Enron’s Case Study
Enron was one of the world’s biggest manufacturers of natural gas, oil, and electricity. Before 2002, it was considered one of the most profitable limited companies whose shares value rose from $19.10 in 1999 to $90.80 at the end of 2000 financial year. These successes is attributed to the board of directors and the top management team who always look for new ventures, partnerships, and make crucial decisions of the company. On several occasions, the company’s Chief Financial Officer, Andrew Fastow had many investments for the company and the board of directors never questioned his decisions, little did they know that despite the created partnership he in fact the major investor participating in the buying of shares and to conceal his deals he introduced a complex scheme of off-balance-sheet partnerships. Analysts in trying to go through the balance sheets did not figure out anything for the scheme was so complex and did not make sense. This was the revelation for the shareholders and it marks the downfall of Enron Company (Welytok, 2006).
Enron’s company was highly respected for her managerial skills and efficiency attributed to its’ hiring of top graduates and experienced personal to undertake in the run of daily business operations. The CEO on the other hand cultivate a culture of competition among the employees, those who were rank low would be dismiss hence everyone was self conscious, but never went into it to find out how it operated, thus the employees cooperated amongst themselves and when a problem occurred it was hidden rather than being disclosed. This shows that the CEO was ignorant on some key issues of running the business. In our society today, we are made to believe and trust too much on the professional bodies like the lawyers, accountants, and the external auditors, but in reality they are the ones who can ruined the company or an organization (Bierman, 2008).
The law on the other hand finds only the key players in a case. Enron’s failure was not only because of bad decisions of the CEO and the CFO, rather the entire management had a problem. There was lack of proper communication between the senior directors and the subordinates of which they should have all been investigated. From the case, the company was more interested on enriching her employees’ welfare and put aside the interests of other stakeholders. For this reason therefore, the employees did anything to benefit themselves and they should have been investigated. Business undertaking is a dirty game and only those who follow the right procedures survive, while those who like short cut will be caught by the law and the consequences are more severe than anyone can imagine. When a company is declared bankrupt, the investors, employees, and board of directors looses many finances because of the scandal that precedes it (Bierman, 2008).
Sarbanes Oxley act (2002) has been very effective in managing the various risks exposed by the Enron, Arthur Anderson, and WorldCom through the implementation of various provisions; Disclosure control. Under this provision, the firm is mandated to set up internal procedures to oversee accurate financial disclosure. The financial officers are answerable and responsible of effective internal control system. This therefore ensures that the CFO discloses their undertakings in a report and presents a conclusion of company’s financial status to the board of directors for further scrutiny, hence enabling transparency and accountability, Disclosures in periodic reports provision requires the disclosure of all off-balance sheet items, a SEC study and a detail report to bring out a clear image of the scope of usage such inventions and discuss on whether accounting concepts completely tackled these inventions (Welytok, 2006).
The other provision is the assessment of internal control. Under this provision, it needs the management and external auditors to prepare a report on the competence of the company’s internal control over financial reporting (ICFR). Annually the management is expected to produce a report on key issues of the company and capabilities of management in maintaining sufficient internal control structures. These are some of the provisions, which enable Sarbanes Oxley to effectively control the management risks facing various companies (Fernando, 2009).
With the current global financial crisis, a new legislation is possible to be introduced. People now are civilized and we need a civilized method of handling current issues worldwide. With improved technology, I believe that the legislation will be in a position to effectively solve the ethical misconduct although it will be a very big challenge for those who are concern. This is because the world is comprised of people of diverse culture and practices; others will feel that their rights are being violated while others will be rigid to accept the new changes in the financial system (Fernando, 2009).
This being a very big company, I could not have taken chances. The company requires an overall reshuffling of the management team, introduction of departments, and ensure that each department is run by a senior director who shall be accountable and responsible for any misconduct in that department. Being the CEO, I will also ensure that I go round the countries with a team of specialized auditors to determine their financial status at a given interval. This will make sure that those who delegate duties are held responsible and incase of any misconduct, they face immediate consequences. Setting targets for every country will also be my responsibility, and whoever achieves them should be rewarded to be loyal to the company and avoid ethical misconduct that may result from abandoning (Fernando, 2009).