Outcome Of The Situation And Its Impact On Stake Holders Accounting Essay Accounting Essay

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The Enron scandals presents one of the most popular case studies in recent times that exposes the ethical misconduct that corporations can present in a global economy. This paper presents the case as it occurred and the various ethical issues that are associated with the debacle. It tackles issues from giving a background of the company to what led to its demise. This provides the ground work for analyzing the effect and impact Enron left in its wake. It also presents how ethics would have played a positive role in the business activities at Enron.

Introduction and background information

Enron started out simply as a pipeline company based in Houston in 1985 after the merger of Internorth and Houston Natural Gas. It however experienced massive expansion during the Reagan go-go years when the energy policy in America underwent wholesale deregulation. The company continued with its upward growth during the Clinton years. This saw the company expand from the mere oil pipes operator to an energy broker with the company trading electricity as well as other commodities that are energy related. The strategic plan of the plan included the supply of electricity for sale by locking fixed prices on its supply contract and then hedging the same contracts in the market. The company enjoyed tremendous growth to become the largest trader in energy worldwide earning 101 billion dollars in 2000. The company has adopted a growth strategy of 15 percent annually.

Enron venture move into the online trading with its commodity being energy was impressive; it was as if Wall Street was specifically intended to deal in energy. On the online market, Enron by its own held 1,800 contracts. It had virtually total control of the United States energy market. Enron shares were trading at 85 dollars each by the end of 2000. The company had its employees invest in its stock with various programs in place to provide employee with retirement and savings plans tied to the stock.

As completion in energy trading increased, Enron began diversifying into other activities. This to a large extent, this proved to be disastrous as the earnings began to diminish. Its acquisition of a water business was an instant failure. On the international front, things were not any better with the power plant in India and Brazil going south. India's power plant venture was hampered by poor regulatory and political relations in the country which lead to the state utility's failure to pay their power bills. In 1991, the company further ventured into the broadband and fiber optics market. Again, the company was not able to anticipate the growth of this market resulting in massive loses from the investment. This massive diversification is what contributed to the bleeding of the once strategic company just line in the case of Corning as well as other companies.

Problems at Enron

Into the 21st century and Enron was already a giant middleman. The Washington post is note as referring to it as a traditional exchange hybrid. The company was not merely bringing the sellers and the buyers together but went further to enter into a contact with the sellers and the buyers allowing it to make money in the selling prices and buying prices margins. This game was on a massive scale and Enron was equally up to it playing its card close to its chest. Most of the sides that were in play did not no their role in the complex contracts. The company had in its employment legions that were tasked with fashioning a masking facade that portrayed the company's limitless profits. This was in an effort to portray Enron as being healthier and profitable (Bauer 2009).

The company also practiced what many refer to as the mark-to-market accounting approach that was under the rules created under FASB for the energy traders. This allowed it to include in its financial records and earnings, profits that it was expecting to earn on its energy contracts as well as estimates of the related derivatives. This standard allowed many companies, Enron included to post quite substantial earnings for non-cash earnings they had still to acquire or would acquire sometime in the future. This financial reporting tool is intended to provide some insight into company's true value by marching their contracts to commodities' market prices and the fluctuations in prices. However this method is purely speculative, since the future earnings on these contracts is subjective. The numbers placed on earnings are based on assumptions of various market factors (Bauer 2009).

Many analysts have often complained about this accounting method because of the non-cash earnings. These same analyst also revealed their concern at the Enron's non-cash earnings which were consistently more that the actual revenue. Further concern arose from the discrepancies between the company's cash flow and margins and the earning records which were phenomenal. Questions were often raised on how the company managed to make money as its operating margins were noted as being very low for the revenue it reported. However, the company was a darling of Wall Street as it met its targets consistently. Skepticism however lingered on the numerous transactions carried out off-the-balance sheet. These early questions, for instance by Bethany McClean, Fortune Reporter and by Mr. Chanos, were often dismissed readily (Bauer 2009).

