Introduction
Much is learned from the past the, whatever was done in Enron the 7th biggest corporation in America a company with $101 billion in revenue in 2001 not just a method by a leading practice that is still been followed in leading organizations. (Martorelli, 83) But history has witnessed and it has become one of the biggest bankruptcy scandals of the world, whatever has been revealed by Enron, has now become an important element contributing to maintaining the maturity of the big organizations.
It is evident how the employees betrayed their executives, how the loyal employees were fired, and how the families paid the price by investing in Enron. The long list of affected people is still debatable where shareholders lost billions of dollars in share value. Altogether state and municipal also lost pension funds worth $1.5 billion in Enron stock. The remarkable is that the state of Florida alone lost $335 million, Georgia $127 million, the cities like Ohio and New York lost $115 and $109 million respectively. (Martorelli, 83) Here one this is evident that tax money will be diverted to curb the loss caused by the Enron stock whereas other important public issues will be given less funding assistance.
We also know that before Enron collapsed it managed to make huge money by deregulating its energy markets by which consumers suffered the most in California 2000 Enron deliberately blacked out and shut its energy power plant which brought millions of dollars into Enron account. Such power plants caused inflation of power price and charged the customers an estimated $40 to 70 billion dollars. (Prentice, 417) Enron did not stop till there New York, Massachusetts, Montana, and other states have also been the victim of such cowardly acts. Moreover, Enron monopoly is not limited to the boundaries of America it goes beyond as in India Dabhol power project attracted the attention of environmentalists and the general public where Enron officials were expecting billions of dollars in profit, ended up with protests on the streets of India which lead closing down of power project. Enron in search of profit crossed all the ethical and moral values, Dick Cheney the American vice president backed the Enron power project and influence the Indian government.
Growth
Enron came as a result of a merger between Northern Natural Gas Company, a consortium of Northern American Power and Light Company, Lone Star Gas Company, and United Lights and Railways Corporation In 1930. In 1979 the Northern Natural Gas was restructured in the form of a new company with the name of, Inter North Inc, it was the new name that emerged on the New York Stock Exchange. Huston Natural gas in 1985 was the competitor of Inter North. (Weiss, 3) Inter North bought Huston Natural gas and Kenneth Lay as its CEO but interesting here was that Kenneth Lay became the CEO of Inter North even it was the purchaser. Enron was renamed by Kenneth lay and shifted it’s headquartering to Huston from Inter North base in Omaha. Enron did huge business since its creation in the United States the list includes construction, development, water sector, power plants, and expanded its business outside America ending up doing business throughout the world.
The Success Story
Enron was a success because of its innovative marketing and promotion campaigns of power because of its unique ability from 1996 to 2000 it was named “ America’s most innovative company” by fortune and in 2000 its was the in the list of 100 best companies to work for in America”. (Martorelli, 83)
What Went Wrong
Kenneth lay the Enron CEO was replaced again in 2001 because Jeffery Skilling who replaces him a few months ago in 2000 quit. Since then the company started deteriorating, the chief financial officer Andrew S. Fastow had hidden over $1billion in debt had developed offshore partnerships did an accounting mess that was all under the notice of the CEO, and it believed that they both were involved in pocketing the money. (Awe, 63) The company admitted that it had inflated its profits by hiding debt because of that it lost the interest of the investors hence resulting in the massive decline in the share price leaving an adverse credit rating by which Enron couldn’t recover.
Moreover, Kenneth Lay betrayed their employees by showing them the false picture, he knew that the company was going to be in massive trouble but he made false statements and declared that the lowest share price was the result of a bargain. As a result, the employee’s retirement savings were wiped out and employees were unable to sell their stock because Enron disclosed it as a “management change”. Andersen, the Enron accountant knew all about the company well but did not disclose it until the company collapsed. Ken Lay Quit as Enron CEO on January 23, 2002. (Prentice, 417)
Role of Accountant
It is clear that the accountants are the medium of transparency which gives the investors the sense of confidence and guidance to further invest in a specific company but in the case of Enron, the Accountant played a negative role. Andersen formally known as Arthur Andersen and Enron was involved in forging the documents up to January 2002. With the proceeding of investigation, it was revealed that the David Duncan executive of Andersen and Kenneth Lay was involved in sharing the millions of dollars of Enron. David Duncan was fired by Andersen following this story.
The Role of Government
The record shows that Kenneth Lay and David Duncan of Andersen had very friendly relations with the US Government and the relations were based on the Bush SR. Enron had access to the energy policy of the US with the help of Dick Cheney Vice president of the US formerly CEO of Halliburton the gas and petroleum company. Kenneth Lay also had good relations with Clinton Administration and always had a benefited from the governmental policies.
