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The success enjoyed by Enron was the envy for most corporations since Wall Street continuously sang its praises while Fortune considered it as a market leader based on its innovativeness. Additionally, business schools used Enron as study case to demonstrate how a business can transform from a conservative energy company into a key global firm. Everyone seemed to be in agreement that Enron was the ideal model of a successful business to be emulated by other firms. Consequently, many people were taken by surprise when Enron declared that it was bankrupt, in December, 2001. This is because nothing of this sort had been anticipated from Enron. This failure was attributed to several factors with the main ones being the manipulation of its financial statements, absence of business ethics and pressure to con principle (Solomon, 2007).

It is important to understand that the Enron culture was that of acquisition and growth. This applied pressure on the employees to compromise on the principles on the industry in order to move forward. While Enron was seeking new acquisitions and other ventures, it did so through debts, which cost the company about $350 million (United States, 2002). This set out a series of other debts that Enron had to deal with constantly. However, the company was intent at manipulating its financial reports so as to portray a positive performance read this

Enron continuously ensured that its debts were not reflected on the balance sheets by disguising debts as Special Purpose Entities (SPEs). SPEs were actually intended for allowing firms to separate certain risks from its main operations and thus they can borrow at a low price. The company therefore, flouted the rules in order to remain on an expansion curve and growth.

Enron took advantage of this by using these SPEs with liabilities, hard assets and even other complex financial instruments. Money borrowed was reflected as money derived from operations in their balance sheets. Consequently, a majority of its forward contracts made with gas producers were also funded by these SPEs. Enron had also ignored the accounting standard requirement that 3% of a company’s assets should belong to independent investors (Bierman, 2003). This way, Enron did not consolidate the SPEs and thus liabilities were understated while earnings and equity were overstated in its balance sheets.

Consequently, Enron managed to fool investors and even its board of its actual financial stand. In this case, Enron was taking advantage of the limitations found within accounting so as to make their balance sheets appear rosy (Salter, 2003).

Since the company’s inception, in 1985, Arthur Andersen had served as Enron’s auditor. Other than being Enron’s auditor, Andersen had also served as the company’s financial consultant. Anderson ensured that some of his employees were permanently based in Enron’s premises. Furthermore, a significant number of Enron’s employees including accountants, controllers and CFOs had come from Andersen’s firm. Despite being one of Andersen’s largest clients, Enron was also considered a “high risk” client.

Whenever Enron felt and complained that an individual within Andersen was obstructing them, Andersen had no choice but to remove that individual. Andersen had conflicting interests since he was conducting internal audits and external audits, in addition to offering Enron financial consultation. This shows that Andersen lacked business ethics when he chose to conduct auditing for Enron while also provide consultation. This is one of the areas that can be seen where principle was abolished in order to create profit for the company.

The share value of Enron shares had always performed well in the stock market with its shares fetching high prices reaching up to $60. The company’s market capitalization went up to $60 billion when the share price was at its highest (Ferrell, 2010). Consequently, Enron was under immense pressure to continue maintaining its share’s growth. This means that it had to seek additional revenue and more capital to facilitate this growth.

Enron did not have the option of using debt to fund this growth since it had already channeled cash into power projects that could not generate immediate earnings. Any additional debt for Enron would be unattractive since their cash flow was already insufficient to cover any more debt (Geisst, 2004). To avoid debt, Enron could have issued additional equity but this would have interfered with its share price since it would have diluted EPS. Consequently, Enron opted to manipulate balance sheets and make use of SPEs so as to disguise their debts. Their main focus was to satisfy the analysts’ profit projections even if it required falsifying their actual financial position.

Enron’s case was a clear manifestation of the limitations associated with accounting since its collapse was brought about by Enron’s ability to manipulate its accounting systems. A majority of its accounting procedures such as off-balance sheet accounts were legitimate. However, Enron manipulated these balance sheets so that they did not include the company’s financial risks. The only possible solution to this includes providing a more clarified accounting system, which cannot be abused as in Enron’s case. The kind of market-to-market trade in which Enron was involved in should have been regulated especially in an illiquid market.

Additionally, financial markets need to be as transparent as possible so as to gain the public’s confidence. This way, any systematic imperfections can be resolved so as to maintain transparency. Where transparency lacks such as in Enron, the managements should provide an accurate insight of the company to its investors (McLean, 2004). This will require leaders that are ethically principled so that they do not forfeit these principles due to pressure. Such a situation can be resolved by the institution of tough regulations within companies that restrict individuals’ actions.

This way, a firm cannot have leaders who engage in fraud as in Enron’s case as there will be clear regulations prohibiting fraud. Additionally, these ethical regulations would prevent leaders from conceding to market pressures as the ones subjected to Enron’s leaders. This way, they will not have to seek shoddy and manipulative ways to meet the market’s standards.

It is evident that in Enron’s case, individuals, especially leader, lacked corporate accountability and integrity. Therefore, businesses should build to build on these business ethics since trust and accountability have a significant impact on an organization’s success. Secondly, the reporting systems used to convey financial reports to investors needs to be improved. Such a system should ensure that investors have access to the actual financial reports which have not been manipulated.

The reporting system should reflect accounting that involves off-balance-sheet procedures or any other uncertainties that may deter the transparency of financial reports. Andersen also erred when he chose to provide auditing, external and internal, and consulting services to Enron. This meant that Andersen had conflicting interest in Enron’s financial outcomes and thus it could not provide a reliable and independent auditing. An auditor who provides external auditing services should be independent so as not to compromise on its reports.

There is a need to have a personal code of ethics that will be of importance when it comes to provision of guidance in the professional and personal decision making. The code of ethics should be able to address how persons relate, honesty and integrity, transparency, fairness, and disclosure of information. There is a need to treat other persons with respect and this should be represented accurately on the way one talks and behaves around other employees. There is a need to avoid what can be described as unwarranted negative criticism of colleagues in communication.

The workers should not practice, facilitate nor even condone any type of discrimination on the basis of national origin, race or religion. The employees should conduct their work with honesty and integrity. This principle is especially outlined in the biblical ethics and there is a special emphasis on honesty in business. There is therefore, a need for the people that are working to be completely honest and cultivate a truthful culture which will enable the company to be trustworthy.

There is a need for a person to maintain utmost integrity and transparency. This is an important aspect as it shows that one is hiding nothing. Further, everything that one does should often be above board and one should not leave room for other persons to ask questions. This is an important aspect and sphere that should be looked keenly in the business world. When corruption or unethical practices occur in the company, there is a need to ensure that there are proper channels in which the information can reach the right and relevant persons. In addition, there is a need to ensure that there are laws that exist in the company to ensure that persons that report such information are granted immunity that they deserve in order to encourage more whistle blowers.

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