According to Mr. Olson, Merrill Lynch, questions of how Enron was making money were often met by the same reply: the company is part of a new economy, u just do not "get it". On his part, Olson advised clients from his company against investing in the Enron Stock. This was because it is unwise to invest in something that one does not understand. Merill Lynch went ahead to fire Mr. Oslon although they denied it had anything to do with Enron, which was a very critical client for the company. Merrill Lynch would come to be associated with the "wanna buy a barge deal engineered by Andrew Fastow, Enron. Merill Lynch bought the Barge from Enron temporarily allowing it to meet its goals on numbers. As such, the company participated in the earnings' management that was going on at Enron (Bauer 2009).

Enron not only suffered from mark-to-market accounting problems but also from minimal disclosures regarding its numerous off-the-balance sheet liabilities. This strategy allowed the company to paint a picture with its financial statements that masked the risks that the investors were putting them selves into. By the time it was collapsing, the company has up to 3000 off-the books partnerships, entities, limited liability companies (SPEs, Special purpose entities) and limited partnership. The purpose of all these was to carry the company's debt and obligations which had been spun off but would not under disclosure in the company's financial reports. This was justified under the FASB 125 which indicates that the company was not required to disclose obligations and debts held in off-the-books entities as long as Enron did not own more the 49 percent of the controlling interest in these entities. Exceeding 50 percent of other entities required the disclosure of all transactions carried out by the entity as a related arty transaction (Bauer 2009).

Enron had a complex network of off-the-book entities with some of its officers acting as these companies' principles. The principles benefited form commissions acquired from the purchases of assets held by Enron to them. Enron's CFO, Andrew, Farsow, as well as his wife Lea, also a senor employee at Enron, acted as principals for most of these entities. Their involvement was on absurd level that some of the SPE's earning could actually come in through their two young children. The description of LLM Cayman, LP, by Enron in 1999 describes the transaction relationship it had with one of its SPEs. It described the entity as a private investment company specializing in the acquisition of energy related investments. It also indicated that one of its senior officers was also a managing member of the entity (Bauer 2009).

These partnerships allowed Enron to transfer from its books assets along with the assets' debt to the partner entity. The outside entity was only required to fund as little as three percent of this partnership. In most cases, Enron provided the initial money to the investor. In addition, Enron would guarantee a bank loan to secure the purchase of the asset by the partnership. Collateral for these loans was often Enron's stock in situations where the bank determined that the asset was not sufficient in case the loan was defaulted. By the time the company was collapsing it had 38 billion dollars in debt through its various SPEs while its balance sheet indicated only 13 billion dollars (Bauer 2009).

The complexity of these off-the-books loans as well as the debt transferred to the entities was that most of these corporations were Cayman Islands-based. This made up to 881 Enron corporations with 700 of them actually formed in the islands. The effect of this is that Enron had the benefits of keeping most of its debt out of its balance sheet as well as enjoyed numerous tax benefits as it operated tax free in the Caymans. This also enabled the company to pay very little in terms of federal income taxes form 1997 to 2000 (Bauer 2009).

Outcomes of the situation and its Impact on stake holders

Primary stakeholders

The business practices affecting the top management include the concealment of dents as well as the overstatement of the company's earnings. The top management also abused its power by selling their stock earlier in order to gain wealth while leaving the other critical stakeholders were left to shoulder the massive losses since the management had failed to disclose the company's actual performance results. The company also limited its fiduciary duty by failing to increase the wealth of its investors with the top management failing by not applying sound business practices. The top management also created as well as sustained the company's a work culture s that rewarded the employees' efforts fro financial results at whatever cost. The top management did not put a ceiling on the moral limits the company would go to allowing it top turn into a moral cesspool. These practices resulted in moral harm to this top management. Character erosion was a major effect with this with such vices as dishonesty arrogance, greed, cowardice, selfishness, indifference and hypocrisy reigning amongst the top management. This group also suffered from a loss of social and business standing after the scandal became public. Some of the main player faced imprisonment while other were faced with bankruptcy or/and risk fines. The situation is in particular in that it badly inhibited those employees who were well intentioned from doing what was right (Milhaupt & Pisttor 2008).