Enron was involved in bribery of Governmental Officials important to discuss is Tom Delay the proponent of energy deregulation in Congress. In 2001 it helped to push the policy in favor of Enron and other energy companies. Wendy Gram the Head of Commodity Future Trading Commission exempted Enron derivatives to be watched so that it can expand its business. A few days later she resigned the body and took a position on the Enron board which she holds to this day. Linda Robertson, senior U.S Treasury Official in Clinton’s period. Robertson helped Enron’s derivatives contracts to sustain by talking to Clinton Administration. Robertson was the key bridge between congress and the white house and the law went in favor of Enron exempting energy trading from oversight, Robertson later become the Head of Washington office of Enron
Who should be blamed?
Dick Cheney: As he had contacts with Enron Administration and favored Enron while drafting the bill on Energy Policy and always facilitated Enron. Moreover, he has never discussed his 6 meetings with Enron officials.
Kenneth Lay: Why did Kenneth Lay encouraged its employee not to sell their stocks and provided the wrong information that declining share price is the result of the bargain, he told the media afterward even know that company is in trouble that its company’s share value will touch to $120 in few days but in months it stopped at $.60 per share. (Weiss, 3) Why did Kenneth Lay ban its Employee from selling their stocks for weeks? Kenneth lay also wrote a letter to one of the top officials of the Federal Energy Regulating Commission that if he changes his view on the deregulating policy of energy only then he may continue his office, but he refused and was fired.
Andersen: Why did Andersen did not expose Enron’s true condition besides enjoying the huge money by shredder documents.
Robert Robin: Former Treasury Secretary used his connections so that Enron should not be downgraded in its credit listing because CitiGroup had loaned $800 million to Enron. Robert tried his best to avoid Enron to collapse because at that time he was a top official at CitiGroup. (Prentice, 417)
The Collapse
Enron’s reputation was shattered as a result of bribery, using political pressure to gain the favor of the interests as it did in the India Power Project and pressurized Bolivia to build the controversial gas pipeline in the world’s only dry forest. Moreover, it also seeded illegal practices for their contracts in Central and South America, the Philippines, and Africa. After the revelation of the fraud and illegal auditing practices by Andersen, the company was on the verge of undergoing the world’s biggest bankruptcy. Enron’s plunge occurred when it was revealed that it’s much of the profits were the results of the deals with the SPE’s (special purpose entities which were controlled by it) and the losses which Enron bared were not reported in its Financial Statements. Enron’s shares which were speculated to touch $120 from $90 stood to $0.30 by the end of 2001. (Awe, 63)
Thousands of Enron employees who have lost their life savings serving the biggest company have filed a case against the administration and officials that includes 29 executives including the chief accounting officer. Mr. Brexter the former Enron Executive was found dead in his abandoned car in a suburb. The Enron Bankruptcy has to lead the way for the strong check over the companies so they may not involve in such illegal practices this regard Congress has drafted Sarbanes – Oxley Act to make sure that such wrongdoings are not followed in the future and transparency is maintained
Sarbanes – Oxley Act
It is drafted so that the investor’s right should be protected as it’s their legal right to know about the exact picture of the company before investing. This act makes sure that proper corporate disclosure is made and advocates the issue of establishing a governmental accounting board so that it is also involved in such issues, auditor independence, corporate responsibility, and enhanced Financial Disclosure.
The bill was sponsored by Senator Paul Sarbanes and Representative Michael Oxley and named after both of them. The bill was signed by President Bush on July 30, 2002, after it was approved by both houses of congress. Originally it is called the Public Company Accounting Reform and Investors Protection Act of 2002.
The Sarbanes-Oxley Act’s major provisions include:
- Certification of financial reports by CEOs and CFO’s.
- Ban on personal loans to any Executive Officer and Director
- Accelerated reporting of trades by insiders.
- Prohibition on insider trades during pension fund blackout periods.
- Public reporting of CEO and CFO compensation and profits
- Additional disclosure.
- Auditor independence, including outright bans on certain types of work and pre-certification by the company’s Audit Committees of all other non-audit work.
- Criminal and civil penalties for violations of securities law.
- Significantly longer jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements.
- Prohibition on audit firms providing extra “value-added” services to their clients including actuarial services, legal and extra services (such as consulting) unrelated to their audit work.
