Enron was a giant energy company that was based in Texas, USA. It was the leading company in the provision of electricity and natural gas, and was then named as the most innovative company until the revelation of its substantial financial reporting and systematic fraud of its accounting processes had been highly institutionalized. The revelations of the scandal lead to the fall of its share, which had been considered to be the blue chip stock from over 90 dollars to selling in pennies. Enron’s code of ethics issued in July 2000 indicated that the responsibility of conducting affairs of the business in accordance with the law, moral and honest manner was in its officers and employees. The code also stated that an employee should not directly or indirectly behave himself in a manner that was detrimental to the company’s interests, thus, basing the codes on respect, excellence, integrity, and communication. The officer of Enron did not follow the codes of conduct, as it was stipulated, leading to its fall. This paper will analyze the accounting systems that never provided the true face of the firm. Enron revenues grew considerably to 101 billion dollars in 2000 until its revelation that appeared to show its problems being not as a result of some core energy operations, but with other ventures.
Reasons for the Collapse of Enron
The collapse of Enron was not due to its large size, but it was caused by decentralization of its operations to numerous subsidiaries that made it hard to detect when the company was running on losses. The requirement to make public the financial statements that was traded publicly made Enron craft some imaginary statements with its subsidiaries that were masking its true financial statements (Nicholson, 2011). The accounting records of Enron held back the losses it had been making and only stated the assets of its subsidiaries. Thus, the company gained confidence of market financiers who financed its e-commerce ventures. The over reliance of the special-purpose entities (SPE) made the company heavily indebted, thus leading the company to form the partnership with its financiers because it was not possible to finance their debts. The financiers then had to lend funds to the partnership, which were never revealed in the company’s balance sheet. This SPE applied all kinds of ventures even selling some assets to these partnerships with the management of the company. The SPE used by this company depicted the recklessness and incompetence of its management team without even disclosing the existence of the SPE.
The company used derivatives that did manipulate the results of the company’s accounting and the need for full disclosure of the financial statements applying the set standards of accounting that were not followed. The markets, in which Enron traded, were never regulated, and thus, the profitability of the company in its derivatives was higher than the financial statements. The offshore entities of Enron were used for planning and tax avoidance in such a way raising the company’s profitability. This, in turn, did provide the movement of funds which necessitated the holding back of the disclosure of losses. These offshore entities made the company looking profitable because of doctoring the financial statements where in the real sense the company was losing funds.
The top executives of Enron were charged with fraud, money laundering and insider trading which were criminal acts. The management of a company is the one responsible for safeguarding the company shareholders’ interests. Enron management waived the rules of interests and creating a partnership that do business with the company and managing these partnerships by the same management. These executives raised their credibility and adherence to the code of conduct of the company.
In any working environment, there are some established rules of effective working. These rules are implemented so as to ensure that the set goals and objectives are achieved in business. One of the main reasons why these rules exist is so as to guide individuals. These guidelines help different individuals to coordinate activities among themselves so as to achieve the expected results. Since the working environment consists of many personalities, they operate as a team. Within the team, there are the established rules on how the team operates. This is extremely vital since it helps in the attainment of these set goals. It also prevents random decisions.
The management of Enron engaged into business activities that violated the company’s code of ethics. The activities involved trading the volatile earnings not rewarded on the stock market. The management of Enron was the one to bear the responsibility for the collapse of this company as the ethics code stated. They were involved in the creation of partnerships that they managed on their own. Thus, they gave some exceptions from the ethics code of the company and its values, and the visions did not match with the management actions.
The collapsing of Enron was not as a result of an accident, but the company’s culture of management. This facilitated its downfall through fraud and greed because the company was extorting its consumers. The management only focused on the maintenance of values appearance that raised the trading price of its stock instead of relying on the creation of the real value of the company. The company also resulted in replacing employees in their divisions even though the integrity was compromised. It is viewed that the company was leveraging with the administration that allowed the perpetration of frauds. Therefore, the collapse can be attributed as the largest problem of management culture (Nicholson, 2011).
The federal law requires that auditing a public company should be conducted by an independent auditor. The auditors of Enron were either misled of the actual income of the company which was restated with the losses being reported to be lower than they appeared, or the auditor compromised its independence used in the determination of the nature and the extents of the procedures applied in auditing. Enron did not use an outside auditor and this led to the management not disclosing the real status of the company’s assets (Jickling, 2002). The auditor was indicted for the destruction of documents that showed the auditing of Enron.
Enron was sponsoring its employees’ benefits. It was later revealed that the retirement stock was even larger than the stock of the company. The company’s collapse led to employees losing their values of the retirement benefits. The plan was supposed to allow the participants to have information setting limits on the company’s stock that can hold the retirement plan.
The collapse of Enron was also contributed by the participation of banks as they provided the funding of the offshore ventures. They were also involved in partnering with the company proving funds that were traded off the balance sheet. The banks were also viewed as providing derivatives to other institutions by recommending the company’s securities as they were faced with the opportunity of making profits form their deals and the risk avoidance from the bank (Jickling, 2002).
The management of Enron was never guided by the code of ethics, and, thus, they did not create the ethical environment for the company as the fundamental values of respect, integrity excellence, and communication that were never followed. The collapse of Enron was enhanced by the management’s failure to guard the interests of the company’s owners. They also used loans to pay the existing loans in supporting the e-commerce ventures. These financiers facilitated the frauds that were being committed to the company.