An analysis on the sudden decline of Enron in 2001
An analysis on the sudden decline of Enron in 2001
Enron was company that was formed to the Northern Natural Gas Company which traces its existence to the early 1932 in Nebraska. The company was reorganized back in 1979 and formed as the leading subsidiary company of Internorth. In 1985 the company acquired the smaller Houston Natural Gas and in the process it formed its name to Enron. (Haney 2001, p. 28)
Originally the company was involved in the transmitting and distributing electricity and gas in the United States. It was also involved in the development and building of power plants and pipelines. The company extended its services to the rule of law and in other infrastructures in the world.
The company owned large had a large network of natural gas pipelines stretching from ocean to ocean and from border to border. Its holding included Northern Natural Gas, Florida Gas Transition, Trans-western Pipeline Company and a strategic alliance with Northern Border Pipeline from Canada.
These holding were real cash woes the kept investors coming to the company. It expanded its ventures and investment in every corner of the country. These investments helped the company to make huge profits. By 1998 the company had entered the water sector and created the Azurix Corporation. The company floated its shares in the New York Stock Exchange but it failed to make a mark in the market. It did not break in the water utility market and ended up as a major money-loser. (Andrew 2001, p. 9)
In 2001, Enron announced that it continued to grow wealthier. Due to its pioneering spirit in marketing and promotion of power and communication bandwidth commodities and other related derivatives including exotic items like weather derivatives. The company was named as the most innovative company by the Fortune magazine for 6 consecutive years spinning form 1996-2001. In 2000 it was listed among the Fortunes 100 best companies to work for in America. It was hailed for its labour and workforce policies including the long-term pensions and other benefits. It was one of the well managed companies in America. (Krugman 2001, p. 8)
But this fame was not to live long. The effective management policies that had been associated with the company were at the end exposed to be fraud. It turned out to be the worst corporate fraud ever experienced on American soil.
This research will look the rise and the sudden fall of Enron which was famed as one of the greatest companies in American history.
Aims and objectives The main aim for carrying out the study was to have a full understanding of the sudden fall of the great company and the factors that contributed to the fall. This is important as it can provide future guideline in management as it gives an insight on how effective management can turn and destroy all the good work that it has achieved.
The following were the objectives for carrying out the study;
• To asses the operation climate of Enron and how the company was able to prosper in the market
• To assess the management of the company and how it contributed to the sudden fall of the company.
• To asses the corporate fraud that led to the fall of the company
Cases of business scandals are not new in the business world. It has become the same as being told the that two great companies are merging in a deal worth billions of dollars and the same story surfaces tomorrow informing you of how the same company have been implicated in a major scandal and financial rip-off. The business press these days has more stories on business scandals than it has on prosperity of mergers. It has been shown that although the stock market boom is over, the boom of business scandals is still on.
According to Ledbetter (2002) it has not been a wonder at any moment in life to hear of companies coming together to expand their operations, but it has become more stunning to hear of prosperous companies involved in all manners of scandals. It is like the business scandals have become the order of the day.
Jayne and Greg (2004) concur that there are many factor that have been contributing to the increased business scandals in the world but some of the factors that have really contributed to the increase is the effect that they have on the personal lives. Most of those who have been implicated in business scandal have not been punished in a way that other are likely to learn from them. For example when Nathan Chapman was sent to jail for 7½ years for defrauding the Maryland state pension fund system and for looting three public trade companies which he owned, he only thanked the testimony that was given by three of her former mistresses as they helped to put him behind bars. This shows the many of those who have been implicated in these scandals do not only defraud their trusted shareholders but they also betray themselves and their families. Greg shows that these individuals may be suffering from some kind of social or mental deficiencies and they are led by greed, ego, and corrupt ideals.
Most of the business scandals do not arise because there are no strong institutions to deter their occurrence but they are caused by individual who are more interested in serving their own interest rather than the interest of their own shareholders. In this case it has been shown that it is a faulty management that can be attributed to the rise of business scandals. It is due to lack of ethics in business scandals continued to hamper the trust of shareholders on corporate leaders. For example while Enron was shown to have strong institution that were even praised and helped it to be classified as one of the Fortune 100 companies, there was not practice of business ethics in the company which eventually led to the scandal. (Brewer 2002, p.7)
Business ethics are important practices that have been recognised in the business world as them most acceptable ways that helps to have fairness in the practices. Business ethics is a form of applied ethics in business operation which inculcate the ethical principles and the moral and ethical issues and the way they are to be addressed as they arise in the course of operation of the business. Business ethics is an important cooperate practice that ensure that the business keep to the normative and descriptive factors in the course of its operation.