- A requirement that publicly traded companies furnishes independent annual audit reports on the existence and condition (i.e., reliability) of internal controls as they relate to financial reporting. (Prentice, 417)
The Sarbanes-Oxley Act’s requirements
It requires control over the relevant accounts and disclosure of financial statements. It is also important to know why and how the transaction took place how it was supported assessed, processed, and reported. The flow of transactions should be clear so that the affected area can be identified easily. It’s necessary to have such a system where there is no room for fraud and proper segregation of the duties must be there so that no one misuses its authority. It should have access to the management testing and evaluation.
Internal Control According to Sarbanes-Oxley Act
This act covers the two parts in sections 302 and 404. One deals with the proper implementation of effective internal control, accounting practices, maintaining of the record, deals with proper auditing standards, such standards that are not biased, and proper financial disclosure. It has been made compulsory for the companies for the first time to have their attestation on the internal control assessment.
This act emphasizes the implementation of IT-based systems for keeping the record as it’s more reliable. The world is moving toward IT-based solutions and corporations should anticipate this new technology, the use of ERP’s could be more effective for the track and record-keeping which provides the complete record of the events, accounts, sales, etc
Implementation of Sarbanes-Oxley Act
Whether Sarbanes-Oxley Act required or not will be clear by the statement John A. Thain, CEO of New York Stock Exchange “There is no question, broadly speaking, Sarbanes-Oxley Act was necessary.” (Awe, 63) And the question of its effectiveness is more strongly attached with its cost of implementation and whether the companies will anticipate it or not. According to the latest survey of 217 companies, the cost of implementation of such a system is around $4.46 million for companies having revenues over $5billion because the companies will have to restructure their record-keeping techniques and process so that they can be accessed even for a longer time. (Kreitner, 125) This Act will require more auditing hours and money to carry out auditing processes that will kill companies just like a double edge sword as it will hinder their performance because of the frequent interruption of auditors and more money will be allocated for maintaining the transparency.
Corporations Stand of Sarbanes-Oxley Act
According to the survey, many areas should be reviewed for its implementation as many corporations are not welcoming its few provisions. The cost of implementation of such Act is high. This act will further segregate the responsibilities of the employees which will result in less effectiveness of the organization. This act looks at internal control as an exact and accurate remedy but practically speaking it’s the other way round the company is vulnerable to risk and risk management should also be taken into account. Sarbanes-Oxley act underestimates the technology implications but technology can only make this act go forward as proper Record keeping can be done with it.
Recommendations
Effective and efficient processes for evaluating testing, remediation, monitoring, and reporting on controls financial and internal control processes should be integrated. Technology should be given more importance. Articulated roles and responsibilities and assigned accountability. Proper training and education should be given for an effective internal control environment. Organizations should be adaptable to the change
Conclusion
What happened with Enron has changed business practices today and has affected many people on a personal level, as well. The enormity of the crimes has brought the business community to reconsider the issue of ethics and try to understand why Enron-complicit auditors Arthur Andersen went down. New signals are out, from the business schools to public legislation. One shock brought on by Enron’s failure was the sudden worthlessness of its securities. Enron employees, major pension funds, and innumerable others took the hit. Many former Enron employees will be or are facing criminal charges. One committed suicide (and observers have said that he was the only decent one among Enron’s top management). Another is writing a book. Enron is a book that cannot be judged by its glossy cover.
Organizations reap what they sow, an invincible corporate giant still can be brought down by gigantic ethical delinquencies. The seventh-largest corporation in America destroyed itself through every kind of greed. The old saying goes; Lessons learned hard are learned best. Traces of Enron’s evolution, expansion, corruption, and collapse have shaped salient warning signals for everyone. The proper disclosure of financial Statements will benefit the government in collecting the tax and enhance the credibility of the organization. It will ultimately bring more profit for the investors where there was forgery involved. It will clarify the roles and stop the authority to be misused by the executives and directors who have been involved like in Enron and WorldCom etc.
References
Awe, S. C. Pipe dreams: Greed, ego, jealousy, and the death of Enron. Library Journal, 128(5), 2003, pp. 63.
Kreitner, R., & Kinicki, A. Organizational behavior (6th ed.). Boston: McGraw-Hill/ Irwin, 2004, pp. 125.
Martorelli, M. A. Enron: Corporate fiascos and their implications. Financial Analysts Journal, 60(6), 2004, pp. 83.
Prentice, R. Enron: A brief behavioral autopsy. American Business Law Journal, 40(2), 2003, pp. 417.
Weiss, S. F., & Priebe, D. Enron and Worldcom settlements suggest risk factors for directors. Securities Litigation, 19(2), 2005, pp. 3.