How did the corporate culture of Enron contribute to its bankruptcy?
According to Albert Camus "A man without ethics is a wild beast loosed upon this world" At first sight, Enron looks like a mega-size illustration of the bad apple among the ripes ones. It projected itself as financial of Business Ethics. On December 2.2001 Enron Corp. Filed the largest bankruptcy in U.S history due to many unethical issues. The 'Enron Scandal' shocked the world. Enron had an overwhelming aura of pride and carried with it the deep-seated belief that its people could handle increasing risk without any consequences. The culture promoted greed and focused on how much money could be made for executives. For, example Enron's compensation plans seemed less concerned with generating profits for shareholders than with enriching Company's wealth. Enron's corporate culture reportedly encouraged profiteering.
The Enron collapse has sent shockwaves all over the financial world and raised serious questions regarding corporate governance. The Enron bankruptcy is becoming the most famous and highly publicized bankruptcy case in history. There are numbers of unethical issues that contribute Enron to its bankruptcy. They are as follows-:
Improper Accounting: One of the major reason behind of its bankruptcy was improper accounting system. (Enron's lawyers in august 2001)The company used corrupt accounting measures to make their profits .Although these practices produced more favorable financial picture ,outside observers believed they might constitute fraudulent financial reporting because they didn't accurately represent the company's true financial condition. For example the company established the special-purpose entities (SPEs) to move the assestd and debt of its balance sheet and increase cash flow by showing through its books when it sold assets.
Hiding the losses and inflating profits: The company has a cash flow of negative amount $154 millions, Enron claimed of 3 million in its cash flow
Bad Communication-: Delivering the bad news. Lying to the various stakeholders, the financial statements hide the momentous losses to their Stockholders. Stock analysts were often vague and didn't specify their operation cost and their finances.
Misleading the financial reports-: The bankruptcy filing came after revealing that Enron used (SPEs),Special Purpose Entities. SPE's hid losses. Enron used SPEs to move assets and debts off it balance sheet. This enables increase in its Cash Flow.
Poor business and accounting procedures encouraged greed.
Unregulated private partnerships(SPE'S) to take on debts
Over 5000 Enron employees lost their livelihood due to Top Management's greed.
Enron's VP Sherron Watkins consistently sent reports out to the then Chairman outlining improper accounting methods employed. The biggest problem was that Enron outsourced its internal audit function. It outsourced both its internal and external auditing function to Arthur Andersen.
2. Did Enron's bankers, auditors, and attorneys contribute to Enron's demise? If so, what was their contribution?
Enron's demise involve its relation to its bankers ,auditor and attorneys .
Enron's auditor: Enron auditors knew in mid August from a senior Enron employee's concern about improprieties in the energy company's Accounting practices (Washington Jan16) .Arthur Andersen was responsible for ensuring the accuracy of Enron's financial statements and internal bookkeeping. Anderson's reports were used by potential investors to judge Enron's financial soundness and future potential before they decided whether to invest. Current investors decide if their funds should remains invested there.
Former CEO Jeffrey Skilling, widely seen as Enron's mastermind. He was so sure he had committed no crime that he waived his right to self-incrimination and testified before Congress that he was not aware of any inappropriate financial arrangement. Jeffrey McMahon told a congressional subcommittee that he had informed Skilling about the company's off-the-balance-sheet partnership in March 2000, when he was Enron's Treasurer. (ENRON'S COLLAPSE: OVERVIEW;RECEIVE WARNING ON ENRON FIVE MONTH AGO(Richard A jr. opeel. published on Jan 17 2007)
Enron's bankers: Although the bank knew there was a problem with Enron finances Its own bankers . Their under writing feeling on debt issue sold to the public to prove that without the bankers Enron will never remained its scheme on the investing public . JPMorgan Chase and Citibank were already aware of the tax regulations and would have had sources for audited accounts. These banks issued large loans to the company. They could do so because they would then lay off much of the risk through a complex process of financial engineering. While shareholders pursue individual claims against the bank the decision Monday stymies any mass effect by shareholders recovers all the parts of loss of $40 billions from a wall street bank that earned millions of dollars from Enron in banking fees .(Julie Creswel)
Enron's Lawyers: In the events leading up to the U.S. Securities and Exchange Commission (SEC) enquiry, Enron's employees shredded important documents to prevent any indictments.
