Tuesday, May 3, 2011

Essay on Enron

Essay on Enron

In today's society of dot com companies you see many organizations rise and fall everyday. It is not a big surprise to see e-commerce companies fall after only weeks, months, or even a few years. However when you see a tried and true steadfast company filing a Chapter 11 people are mystified. The company Enron was one of these pillar companies, whose financial demise shocked America in particular. The world and people in general were in awe to find out that this company was in fact filing for bankruptcy. People lost millions of dollars due to the drop in stock and were in disbelief. But where did the catastrophe start? Who is responsible for the collapse of a multi-million dollar a year company? There is no one person, or idea that collapsed Enron. There were many business practices that were ignored, accounting was done poorly, and there were poor managers in the middle ranks. These as well as poor managers and decision-makers at the top combined lead to the fall of Enron.

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After hearing the news and reading numerous articles many people have realized that the collapse of Enron did not happen over night. One of the many faults that Enron had was the leniency on its employees, in regards to corruption. Many times the company did some fancy accounting to help make the numbers look better, but when caught the executive management did nothing to correct the problems. In fact the companies problems go back to 1987 where the company's auditors had learned of a billion-dollar scandal that was being ran at their Valhalla, NY site (Fowler, Oct 2002). In fact the employees were kept on the payroll and Enron tried to cover up the problem. Not that that was bad business, but to help cover up the losses, the company only reported an $85 million loss when sources said it was at least $136 million (Fowler, Oct 2002). A second incident of corruption in the employee ranks was when Enron gave bonuses for trades. Individuals would earn 3% on the value of the entire deal and were paid upfront before the project made money (Fowler, Oct 2002). Of course employees would give a high estimate on the value of the project making more money than they should have leading to obvious problems (Fowler, Oct 2002). One division in particular alleged profits so outlandish that when the company realized these fabrications, all bonuses for this division were halted (Fowler, Oct 2002). With all this corruption going on with employees and traders, Enron did not have much of a chance to stay afloat.

With all the number crunching going on, the management felt they had to hide all the financial disasters to keep the public happy and keep stock prices high. Enron started doing some creative accounting to keep the numbers high on paper and in stock prices to stay on top. In 1999 Enron formed two separate companies in which they fused all their own cash and stock. The idea behind these two companies was to become sources of capital and to buy assets from Enron. Designed to spread the wealth, the companies risked passing money around and covered each other's back for awhile. In one example Enron purchased $100 million worth of fiber optic items in which, $30 million was paid to Enron and the remaining $70 million was in the form of an IOU. Enron later sold the fiber optics for $113 million in which it then paid an "agency fee" to the LJM2 for $20.3 million. To make matters even more complicated LJM2 sold the remaining fiber for $113 million in which they paid off the IOU to Enron, however Enron also had signed a contract with one of the investors for $113 million to help the buyer of the fiber optics out (Fowler, Jan 2002). Maybe the very collapse of the company was due to this fancy accounting that the accountants were cheating the system with. Making the company look like it had made more money that it actually had, or reducing their credit risk in certain purchases Enron was playing a dangerous game.

If the corrupt employees and "fancy accounting" was not enough for the company to crumble, the management style of Enron also caused the company's demise. A particular example of this was when Andy Fastow was allowed to be Enron CFO and managing director, this was a conflict of interest in many ways because people felt he represented both buyers and sellers, which could lead to insider trading. He earned as much as $30 million through his role with the partnership while other employees also reaped the benefits (Fowler, Jan 2002). Another management style that was an error for Enron was under the guidance of the top executive Jeff Skilling. His attitude of making profits now and worry about details later was an aggressive philosophy and one that proved to fail in the end. As well as his philosophy he put fear in his employees and terrified those people who did not meet the companies goals (Fowler, Oct 2002). His management style eventually lead to errors made on the books as well as expenses catching up to him down the road.

As you can see this "fancy accounting", corrupt employees, and management styles led to Enron's bankruptcy. The loss of over 4,500 employees and disarray of the entire ordeal has left this as one of the United States most talked about fiascoes (Rice, Oct 2002). The effects that these disasters have put America at risk. With such a weak market, businesses should be cautious in their practices. If one lesson was learned ramification of scandals are felt all across the homefront. Possibly if one of these events had happened without the rest, the company would have pushed though. Though with the combination of all these problems within one company bankruptcy was bound to occur.

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