Enron: The fall of a Corporate Giant

Abstract

The year 2001 saw a sudden fall of Enron devastated and shocked, not just the business world but also disrupted the lives of thousands of employees and the people. Being listed as one of the top ten companies in America, Enron Corporation was the largest natural gas, energy trading, and utility company in the world.  The cataclysmic downfall of Enron is today still one of the most infamous and shocking events in the financial world, and its impacts felt worldwide, which was followed by a sequence of revelations on how they manipulated their way to success.

Introduction

Lauded as the “most innovative company in America” to the being “biggest corporate bankruptcy in America.” With headquarters based in Houston, Texas, Enron Corporation was founded in the 1990s, gaining international recognition amongst the incorporated natural gas and electricity companies throughout the world. With its background in the transmission of natural gas liquids, Enron grew to be one of the largest natural gas transmission organizations worldwide and one of the principal developers and producers of electricity, providing service to industrial and emerging markets, a well as to individual consumers. It became the number one supplier of both solar and wind renewable energy globally. Due to its rapid growth, Enron was listed as the seventh largest corporation in the United States. It gave the impression of a steady company with outstanding revenue, which was designed the mislead their competitors and the public, as to their acclaimed profits, this was only on paper. Enron had created various offshore entities which were being used primarily for avoiding taxes, boosting the company’s profitability. The executives and insiders knew the ramification of this information being made public.  Its investors knew nothing of these duplicitous practices. After unsettling information about its accounting practices surfaced revealing the company’s debt and the extent at which they went to hide their losses, Enron declared bankruptcy under Chapter 11 of the United States Bankruptcy Code in late 2001. 

Journey to the top

In 1985, Kenneth Lay formed Enron, after merging Houston Natural Gas and Internorth Inc., two natural gas transmission companies. Soon thereafter, he hired Jeffrey Skilling as a consultant and who later became the company's chief operating officer.  After the US Congress implementer essence of laws to deregulate the sale of natural gas is the company lost its rights to operate its pipelines exclusively. Nonetheless, Enron positioned and rebranded itself universally, by using former business contracts and started creating new businesses, becoming a trader of energy between natural gas producers and their customers for a fee. Under the guidance of Skilling, the company grew, and the culture gradually changed, emphasizing a more aggressive trading manner. Skimming also went on to change Enron’s accounting system from the traditional to the mark to market accounting system and making Andrew Fastow, Enrons chief financial officer.[1](Healy, Paul M. 2003)

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Ethical assessment

One thing that led to Enrons’ downfall was the lack of transparency.  It was the intent to commit fraud, accounting breach, and to mislead the shareholders. Enron had absolutely no revenue.  The mark-to-market principle that was used can measure the value of an account that can change over time, such as assets and liabilities. Though this is a legitimate practice and one that is widely used to provide a realistic appraisal of a company’s current financial situation, Enron was the first non-financial company to exercise this technique.[2] They were approved the U.S. Securities and Exchange Commission to practice this method of mark to marketing accounting. In other words, Enron was using an estimated income from projects that they had not received payment for and by providing these estimated future net or cost related reports misled their investors. The support and trust of an investor depend on the business prospects and compliance in regards to profitability growth and innovation. “Financial reporting is intended to measure performance, not be a performance. When financial transparency is obscured, it means that real corporate value is out of synch with actual performance. At that point, it is only a matter of time before the principle of mathematical regression lays bare that dirty little secret. The high-wire act loses its footing. The bubble bursts. The numbers fall, and credibility, trust, and reputation fall with them.”[3] (Hasl-Kelchner, Hanna, 2006)

When considering the importance of business ethics, conduct, and practices, it is clear to see that Enron failed on all fronts. Fastow and Skilling masterminded what is known as the Special Purpose Entities where they hide millions worth of debt from creditors and investors. By doing this, Enron's financial reports were free and clear from any debt. Their auditors, Arthur Andersen LLP., were being paid to ignore financial falsity. With all these details coming to light the Securities and Exchange Commission launched an investigation in the transactions between Enron and Fastow SPEs’.   Due to Enron’s growing scandals, the government was forced to enact a new set of rules regulations, and legislation is to monitor the accuracy of financial reporting for all companies trading publicly. The Sarbanes-Oxley Act 2002, a federal law was set in place to reform financial business practices, and impose penalties for tampering with destroying or fabricating a company’s financial records.[4] (Hasl-Kelchner, Hanna, 2006)

On December 2, 2001, Enron preceded to file Chapter 11 bankruptcy protection as its reputation was severely damaged that dissolving itself was the only option. With the unmasking of details relating to accounting fraud, they were facing several federal lawsuits and civil suits filed by both shareholders and employees against Enron and Anderson.