Business ethics requires a company to do what it is supposed to do and in the right way. Business ethics are the same the social and moral ethics but as applied in business. There are ethics that are applicable to all the sectors of business operation. There are ethics in accounting information, human resource management, sales and marketing production, intellectual property, and in other business areas.
Most of the business scandal usually occurs due to lack of practice of business ethics in one of those areas. In some companies there may be scandals that many occur due to breach of more than one area as listed above. For example in case of Enron in America it had breached ethic in production and distribution of power, human resource, accounting practices, and in other areas.
The study mainly collected data from the secondary sources. The study used qualitative research using a case study. In this case Enron Company was used as the main sample. The study decided to use qualitative research in order to collect detailed data about enron. By concentrating on Enron, the study was able to gather as much data as possible that was used for the study. The study chose to use qualitative research instead of quantitative research since it wanted to collected detailed data about the operation of the company that would give an insight on what happened and the overall fall of the company. The study was not interested in the quantitative data but it was interested on whom, when and how things happened.
Most the data was collected from secondary source. The study used various sources of data that gave any information regarding the operation of Enron Company. It also looked at various case studies that had been done before regarding Enron and the ethical issue r4egarign the operation of the economy. The following were used as the main sources of information for the study;
• Periodicals and journals
• Company reports
The data collected was analysed in comparison with the studies that have been done before. The practice that led to the fall of the company was benchmarked on the required ethical practice in the corporate world in America.
The research was conducted for one week through the analysis of the above mentioned sources. There were a number of ethical issues that were taken into consideration in the collection of the data. In the process of the correcting data the research visited several libraries and other sources that could help to get information on the operation of the company. The researcher ensured that the information that was requested was only the one that pertained to the operation of Enron and its eventual fall.
The research also ensured that it reduced the amount of bias in the collection of data as much as possible. Although it considered personal views that had been expressed by different writers about the operation of the company, it did not bank on their opinion which could have been biased. Instead it concentrated on collecting facts.
In the 1990s, Enron was universally accepted as one of the most innovative companies that had made crucial step to adopt to the new market that and the new economy to record success in an old industry that had remained unattractive due to the high risk that was involved. The company had growth to success very fast and in the same way it coma crumbling down. (Floyd 2001, p. 4)
The eventual fall of the company has been attributed to the scandals that ware perpetrated by individual persons and the whole organization in general. From the 1990 to1998, Enron’s stock had recorded a rise of 311 percent and which was considered to be one of the highest growths in the country. The stock had just soared in a short period in the stock market. In 1999 the stock further rose by 56% and 87% by 2000. It was rated the most innovative company at the same by the Fortune magazine owing to the success it had made. But his image was to change in a short period of less than one year. In less than a year the company was in tatter and stock price fall nearly to zero. The main question that was asked by many people not only the shareholders was what was the main reason behind the fall of Enron once a successful company in period of less than one year? (Bryce 2002, p. 4)
Though there were a number of activities that led to the eventual fall of Enron, the unfolding events from 2001 have been earmarked as the final blow that drove the nail in. The following events that happened in a period of one year were responsible for the fall of the company
On August 14 2001 Skilling resigned from the company after heading it for just 6 mothers. He cited the need to have more time with the family although there was a factor the sagging share price. He was succeeded by Lay as the CEO.
On august 22 the vice president Sherron Watking met with Lay in order to discuss a memo she had written citing looming accounting problems.
On 12th October, An Arthur Anderson lawyer contacted a senior partner in Houston to remind him that the company did not uphold a polity of retaining documents that were no longer needed which prompted the shredding of the documents.,
On 16th October the same year Enron which had been posting huge profits before reported a quarter loss of $638 milling loss and it also disclosed a $1.2 billion reduction in the shareholders equity. This was actually attributed to the partnership that was run the chief financial office Andrew Fastow. (Gilpin 2001, p. 8)
On 22nd October Enron acknowledged Securities and Exchange Commission inquire in the probability of the a conflict of interest which was related to the dealings and partnerships at the company
On 23rd October Lay who had assumed the CEO passion expressed his support for Fastow. Fastow was eventually ousted in Oct. 24
On October 31st Enron accused the SEC inquires that had been upgraded into a forma investigation
On November 8th Enron restated plans to consolidate partnerships arrangement retroactively. The profit from 1997 to 2000 had declined by more that $591 million and the debt had increased by more $658 million. (Swartz 2003, p. 3)
In November 9th it entered tin a merger with Dynergy
In November 28 major credit rating agencies now downgraded Enron’s debt to junk bond status which made the liability to retire its $4biono f its $13 billion debt. At the same time Dynergy pulled out of the proposed merge. (Berenson 2001, p, 23)
On December 2 the company led for bankruptcy in New York and at the same time it sued Dynergy for breach of contract.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 18 October 2016
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