When considering whether or not to invest money, many Americans have become hesitant. Shock waves of the Enron, Tyco, and WorldCom scandals can still be felt more than ten years later. As Americans witnessed the loss of thousands of dollars by Enron investors and employees, they became timid about investing their life savings not knowing if they too would receive nothing in return. With the knowledge of how a decline in Financial Marketing would greatly affect the U. S. economy, Congress eagerly began pursuing ways to reinforce America’s faith in investing their hard earned money. Government officials wanted to more accountability for a company’s principal officers, a line of separation between the company and its auditing firm, and defined punishments for non-compliance. The U.S. Congress passed the Sarbanes-Oxley Act of 2002 with the anticipation of restoring America’s confidence in investing.
The fall of Enron
Enron was a large corporation that marketed natural gas and electricity in North America. The once corporate giant, which was headquartered in Houston, Texas, was listed on Fortune’s “Most Innovative” in the United States for several years and was ranked #7 on the Fortune 500 list in 2000 (Frontain). The company had reported earnings of $100 million dollars in the year 2000 and was believed to be worth billions in the stock market exchange (Lehrer). As company officials of Enron used secret investments and fraudulent mathematics to increase the company’s value, the company’s stock prices drastically increased. Company insiders who were aware of the inflated stock prices quickly sold their stocks while prices were high. However In 2000, the company hit rock bottom. PBS.org reports that “When word got out that Enron...
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...guilty of this type of wrong doing. Congress wanted companies to understand that anyone wishing to operate in the manner that Enron chose to operate would be heavily prosecuted for their actions in hopes of restoring faith in the criminal justice system.
Works Cited
A Guide To The Sarbanes-Oxley Act. 2006. 13 November 2013 .
Frontain, Michael. ENRON CORPORATION. n.d. 11 November 2013 .
Lehrer, Jim. Not Business as Usual. 30 January 2002. 11 November 2013 .
Sarbanes-Oxley Essential Information. 2012. 11 November 2013 .
Sridharan, Uma V., Lori Dickes and W. Royce Caines. The Social Impact of Business Failure: Enron. 2006. 2013 13 November .
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
A documentary film released in 2005 called the Smartest Guys in the Room reveals the shocking collapse of Enron. The Smartest Guys, Kenneth Lay, Jeff Skilling, Andrew Fastow, Lou Pai, Clifford Baxtor, and Arthur Anderson, were all involved with America’s ultimate Corporation Scandal. But who do we blame? Enron had over 20,000 employees and was founded by Kenneth Lay, CEO of Enron, in 1985. Lay wanted to push his views of deregulation which pushed him to start the company (SGR). The first event that happened leading up to the downfall was the president, Mr. Borget, and his traders manipulating the company’s earnings and exporting the profits to their personal account. When Lay made the decision to not fire them, it definitely raised the
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The Enron Corporation was founded in 1985 out of Houston Texas and was one of the world 's major electricity, natural gas, communications, and pulp and paper companies that employed over 20,000 employees. This paper will address some of the ethical issues that plagued Enron and eventually led to its fall.
Many organizations have been destroyed or heavily damaged financially and took a hit in terms of reputation, for example, Enron. The word Ethics is derived from a Greek word called Ethos, meaning “The character or values particular to a specific person, people, culture or movement” (The American Heritage Dictionary, 2007, p. 295). Ethics has always played and will continue to play a huge role within the corporate world. Ethics is one of the important topics that are debated at lengths without reaching a conclusion, since there isn’t a right or wrong answer. It’s basically depends on how each individual perceives a particular situation. Over the past few years we have seen very poor unethical business practices by companies like Enron, which has affected many stakeholders. Poor unethical practices affect the society in many ways; employees lose their job, investors lose their money, and the country’s economy gets affected. This leads to people start losing confidence in the economy and the organizations that are being run by the so-called “educated” top executives that had one goal in their minds, personal gain. When Enron entered the scene in the mid-1980s, it was little more than a stodgy energy distribution system. Ten years later, it was a multi-billion dollar corporation, considered the poster child of the “new economy” for its willingness to use technology and the Internet in managing energy. Fifteen years later, the company is filing for bankruptcy on the heels of a massive financial collapse, likely the largest in corporate America’s history. As this paper is being written, the scope of Enron collapse is still being researched, poked and prodded. It will take years to determine what, exactly; the impact of the demise of this energy giant will be both on the industry and the
Investors and the media once considered Enron to be the company of the future. The company had detailed code of ethics and powerful front men like Kenneth Lay, who is the son of a Baptist minister and whose own son was studying to enter the ministry (Flynt 1). Unfortunately the Enron board waived the company’s own ethic code requirements to allow the company’s Chief Financial Officer to serve as a general partner for the partnership that Enron was using as a conduit for much of its business. They also allowed discrepancies of millions of dollars. It was not until whistleblower Sherron S. Watkins stepped forward that the deceit began to unravel. Enron finally declared bankruptcy on December 2, 2001, leaving employees with out jobs or money.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Enron was in trouble because of something that almost every major corporation during this time was guilty of. They inflated their profits. Things weren't looking good for them at the end of the 2001-year, so they made a common move and they restated their profits for the past four years. If this had worked to their like they could have gotten away with hiding millions of dollars in debt. That completely admitted that they had inflated their profits by hiding debt in confusing partner agreements. Enron could not deal with their debt so they did the only thing that was left to do, they filed for chapter 11 bankruptcy. This went down as one of the largest companies to file for bankruptcy in the history of the United States. In just three months their share price dropped from $95 to below $1.
Enron Corporation was based in Houston, Texas and participated in the wholesale exchange of American energy and commodities (ex. electricity and natural gas). Enron found itself in the middle of a very public accounting fraud scandal in the early 2000s. The corruption of Enron’s CFO and top executives bring to question their ethics and ethical culture of the company. Additionally, examining Enron ethics, their organization culture, will help to determine how their criminal acts could have been prevented.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron.
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,
Enron’s stock price fell from 90 dollars to 50 cents a share. Because of the executive’s choice, the employees lost their entire pension fund and any other money they had invested in the company.