When considering the investors, we see that they hid Enron's debt and falsely enhanced its profits through non-transparent and secret SPE s as well as partnerships that were kept-off-the books. In addition, the institutional investors accepted the story by Enron regarding the investor relations although passively. This resulted in huge financial losses for both the individual as well as the institutional investors. It also resulted in the loose of trust in the general stock market by the individual investor in America. Further still, the American capital credibility lost international credibility as a result of the crony capitalism (Milhaupt & Pisttor 2008).

Employees were also greatly affected by the scandal. Enron required its employees to buy and hold its shares in their retirement savings account so as to sustain the company's losses. This is despite the fact that the top executives could sell their shares for profits. In addition to this, most of the employees ignored the whistle blowing of some of their fellow employees as well as ignored the malfeasance being propagated since their retirement portfolios continuously rose. These practices had numerous moral impacts. The moral right of stocking information in an accurate and timely manner was violated. The company also participated in the devaluation of the participation in economic democracy in matters of corporate governance since they ignored employee whistle blowing. The employees were also subjected to the practices which denied them the freedom and right to diversify their retirement funds. Most of the employees also lost their lifetime pensions in the collapse. Loyal employees to the company were subjected to injustice as disproportional harm was inflicted on them. The company further disrespected the employees' contribution of labor to the success of the firm (Milhaupt & Pisttor 2008).

The government involvement comes into play since the company used its lobbying and campaign influence to enable deregulation by the government. This further ensured limited liability as well as reporting requirements that were minimal and thus allowing the stakeholders to be victimized. This forced the government to enable the powerful private interests to unfairly reign above the public interest. This had the impact of eroding the public trust in the government's ability to protect them from abuse of power by businesses. Regulatory standards as well as their enforcement also suffered from credibility. The government is now under pressure to redress grievances made as well as secure remedies for groups in the lower socioeconomic strata as well as other accompanied risks (Milhaupt & Pisttor 2008).

The customers suffered from the higher prices the company charged as a result of its monopolistic control of the energy resources it traded in which resulted in a loss of loyalty by consumers. The price gouging resulted in then unfair deprivation of markets in the west coast as well as alternative markets.

In its role, the company's board of director had knowledge of the risky financial practices conducted and could have prevented this but rather choose to do nothing. The board also was responsible for abdicating their substantive responsibility to proved corporate oversight as well as failed in their role to ensure effective audit control as well as a coordination of the ethics systems was effective. This board also lacked in depth as it s lacked independent directors as a majority to exercise oversight of the processes of audit that was capable. The board is also guilty of not democratizing the power structure only playing to legitimize the decisions made by the executives' hierarchy. It also participated in board activities that were interlocking while remaining rather silent in the executive's accountability. As such the board erodes the respect held on corporate board governance while exposing its members to possible civil and criminal litigation. It also devalues the significant role the corporate oversight as well as the participation in democratic economy plays in corporate governance. Further more, the participated in the managerial malfeasance that resulted in all stakeholders injuries (Milhaupt & Pisttor 2008).

Secondary stakeholders

The main secondary stakeholder was Arthur Anderson, LLP, the external auditor and certified public accounts. The company was pressurized by Enron to use accounting practices that are questionable which exacerbated the auditor's participation in condoning the off-the -balance sheet financing, a conflict of interest as well as its role in facilitating management fraud. Morally, these actions impacted the audit firm since it caved in to pressure for fear of losing its consulting business. The company also suffered a collapse of its professional standing and independence as well as the concern it held for the good of the public. The company also became an accomplice as it shredded documents and as such obstructed justice. As such, the company risked being limited in the consulting work in auditing. The company also lost its professional service credibility and reputation. As it stands, the company faces demise or either a hostile takeover and/or bankruptcy. The company was disgraced by how easily it was manipulated into violating the public and market trust. The company's actions also provoked the government into creating a board tasked with overseeing the corporate audits as well as discipline professionals in the auditing sector (Milhaupt & Pisttor 2008).

Vinson and Elkins acted as the external legal services to Enron. The company was pressurized into using legal practices that are questionable which contributed to the legal condoning of employee and investor fraud as well as contributed to the firm's loss of reputational capital. The impact on Vinson and Elkins is similar to that suffered by Anderson. In addition, the company violated the contractual right of the client to timely and accurate legal services that are professional. The company's actions also delegitimized the role of the stakeholders in corporate governance (Milhaupt & Pisttor 2008).

