The 2002 failure of Enron corporation and Arthur Anderson Co, their auditors - Essay Example

Final Critical Incident Report (Final Exam) Guidelines The 2002 Failure of Enron Corporation and Arthur Anderson Co, their Auditors. The Enron Corporation became such a controversial rise and fall story of a multinational company. Although it has earlier engaged in a very credible energy enterprise, its diversification to products such as weather derivatives and the information technology brought itself to the spotlight, getting awards from prestigious media like Fortune, which could now have lost it's prestige because of Enron itself. This study discusses what happened with Enron, defines the problems that plague the high profile corporation, present solutions and alternatives, as well as give a sweeping opinion on how the problems could have been solved or avoided in the first place from this researcher's perspective alone. Summary: Enron Corporation was an American energy company and considered as one of the world's leading electricity, natural gas, pulp and paper, and communications group of companies. It claimed $111 billion revenues in 2000 and Fortune magazine accorded it "America's Most Innovative Company" for six consecutive years, employing around 21,000 people (Mclean and Elkind, 2003). Enron started out as Northern Natural Gas Company in early 1930s at Omaha, Nebraska. It became an organized holding company Internorth in 1980s, and then it purchased Houston Natural Gas in 1985 of which Kenneth Lay became the chief executive officer. The merged company was named Enron and was involved in transmission and distribution of electricity and gas throughout the United States. It also engaged in the development, construction and operation of power plants, pipelines, and other infrastructure worldwide. It later market and promoted communication bandwidth commodities and other "derivatives" and grew in opulence behind inflated, fraudulent and non-existent financial reports. Enron declared bankruptcy in late 2001. Critics have identified the complicated management approach as one of the culprits that caused Enron's collapse besides an institutionalized, systematic, and well-planned accounting fraud. Diagnosis By 1995 accountants at Arthur Andersen knew Enron was a high-risk client who pushed them to do things they were not comfortable doing. Critics have identified the complicated management approach as one of the culprits that caused Enron's collapse. Initially, the company performed extensive diversification to expand its product and service lines. Because of the strategy, the company experienced robust growth and gained reputation as a multi-dimensional firm. In addition, the firm continued to evolve its business model. Considering the unpredictable circumstances and calculated risks, Enron was successful on paper. This was reflected in the financial reports suggesting the extent of growth in the financial capability of the company. Specifically, the level of stocks reported by the company has skyrocketed. The information provided by the Enron 10-K annual report suggests that it was only in 1997 that the company experienced a decline. According to James Hecker, one of the investors of Enron, Andersen had knowledge on the nature of Enron's operations. The company even branded Enron as a high risked firm that is willing to do all means required to achieve its goals. Moreover, Hecker described the relationship of the Andersen employees to Enron. In the exact words, Hecker said: "Managers in the doorway, thinking out of the box. And I was thinking to myself, I'll bust by butt and then I'll bust my rocks (Schepp, 2002)." This satire showed how generously the employees of Andersen working for Enron were compensated and provided with great incentives. Moreover, Hecker described Enron as a lovely face and a fragile place. Basically, Hecker has knowledge on the true status of the company. Hecker even mentioned in the satire that the managers will soon bring their alibis to court. Precisely, Hecker highlighted the events that will happen years later. The Problem Enron Corporation engaged in too much speculation and failure in management accountability. While the corporation was earning, its executives were investing on personal matters. Physically, Enron appears to be growing as its financial reports suggest growth but in truth, the company was troubled inside as corruption grew from within. Proposed /Alternative Solution It is necessary that (who) investors have an insight on (what) what had been going on within the company throughout the process (when) starting on the day investors become interested to invest. The truth on the state of Enron should have been accessible not only to its accomplice accountants but also, even if unlikely (how), to its stakeholders or major investors. The lack of knowledge by investors in the proceedings of an organization (why) made them vulnerable to fraud and connivance between the management and its auditing firm, as exemplified by the Enron case. Another proposed solution which was undertaken by the US Government was the creation of Sarbanes-Oxley Act. It was passed to emphasize management accountability. The Act mandated strong financial control and boosted the role of auditors. In addition, the Act was created to provide guidelines on desirable and financial reporting standards. Primarily, the Act affected public corporations and financial markets (Lamont, 2005). Basically, several financial intermediaries have failed to accurately establish their position to the investors. In addition, loopholes of previous regulations have been used as scapegoat by firms. Enron's collapse marked the increased concern of regulators on all the aspects that govern the financial service sector. Indeed, ignoring an area of operations will be critical for the industry. Evaluation Initially, the company performed extensive diversification to expand its product and service lines. Because of the strategy, the company experienced robust growth and gained reputation as a multi-dimensional firm. In addition, the firm continued to evolve its business model. The growth in stock is generally perceived as an advantage for the company. Increasing the stocks means that more investors become willing to invest in Enron. This improved the financial resources of the company because the market capital also expands. Accordingly, this performance was fuelled by the intricate schemes of Enron in managing its operations. If there had been an on-hand participation of major investors in the executive and management process, corruption of executives could have been avoided, or minimized. On the other hand, the Sarbanes-Oxley has helped restore investor confidence and corporate accountability (Business Roundtable, 2005). Roundtable, which is a group composed of 160 companies in the U.S. will continue to support the implementation of the Act. Aside from the Act, several companies have incorporated several methods of corporate governance to make firms effective. Also, the Act has resulted to several changes in governance. In fact, the reforms during the firs three years after the Act's implementation have outperformed the changes implemented during the previous decade. Findings Barnhart (2004) pointed out greedy directors, who have acquired various post-graduate degrees in prestigious schools have staged several gimmicks that led to the collapse of Enron. This is essentially an important consideration for most executives and investors, as much as auditing firms. Accountancy is rarely possible in the world of materialism. Profit and greed rule in most business environments so that enough could never be achieved. In favor of material wealth, executives and investors fail to see consequences such as corruption, displacement of skilled and dedicated workers, and at some point, degradation of morale. Vigilance by most investors, the public and the government sector must be at hand in order to prevent corporate abuses such as that of Enron. References Barnhart, B. (2005). Business Journalism. "Journalist tell the Enron story in two different ways." Business Roundtable. (2005). New Business Roundtable CEO Survey Shows Continued Commitment to Improving Corporate Governance among US Companies." New York: Business Roundtable. Greenberg, J. The Reporter. "Enron: The smartest guys in the room." VNU eMedia, Inc. Healy, P. and Palepu, K. (2003). The Journal of Economic Perspectives. "The fall of Enron. Lamont, J. (2005). KMWorld. "Managing Content for Compliance." Information Today, Inc. McLean, Bethany and Peter Elkind. (2003). Smartest Guys in The Room: The Amazing Rise and Scandalous Fall of Enron. Portfolio. Schepp, D.(2002). BBC News Online. "Andersen's trial gets musical. Date retrieved: 13 October 2006, from: Read More