Accountability

Enron’s primary focus was always on its earning end any growth related to its financial incentives. Their business practices lacked transparency as they were unequivocally unethical. They misled their shareholders by delivering higher capitalization reports in order to gain more wealth. In the business world, the underlying assumption is that a business must be profitable. Corporations are owned by shareholders and have a fiduciary duty to their shareholders. Under the law of Corporation, the managers have a responsibility to improve the value of the shareholder investment as well as they are answerable to the owners of the company. Free market economist Milton Friedman argues that it is wrong for managers to use company resources to deal with societal problems. Friedman thinking and analysis is flawed. By using Friedman theory, companies seek ways to justify their bad behavior. Friedman theories have been called unstable and downright evil. Enron's overall focus was on driving share prices up with their progress if dishonesty in generating revenue by selling stocks for higher than they were worth and as such, deceiving the stock market and their employees.[5] (Healy, Paul M 2003)

So how was Enron able to create such an outstanding public image? Currall and Epstein (198), the theory is that trust is earned over time and that although Enron was skillful at manufacturing trust among the investor community, the Enron and Wall Street relationship was multifaceted, as many financial analysts trusted that Enron could deliver superior returns on its stock[6] (Currall and Epstein 201).

Considering Jon Stewart Mills, utilitarianism principle Which does not offer a straight forward approach or method in the side and when an action is morally right for all the situations that one can find itself in. The issue of cost-benefit analysis and if its efficiency calculation is come on business making decisions. Nonetheless, utilitarianism asks that the harm and the benefits of action be compared not just for the decider but for all the persons to be affected by the outcome of the decision. Ethical egoism is also applicable in fact; the entire management team was more focused on their self-interest of gaining more wealth than they were of the shareholders and their employees.[7] (Halbert, T., 2008) One method that can be used to determine what should be done is to identify the different course of action that applies to the situation. Enron did not apply this strategy, based on how quickly their stocks fell, forcing it to file for bankruptcy. It was their duty to be responsible for exercising integrity, along with control and creativity.

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Conclusion 

Enron founded in 1985 grew to be the biggest in its field with executives that worked to create a façade which contributed to its global expansion, did their best prevent it from becoming public knowledge of its failings. For the three top executives, their goal was to have an appealing image, a solid history, a reputation for keeping competition at bay while attracting more investors.  The executive team not only changed the policy of how business was done at Enron, but they also changed the culture and succeeded in building an outstanding reputation of the company.  A reputation that was highly innovative and profitable company boosting an annual income of over $100M and whose share price was being sold between $80.00 - $100.00 for one.

Enron engaged in unethical practices by encouraging their staff in a managerial position to become involved in fraudulent actives and committing crimes. It advocated for a “free market” where a man’s success is determined in terms of his wealth. At the time of Enron’s collapse, it was the biggest corporate bankruptcy to hit not only the US but also the world. It ended with several of its top executives being sentenced to prison.

Though there are various perspectives as to why Enron’s bankruptcy scandal became the largest of this century, it is safe to say that it resulted from its overall actions.   The rise and fall of Enron is not one that should be ignored but one to which close attention should be paid,  to both the political and economic aspects which contributed to its outcome. The fall of Enron was on the accumulation of the consequences of their action over some time.  

Works Cited

[1] Healy, P. M., & Palepu, K. G. (2003). The fall of enron. The Journal of Economic Perspectives, 17(2), 3-26. Retrieved from https://search-proquest-com.ezproxy1.apus.edu/docview/212077863?accountid=8289

[2] Enron Scandal: The Fall of a Wall Street Darling - Investopedia

https://www.investopedia.com/updates/enron-scandal-summary/

[3] Hanna Hasl-Kelchner, 2006: The Business Guide to Legal Literacy: What Every Manager Should Know About the Law: Chapter4. How Legal Leverage Creates Value and Competitive Advantage  http://ezproxy.apus.edu/login?url=http://ebooks.apus.edu/BUSN311/Ch4.pdf

[4] Hasl-Kelchner, H. (2006). The business guide to legal literacy: What every manager should know about the law. [Books24x7 version]. Appendix C - The Lessons of Sarbanes-Oxley.

 http://ezproxy.apus.edu/login?url=http://ebooks.apus.edu/BUSN311/AppendixC.pdf

[5] Healy, P. M., & Palepu, K. G. (2003). The fall of enron. The Journal of Economic Perspectives, 17(2), 3-26. Retrieved from https://search-proquest-com.ezproxy1.apus.edu/docview/212077863?accountid=8289

[6] Currall, Steven and Epstein Mark. “Lessons from the Rise and Fall of Enron.” Organizational Dynamics, 32.4 (2003): 193–206. PDF file.

[7]Halbert, T., & Ingulli, E. (2008). Law & ethics in the business environment. (6th ed ed.). Mason, OH: South-Western Pub. Chapter One.