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The Fall of Enron Case Solution
The case discusses Enron and its fall of it. The company once used to be one of the largest Natural and electricity companies situated in North America, which ended up bankrupt due to unethical practices. The fall of Enron shook investors, employees, and the whole of wall street, terribly. So much so that the experts were baffled that how could the company pull off fooling the system and so many stakeholders in the system for such a long time. Investigation revealed that they were not the sole players, the corrupt officials in government and unethical practices of auditors also played a significant role in enabling the company to leverage all the loopholes in the system and create an intricate network of deceit. Post-Enron debacle, the Sarbanes Oxley act was introduced to ensure effective corporate governance and safeguarding of the interests of the stakeholders.
Following questions are answered in this case study solution:
Briefly, provide a history of the company.
The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are the most responsible for that crisis. Briefly justify each of your choices.
Identify and list the governance principles and guidelines that were breached.
Can Audit firms truly be independent consultants?
Who was most affected by Enron’s Fall?
Identify and list five recommendations that have been made recently to strengthen the audit function after Enron's scandal.
Case Study Questions Answers
1. Briefly, provide a history of the company.
Enron started its operation in the year 1985. The company handled the development and production of natural gas and electricity at the global level. The company was also responsible for its supply and marketing. The giant also facilitated emerging economies in future and renewable energy. Despite the categorical efforts, in 2001, the company faced bankruptcy issues and was pushed to shut down this decade-and-a-half-long journey with a bitter taste. The case of Enron is that of a company that soared to extreme highs only to taste the worst fall. The company’s stock prices in 2000 were around $43.
By late August the same year, it had soared to $90. This is a 107% return over 8 months, by the end of 2000, the Enron Stock closed at $83. All this progress while the S&P 500 Index fell almost 10% during the same phase. Before the declaration of bankruptcy which happened in 2001, the company was trading at the rate of 0.26$. It is very unorthodox that the management wove a network of people and opportunities to trick investors into investing, through false reports and malpractices. This created a bubble, which when burst, took many people including the company down.
2. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are the most responsible for that crisis. Briefly justify each of your choices.
Enron often called the darling of Wall Street, shook the investor's confidence when it fell. Several players were responsible for the situation, beginning with:
a. Deceitful Top Management
It is the responsibility of management to devise strategies that will ensure reasonable safety for investors. It is now well established that the Chief Executive Officer of Enron at that time, Kenneth Lay, and President Jeffery Skilling chose to deceive the oversight bodies and over-promise the investors. They invested their time and efforts in promoting deregulation of the sector, as it would benefit their schemes. They concealed the true progress of the company and that they were unable to close major deals, their business too was unstable and flawed. They created a bubble of inflated stock prices, which when burst, caused losses for the investors. Both of them resigned in 2001 and 2002 respectively while Enron was still in shambles.
b. The Accounts Department and the Independent Auditors of Enron:
It is a known fact that if the accounts department is not honest in their reporting, they may be able to brush the losses under the rug and report inflated profits. These malpractices keep the stock prices high. When the company suddenly reported a high loss, it was revealed that the company was falsely reporting the profits for the past many years. Their accounting partner Arthur Andersen LLP was found guilty of destroying accounting evidence that indicated losses and deregulatory results. These were evidence of the malpractices in bookkeeping and financial reporting by Enron. They exploited their position and deceived the public and investors who expected a fair and objective functioning from their part. This led the investors to make faulty assessments about the financial health and stability of the company. They breached the trust of the public, the code of ethics, and the laws. They did get sanctioned for all these once the investigation was done.
c. The Corrupt Government Officials
As it is a known fact that no corruption or deregulation at this level can take place without the involvement of government officials. It was found that several of the politicians have accepted bribes on account of Enron on various occasions. Moreover, the mark to market practices at the company also gave them a pass to legally fraud the investors.
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