Critically Review Enron Scandal: How & Why Enron Corporation Collapses. My opinion on how to protect a company from collapse.
Critically Review Enron Scandal
Enron Corporation, an energy company based in Houston, Texas, was involved in one of the most devious economic scandals. The company was also a commodities and services organization that served much of the country. Multitudes of financial results issued by the company have been found to be based on a systemic scheme that can be distilled down to pure accounting fraud.
Enron’s relationship with accounting firm Arthur Anderson had been challenged numerous times. Questionable accounting techniques were brought to light, and many suspected that the stench of fraud was lingering around the business. During the profitable years, Enron’s stock price was above $90 per share. However, the scandal that eventually was revealed toppled the business in an instant by Bottiglieri, Reville, and Grunewald. The stock closed in 2001 at an ultimate low of 26 cents a share. Furthermore, Enron’s inevitable declaration for bankruptcy.
Kenneth Lay, the founder of Enron, promoted the importance of high stock prices above all else. He pushed employees to focus on rising rates of return by trading assets and borrowing more money. An asset free balance sheet meant that new resources could come in and trick the public into thinking that the company was hugely successful. Lay essentially began the craze for high earnings, an obsession that cost his company its life. Ultimately, it was Lay’s role that set in motion the collapse of Enron.
Andy Fastow, Enron’s CFO, was a master at manipulating liabilities. He used a technique common among energy corporations that used special purpose entities to relocate liability away from Enron. He made it so that the stock price per share would continually increase, which allowed it to continually hold a high investment rating. Fastow was the reason that Enron got away with the scandal for so long. He enabled the company to hide behind false information and comfortably take advantage of the system.
Enron, as a company, completely fell apart after the collapse. It was forced to renounce earnings with multiple partnerships such as Chewco Investments and JEDI. The corporation was then required to recover profits back to 1997, which amounted to just $586 million which was just 20% of the estimated earnings. The stock prices dropped to mere pennies and lost all consumer and financial buoyancy. Enron declared bankruptcy shortly after
Enron’s shareholders did not benefit from the greed of the executives. Those that had their pension funds financed in the company lost almost everything. Consequently, the SEC and Congress worked swiftly to begin immediate restructuring to reduce losses like those experienced, in the future. A $40 billion lawsuit followed the collapse, demanding compensation for the shareholders’ worthless stock. The collapse destroyed more than $2 billion in pension plans.
The Enron workers have suffered immensely and in most cases lost all that McLean and Elkind “The Guiltiest” had put in the company. One employee, Charles Prestwood, lost $1.3 million in the Enron collapse. Money entrusted in the company in retirement savings or investments disbanded overnight. The SEC announced after the crash that they would try to regain as much of the missing money as they might through their justice system. Enron employees have fired abruptly without issuing any notice. Employees also need to vacate the company within 30 minutes. So, the company should be aware of the economic situation and the factors of the company’s downfall. We must always monitor and speed constantly.
Enron executives also felt the consequences of the collapse. Paula Rieker was charged with insider trading when she sold just under $1 million worth of shares just a week before the collapse. Skilling was charged with 24 years in prison due to mostly charges of securities fraud. Lay was charged with 45 years in prison but died before the sentence was scheduled. Fastow was sentenced to 10 years in prison with no parole.
My Opinion on Critically Review Enron Scandal
So in my opinion the company should be aware of the economic situation and the factors of the company’s downfall. We must always monitor and speed constantly. Instead of the company’s Enron wasting the struggle to make a loan to support Enron’s business.
The company should try to cover back the share that employees have invested in the company. So no company still bears debt in terms of banks and between employees but often if the share, if the company loses indirectly the person involved or invests with the share also loses. This is because if the employee wants to claim rights, the company has nothing, they want to sue the company is under bankruptcy so no point. From this, the company must take care of management at least issue a notice saying the company can’t cope for the next month, so employees can take time from the issuance of the notice to find a job.
Besides that, is that the ethical choices of corporations need to be more closely monitored. If an organization is left unchecked, it has the ability to abuse the system and do whatever it wants. I believe that due to the Enron collapse people will pay more attention to how corporations operate even if they cannot directly control the ethics of the company. At least in this case there will be significant pressure to do what’s right.
Last but not least, that our group can conclude was organizations can be as ethical or unethical as they want. They will treat their employees, shareholders, partners, and creditors however they want. Sometimes corporations will act in their best short term interest, but there’s also the option to behave properly and look at the long term goals. Risk tolerance can be a good thing, but it is up to the corporation to decide how much risk they are going to take and at what cost are they going to take risks. We can do our best to regulate and criticize, but in the end, it’s their call. We can only hope they do the right things.