Reaction Paper on Enron Corporation
Enron Corporation is one of the largest companies in the United States that
was formed in 1985 following a merger between Houston Natural Gas Company and
Omaha-based Inter North Incorporated. The CEO of Natural Gas Company became
Enron’s CEO and chairman. The CEO rebranded Enron into an energy trade and
supplier. A competitive entrepreneur joined Enron at an auspicious time. The era’s
minimal regulatory environment allowed Enron to flourish. At the end of 1990s, the
dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet
stocks were being valued at preposterous levels and most investors and regulators
simply accepted spiking share prices as the new normal.
Deregulation of the energy markets allowed companies to place bets on future
prices, and Enron was poised to take advantage. Enron created Enron Online (EOL)
in October 1999, an electronic training website that focused on commodities. With
this, Enron was praised for its expansions and ambitious projects, and was named
“America’s Most Innovative Company” by Fortune for six consecutive years between
1996 and 2001.
Fastow and others at Enron orchestrated a scheme to use off-balance-sheet
special purpose vehicles. This is a strategy Enron used to hide its debt. Enron’s
leadership fooled regulators with fake holdings and off-the-books accounting
practices. It also used special purposes entities, to hide its mountains of debt and toxic
assets from investors and creditors. The primary aim of these special purpose vehicles
was to hide accounting realities rather than operating results. The transactions
occurred were the transfer of rapidly rising stock to the special purpose vehicles in
exchange for cash or a note. These would subsequently use the stock to hedge an
asset listed on Enron’s balance sheet. In turn, Enron would guarantee the special
purpose vehicle’s value to reduce apparent counterparty risk.
The price of Enron’s shares went from $90.75 at its peak to $0.26 at
bankruptcy. The company paid its creditors more than $21.7 billion from 2004 to
2011. A powerful business and one of the largest companies in the United States
disintegrated almost overnight. Leadership managed to fool regulators for so long
with fake holdings and off-the-books accounting.
Enron’s collapse and the financial havoc it wreaked on its shareholders and
employees led to new regulations and legislation to promote the accuracy of financial
reporting for publicly held companies. In July 2002, President George W. Bush signed
into law the Sarbanes-Oxley Act which heightened the consequences for destroying,
altering, or fabricating financial statements and for trying to defraud shareholders. The
Enron scandal resulted in other new compliance measured. The Financial Accounting
Standards Board raised its level of ethical conduct and the board of directors became
more independent, monitoring the audit companies, and quickly replacing poor
managers. These new measures are important mechanisms to spot and close
loopholes that companies have used to avoid accountability.
Truly money is powerful and easy to control minds especially to those who are
greedy. The bigger the company the bigger the risks and the chance of doing some
unethical and illegal acts to raise revenue. People in finance and accounting
department would be knowledgeable and able enough to manipulate the digits in the
financial statements to cover debts, increase stock prices and enhance company’s
liquidity to attract potential investors. But there is a saying that ‘there is no truth that
cannot be revealed’. Later on, Enron Company’s unethical and dishonest
presentations of their financial statements were discovered, stock prices decreased and
even reached zero, and the company became bankrupt and obliged to pay its creditors
for years. These ethical dilemmas came from pressure on the inside and outside forces
and changes in societal values, mores, and norms. The reason why people believe that
entrepreneurial unethical activity is somehow acceptable is that they believe it is the
best for their business and will never be found out. Unethical behaviors occurred also
because of greed, survival, lack of foundation in Ethics, and reliance on other social
institutions and reinforce ethics. Just like the Enron Corporation, the company failed
to highlight the essence of Business Ethics as well as credibility in their work.
The act omitted by Enron Company was a violation to the Sarbanes-Oxley Act
which is a law passed by Congress that requires the CEO and CFO to certify that
their firm’s financial statements are accurate. Enron Company proves that illegal and
unethical acts don’t lead to prosperity and success and this reminds us the importance
of Business Ethics in the world of business and finance.