Financial suppliers such as J.P. Morgan, Citigroup and Merill Lynch were pressurized into boosting Enron's credit worthiness. The credit rating agencies were also deceived with regard to the performance of the company financially. The creditors and suppliers were subjected to loss of reputation as well as lacking inadequate due diligence in the scandal. These companies could still be in risk of civil litigation in future. Enron also perpetrated disproportionate unjust harm to those creditors and suppliers who trusted the company. This further furthered the view of crony capitalism that further eroded credit rating agencies credibility (Milhaupt & Pisttor 2008).

The community and society was also affected. The policy on community relations destroyed social capital though layoffs, bankruptcy as well as abuse of power by the top management. This had the impact of leading into broken families as well as social ills that will endure as a result of abrupt job losses as well as retirement savings. The former vice chairman who was tortured committed suicide which contributed to social and family losses. Thee scandal also had the effect of externalizing the costs of social, health and emotional damages onto the American society. Community trust was eroded by the scandal as well as the expansion of cynical resentment by the community (Milhaupt & Pisttor 2008).

Tertiary stakeholders

The scandals impact also extended to the taxpaying public. The practices of Enron promoted aggressively private business interest that has no consideration from the interest of the public as well as any regulation by the government that was appropriate to protect the public. This shifted the risk to the taxpayers who had to cover the collateral damage of the bankruptcy. The impact of this outcome is the public was faced with an increase in taxes as well as the public resources that were allocated in order to pick the pieces after Enron's negligence and malfeasance (Milhaupt & Pisttor 2008).

The media was also drawn into the scandal. In particular, the media relations policy was compromised as it was systematically manipulated into believed that the financial conditions as well as the accounting practices were sound and that the executive at Enron were not abusing power. The credibility of the media to be able to detect early as well as disseminate to the public, information regarding business corruption was also compromised (Milhaupt & Pisttor 2008).

Enron questionable tactics were meant to sustain its industry leadership by using unconstrained measures. This tactics however forced competition that was law abiding out of business. Government remedies were also shut down by the company's self serving practices as well as withholding sensitive information. This resulted in the whole industry being tainted by the actions of one (Milhaupt & Pisttor 2008).

Enron also trivialized and on occasion completely ignored compliance to accounting managerial, legal as well as financial professional standards. This resulted in the erosion of both the public and professional respect of the professional and business practices in America. The insurance rates were also raised so as to cover professional and business liabilities further locking out smaller players. The company also failed as a market leader to design structures based on economic democracy on organizational governance and power that could have been used to the property of other ventures in the country (Milhaupt & Pisttor 2008).

NGOs also suffered in that the bankruptcy contributed to philanthropic donations drying up as well as a victimization of parties that were innocent on a wide scale. This was an utter disregard to some of the interests by non governmental organizations in their effort to ensure corporate social responsibilities as well as well as the furthering general human and nature welfare (Milhaupt & Pisttor 2008).

In a globalised economy, Enron's scandal also stretched to global citizens. This in effect was felt in the possibility of Enron's corporate irresponsibility as well as America's crony capitalism extending to other nations under the pretence of globalization and free trade. The concept of Deregulated markets lost faith around the world. This also extended to the ability of American managers to make a contribution to a better world where equity and growth prevails (Milhaupt & Pisttor 2008).

Enron's punishment and its fairness

The best description for the aftermath of Enron's scandal is 'gone'. All the money is gone, the once great company is gone, thousands of jobs are gone, the boards of directors who stood by and watched the rot are gone, documents that could shed more light on the corrupt activities are gone and the shareholders' investment profits, lifesavings and pensions are all gone. What now remains is the ridiculous amount of money that will be used in the process of uncovering the scandal in terms of fees paid to accountants, investigators, and lobbyists, criminal and civil attorneys (Franzese 2009).

