Identify an event or series of events that occurred in the financial marketplace falling within the realm of Financial Management, Financial Institutions and Markets, or Investments that raise significant ethical questions. Analyze the events, public policy responses and their impact on the financial markets and economy at large. Suppose you are the CEO of a well respected, multi-million dollar energy company. You stand at the forefront of innovation and you are world-renowned for your pioneering efforts in the energy industry. However, due to a series of poor financial decisions, your company is on the verge of bankruptcy. You realize that in order to protect your own interests and investments, desperate measures need to be taken. Just exactly how much are you willing to sacrifice? Are you willing to risk everything? Imagine your company is Enron. Imagine your name is Ken Lay. Many remember and know of Enron not because of its reputation but because this company filed one of the largest bankruptcies to ever occur in American history. Enron began its reign as a powerhouse company when congress passed legislation that deregulated the sale of natural gas and electricity which allowed Enron to excel among companies in this field. This increased Enron’s stock price up to $90 per share and made it appear to be one of the best companies for stockholders to invest their money into. Enron then decided to create offshore accounts commonly referred to as special purpose entities that would hinder any losses that the company was incurring and also deter taxes since international territories have different laws, and would show how much profit the company was making. It was then discovered that these offshore companies were solemnly cr... ... middle of paper ... ...s to finance its operations. The financial manager must decide how much the firm should borrow as well as the least expenses sources of funds for the firm. How and where to raise the money are important decisions that the manager must correctly make so that no financial consequences occur. Companies borrow money from a vast variety of lenders and a variety of ways so the always be aware of the possible options regarding this. In order for a financial manager to be successful, all 3 of these areas of financial management must be executed properly. Working capital deals with a firm’s short term assets; capital budgeting is the process of planning and managing a firm’s long term investments; capital structure is the mixture of debt and equity maintained by a firm. All 3 of these areas entail different things as explained but together they make up financial management.
Another reason for Enron’s bankruptcy was the unnecessary personal spending by corporate managers. It was a direct loss to the company’s shareholders. In the later stages before its bankruptcy, the luxuries were paid from the company’s borrowing, as it had no real profits. Therefore in the later stages, the creditors were at a loss rather than its shareholders.
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 Enron Corporation was committed to pushing the legal limit as far as possible. Many individuals only seeking to promote their own well-being over any legal or ethical boundaries did this. This was not only isolated with the Enron Corporation, as Arthur Andersen the outside accounting firm and Vinson & Elkins Enron’s law firm were also participants. The key players that led to the collapse of Enron was the founder Kenneth Lay, his successor
Enron was a Houston based energy, commodities and services company. When people hear the name Enron they automatically associate their name with one of the biggest accounting and ethical scandals known to date. The documentary, “Enron: The Smartest Guys in the Room,” provides an in depth examination of Enron and the Enron scandal. The film does a wonderful job of depicting the downfall of Enron and how the corporate culture and ethics were key to Enron’s fall. As the movie suggests, Enron is “not a story about numbers, it is a story about people.”
Enron was formed following a merger between two natural gas companies in 1985, Houston Natural Gas and InterNorth.3 When Enron formed, it had accumulated a large sum of debt, roughly 2 billion dollars.4 As a result of deregulation, Enron no longer had the exclusive rights to its pipelines, resulting in the company hemorrhaging money. Kenneth Lay5, the chief executive officer (CEO) of Houston Natural Gas, became Enron’s CEO. Lay knew he had to quickly come up with a new innovation to keep the company afloat. Lay hired McKinsey & Company6 to help in coming up with a business strategy for Enron. McKinsey & Company assigned Jeffrey Skilling7 to Enron’s company as a consultant. Skilling, who had a background in banking, asset and liability management, came up with a solution to Enron’s financial crisis in the gas pipeline business. He said to create a “gas bank”, in which Enron would buy gas from a network of suppliers and sell it to a network of consumers, allowing them to control the supply and price of the gas. Enron’s debt was no more, and Lay was so impressed with Skilling, that he created a new d...
Beth Gardner writes about the implications of the 2008 financial crisis as a “trigger” for business schools to teach their students ethics. Ethics is a broad term about moral conduct and how the decisions of an individual affect others. As discussed in class, the three goals of ethics include: preventing harm from occurring, stopping harm from continuing, and minimizing unavoidable harm (Bryan, 6). As witnessed in the 2008 financial crisis, ethics was submerged by the political and selfish nature of corrupt business leaders who focused solely on money.
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.
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.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
When an ethical dilemma arises within an organization, it is difficult to separate right and wrong with what is best for the majority. Sometimes the answer is not a simple “yes” or “no.” In 2002, Enron Corporation shows us just that. By 2002, the sixth-largest corporation in America filed for Chapter 11 bankruptcy. The case of the Enron scandal is one of the best examples of corporate greed and fraud in America.
The following are the reasons that lead an organization to a situation of difficulties in terms of arranging its finance for the payments and for carrying out the various day to day activities which is termed as the management of working capital are as follows
Ethical issues in finance are important because they bear on our financial well-being. Ethical misconduct as everyone knows, maybe by individuals acting alone or by financial institutions
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,
02. Banks are vulnerable to stocks which may arise from Non- performing assets, frauds, bad management, even rumors which could cause a run out. In such cases, even if one bank is distressed, the panic spreads like wild fire to the entire system soon/even beyond boundaries.The whole economy of the country collapses and hence ethics in banks is
The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.