3.What role did the chief financial officer play in creating the problems that led to Enron's financial problems?
According to Bill Saporito, Fastow earned a reputation of being a money wizard who constructed the complex financial vehicles. He employed techniques that could rapidly exploit deregulating markets for energy, water, broadband capacity and anything else that could be traded. In 1993, Fastow created hundreds of "special-purpose entities" designed to transfer Enron's debt to an outside company and get it off the books-without giving up control of the assets that stood behind the debt.
To prevent degrading in Enron's credit rating, Fastow tripled his staff, to more than 100.He hired various banking experts and giving them the task of selling and buying capital risk.
This effectively allowed Enron's audited balance sheet to appear debt free, while in reality it owed more than 30 billion dollars at the height of its debt. While presented to the outside world as being independent entities, the funds Fastow created were to take write-downs off Enron's books and guaranteed not to lose money.. Fastow made tens of millions of dollars defrauding Enron in this way, while also neglecting basic financial practices such as reporting the 'cash on hand' and total liabilities.
Giles Darby, David Bermingham, and Gary Mulgrew worked for Greenwich NatWest. The three British men had worked with Fastow on a special purpose entity he had started called Swap Sub. When Fastow was being investigated by the SEC, the three men met with the British Financial Services Authority (FSA) in November 2001 to discuss their interactions with Fastow.
REFERENCES AND BIBLIOGRSPHIES:
1.Farrell, O., Fraedrich ,J and Ferrell, L,(2010)Business Ethics: Ethical Decision Making and Cases (8th edition),Houghton Mifflin.
2.Cullen,J(1999)Managing Ethical and Social Responsibility: Challenges for Multinational Companies ,in Multinational Management .a Strategic Approach, International Thomson Publishing.
3.Ackman, Dan. .Enron Files Chap. 11.. Forbes Online 3 December 2001.
Farrell, Greg and Woodyard, Chris. .Three powerful men forged Enron.s path.. USA Today 28 January 2002
4.Miller, Roger and Jentz, Gaylord A. .Business Law Today.. West Legal Studies in Business, 2000.
5.St. Onge, Jeff. .Enron set to file largest-ever Chapter 11.. Seattle Times 30 November 2001.
6.Talaski, Karen. .Enron.s fall sped Kmart into tailspin.. The Detroit News 27 January 2002.
7.Bankruptcy in Brief.. 4 May 2002 http://www.moranlaw.net/bankruptcybasics.htm
8.Cooper outlines Enron reorganization proposal.. Houston Chronicle.com 3 May 2002.
9.Enron Arranges $1.5 Billion of Debtor-In-Possession Financing.. Enron Corp. Press Release, 3 December 2001. http://www.enron.com/corp/pressroom/releases/2002/ene/95-
10.Enron: Crouching Profits, Hidden Debt.. 30 April 2002 http://usgovinfo.about.com/library/weekly/aa011402a.htm
11.Enron Files Voluntary Petitions for Chapter 11 Reorganization.. Enron Corp. Press Release, 2December 2001. http://www.enron.com/corp/pressroom/releases/2001/ene/PressRelease
12.Enron Races to File for Chapter 11, Avoid Liquidation.. Wall Street Journal 30 November 2001.
13.Enron, the basics.. 5 May 2002
14.Frequently Asked Questions About the Chapter 11 Filing.. Enron Corp. Press Release, 30 April 2002
Profnet Round-Up: Corporate Bankruptcy.. Profnet Online 26 February 2002
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