Few answers have been uncovered in addition to the little comfort derived in the effort to have the guilty parties brought to book. This is because of apparent lack of prosecutorial interest in seeing justice being served. Most of the gains from the debacle have so far not been frozen, for instance, all the assets or Ken Lay, international player which allows this players to mover the money perhaps to safer havens. In the meantime, courts are focusing on some the company's underlings. Michael Kopper, Fastow's close ally confessed to two counts, one for conspiracy and the other for wire fraud. This was by manipulation of the off-the-balance sheet partnerships with an aim of hiding the financial health of Enron and as such defrauds security holders. He is still awaiting sentencing as he continues cooperating in the case. Other such as Fastow himself and Balden, have also been charged with countless charges of conspiracy and wire fraud, crimes for which they are still to be sentenced. 37 million dollars belonging to Fastow has already been frozen (Franzese 2009).

Author Anderson has suffered most for its role in failing to provide the stockholder, creditors and employees with honest audit of Enron. Found guilty of conspiracy, the company was fined for obstructing justice although it was not held accountable for shredding numerous documents that would have been used in investigating Enron. The fine includes a half a million dollar in fines and probation for five years. Further, the company has been banned from ever auditing public companies. In addition, the company will pay 60 million dollars to shareholders, creditors and employees of Enron. Only one employee from Anderson, David Duncan, ahs been charged for obstruction of justice. Arthur Anderson just like several other entities that had an association with Enron is gone (Franzese 2009).

Although indictment continue to be handed down, it all comes down to who knew the goings on in the financial deals that took place. The board's members have managed to so far avoid being dragged into the investigation despite the pivotal role of their position. When it boils down to it, Enron was a political company and it manipulated the political class to help run its activities. The main players have as such managed to come out unscathed even thought they facilitated the loss of life saving for thousands of people, as well as made paupers out of people who had been saving for retirement among other ills. It is shocking that people like Ken Lay, CEO of Enron will escape without ever paying for their role in these crimes (Franzese 2009).

The Role ethics would have played in the business activities at Enron

The case of Enron demonstrates the importance of fundamental ethical standards in a capitalist system. Ethics is what brings about trust; the lack of trust is what makes a capitalist system collapse. The role of ethics in the business activities of Enron is apparent after the scandal erupted than it was for the main players as they escalated the efforts of the company to cover up the losses it was accumulating from its diversification. Considering various ethical obligations that such an organization has towards its stakeholder would have enabled it to successfully adopt strategies that would have mitigated the negative impacts it left in its wake after it collapsed (Carol & Bucholtz 2008).

The main ethical obligation of any corporation should be upholding its stakeholders' interests while making business decisions. This works to link organizational, societal and individual interest. In areas that are ambiguous such as the case of Enron using critical thinking comprises of a main part of the decision making process. The development of character although important needs to be linked to competence so that participants can understand the approaches and risk in managing ethics as well as compliance in an organizational context that is complex. Ethical decision by such huge and complex organization need a regulatory system as well as national culture that is strong enough to affect the decision making framework (Carol & Bucholtz 2008).

Business ethics demands that the top management to exhibit leadership that is values-based. This should also include purposeful actions that should comprise of planning as well as implementation of appropriate standards conduct as well as transparency and the genuine improvements of the ethical performance of the organization in question. Ethics demands that individuals in organization exhibit personal values to guide policies, actions and decision of the organization. However this is merely one aspect of the requirements (Carol & Bucholtz 2008).

Ethics demands that the ethical behavior be on a n organizational level and not just on the individuals tasked with making decisions and implementing them. Ethics would have as such ensured that Enron planned and implemented business standards that complied with set standards in an effort to structure its activities and resources with an aim of achieving ethical objectives in a manner both efficient and effective. This would have helped Enron to avoid the damning misconduct witnessed (Carol & Bucholtz 2008).

Conclusion

The scandal at Enron exposed what a lack of ethical business practices can do to not only an industry but the country in general. It exposed the failures of most corporations in their obligations to be socially responsible in an effort to maintain their growth and coveted image at the expense of its stakeholders. What was exposed at Enron portrays the picture of a business world driven by arrogance and greed with the regulations and oversight put in place to protect the innocent party being overlooking and lacking proper implementation procedures. This resulted in the damning report that set off one of the worst financial crisis in the modern globalised economy. The ills of the debacle are many but so are the lessons to be learned regarding ethical business conduct and corporate social responsibility.

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