The fall of Enron
What went wrong and why?
Answer. The wrong done in the case of Enron and the reason for the wrong can be described on the basis of the following aspects of their business:
Enron’s core business was initially focused on natural gas pipeline and they made exceptional growth in the business. By the end of the 1990s they decided to diversify their business to the newly emerging business of asset management, construction, and Internet operations.
Enron entered into foreign markets of Latin America, Asia, and UK with fresh subsidiaries focusing on development of asset management, construction, and internet based operations within 1997 and 2000 (Healey and Palepu, 2011).
The adverse impacts of local politics and gradual decline in the dot com market led to severe losses in the newly diversified business.
Enron suffered losses in its business subsidiaries and the new CFO Andrew Fostow was determined to make it look as a healthy business.
He collaborated with the Enron’s financial auditors to hide the losses in Enron’s business and make it look to be in great health, so as to ensure a steady growth in the stocks of Enron.
The top management was not ready to disclose the actual status of the firm and they decided to pool out the loss-making assets to the external Special purpose entities (SPE).
The transfer of the loss-making assets to SPE prevented from getting reflected in Enron’s financial books. Thus, Enron’s books were kept unaffected from the actual losses.
The investors of the SPE were also furnished with Enron’s stock in order to compensate their losses for their depreciating investments.
What regulations came out of the Enron debacle?
Answer. As the Enron scam was exposed in the end of 2001, there were multiple hearings by the government agencies like the committee on banking and urban affairs and the committee on financial services. There were two regulations formed in this regard. The first was Sarbanes-Oxley act and the second was NYSE proposal on corporate governance norms.
Sarbanes-Oxley Act (2002)
The act established the national agency for monitoring the audit reports and specify the standard practices for financial reporting various firms (Public Company Accounting Oversight Board) (Peregrine, 2011).
The financial disclosure of various associated subsidiaries was mandated in the audit reports for the firms(Peregrine, 2011).
The board members and senior executives were mandated to attest the financial reports.
Complete authority and independence to the audit agencies was granted to ensure honest financial reporting(Peregrine, 2011).
NYSE proposal on corporate governance (2002)
The act focused on stipulating a certain percentage of independent directors in the company’s board and their main committees like audit, remunerations, etc.
The financial awareness of the audit committee directors and their control over supervising the various financial activities of the firms were mandated.
Should government do anything with respect to additional regulations? (They already have, but time has gone on since then).
Answer. In addition to the earlier formed regulations the following additional regulations need to be included to ensure a check on such scams:
Corporate governance to have specific codes of alienating the financial consulting and financial audit schemes for the business.
Intervention and supervision of the board of directors over all of the ethical committee operations and their authority in monitoring the financial operations.
Mandatory check over the actions and initiatives taken for the efforts adopted by the senior executives for maintaining the firm’s image in the stock market.
4. Will there be more Enron situations from this point on? Why or why not?
Answer. There is always a chance of situations like Enron because of the following reasons:
The actual reason behind the Enron scam was that of ethical violations because of highly ambitious motives of the top officials of the business to uphold the stock market image of the business. Such ambition can always recur in the top management executives of any business.
Also, the businesses which do not have strong ethical foundations and inclusion in their corporate governance are always gullible to fraudulent schemes related to the manipulations and window-dressing of the financial statements to keep up with their image in the financial markets.
Growing pressure of the stockholder’s value perception on the business and the corresponding fluctuation of the stock prices in accordance with the changing financial performance of the companies make it an extremely crucial factor to keep the most positive image in front of the investors.
5. Are individuals more or less honest than they were running companies 100 years ago?
Answer. The individuals are relatively more dishonest in running their companies than that they were practicing 100 years ago. The prime reasons for this are as follows (in comparison to the situations 100 years ago):
Owing to the rising globalization, companies are more inclined to diversify their business oversees and this exposes their business to an entire new range of risks that can result in sever losses, like that of Enron.
The company performance and its financial monitoring are now furnished with advanced financial awareness which provides ample scope of the manipulation and improvement of their performance.
Rise of stock market’s prominence in being affected by the company performance and advanced Information technology features lead to quicker spread of the financial performance to the investors. Hence, top executives are nowadays forced to prevent such information getting across the markets.
References
Healy, P. & Palepu, K. (2011).The fall of Enron. Part2. Business Analysis and Valuation tools. pp.3-21: 3-27.
Peregrine, M.W. (2011).Another View: Sarbanes-Oxley and the Legacy of Enron. The New York Times. Retrieved online from http://dealbook.nytimes.com/2011/11/25/another-view-sarbanes-oxley-and-the-legacy-of-enron/
