor from the provision of these services.
Lastly, the auditors of a firm should constantly be changed within a stipulated time frame. This ensures that any malpractice that may have been committed by the previous crop of auditors is brought to light when the new auditors begin their work.
Additional Questions
Question A
Enron was so appealing and as such several MBA graduates desired to join it. This was primary because the associates at Enron were rewarded with substantial corporate benefits. It also offered the graduates the opportunity of working and gaining experience in a highly performing company in the country.
Question B
The business model brought about by Skilling and Lay, in fact, worked so well in electricity and also energy markets but failed in those markets that it lacked comparative advantage on information. As a result, Enron Corporation had to bear substantial costs in the creation of a physical environment that were required for purposes of rectifying the relative inadequacy of market information.
Question C
The several strategic misadventures of Enron resulted from the conflicting interests’ observable by the 2 roles performed by Arthur Andersen, the company's culture that promoted the lack of reporting and also the unavailability of transparency in the company dealings.
Question D
The internal systems of a company often play a critical role in promoting corporate governance. A company may as well protect and also cover against the risks of operation by implementing functional controls. The collapse of Enron depicted a failure in the corporate governance where the mechanisms that would have been used in the internal control were hampered by conflicts of interests that consequently enriched particular senior staff at the expense of the stakeholders.
REFERENCES
Fox, L. (2003). Enron. Hoboken, N.J.: Wiley.
Healy, P. & Palepu, K. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3-26. http://dx.doi.org/10.1257/089533003765888403
Salter, M. (2005). Innovation Corrupted: The Rise and Fall of Enron (1st ed., p. 36). United States: Harvard Business School.
Thomas, W. (2002). The Rise and Fall of Enron. Journal of Accountancy. Retrieved 3 May 2016, from http://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html
