Enron Financial Health sample essay

Enron was formed in July 1985 as a result of a merger of two companies, one being Houston Natural Gas and InterNorth from Ohama, Nebraska. At first the company was only selling natural gas, but later the company developed and marketed not only natural gas but also electricity and high-speed Internet bandwidth. The company was based in Houston, Texas.

During the first years of its operation, Enron was a very profitable company; during ten years of operation it has evolved into a giant corporation and entered European market. Eventually the company operated in India, Australia, South America, Europe, Japan, and Canada. Four years later, in 1999 Enron implemented its plans to trade high-speed Internet bandwidth, and so it launched its e-commerce project EnronOnline, a web-based commodity trading web-site. By the end of millennium, Enron was one of the fastest developing companies in the United States, and one of the largest U.S. companies at the same time. That year the company’s accountants reported total revenue of $101 billion. In addition, the company’s stakes included 30,000 miles of gas pipelines, 15,000 miles of fiber optic network, and electricity operations around the world. The company’s main activities were divided into five sections, namely wholesale services, transportation and distribution, broadband services, retail energy services, and other. Thus, by 2000 the company showed very good financial health, enormous potential, huge profits to shareholders, and great contribution to the well being of Americans and American economy. Unfortunately, this positive and reassuring picture would soon change into something very disturbing and malicious.

The year 2001 was the year of company’s collapse. It was the largest bankruptcy in the history of the United States. As the company filed Chapter 11, thousands of employees were left without jobs. Moreover, these employees lost “their life savings in 401(k) plans tied to the energy company’s stock” (NYSSCPA, 2005). Such unexpected (at least for the public) collapse of such huge company appeared very suspicious for many entities, including Securities and Exchange Commission, Labor Department, and U.S. Justice Department of Enron. All these entities attempted to identify and clarify the roots of the company’s such rapid downturn. As later found out, the causes of the collapse were “numerous outside partnerships, set up to keep debt off its books” (NYSSCPA, 2005). Moreover, Enron has purposefully avoided income tax during four-year’s period by implementing various techniques, one of which was using about a thousand subsidiaries in tax-haven countries.

The prelude of the total collapse was the announcement of third quarter 2001 financial health. On October 16, 2001 Enron reported a net loss of $618 million. Enron’s public accounting firm was Arthur Andersen. They were one of the biggest accounting firms in America. They had 85,000 employees in 84 different countries. Their job was simply to audit financial statements, but they did not do just that. Arthur Andersen was with Enron for all 16 years. According to Enron’s financial statements Andersen earned $25 million for the auditing work that they did and $27 million for the non-audit fees in 2000 alone. But, that is from Enron’s financial statement. After Enron filed for bankruptcy, the SEC questioned Andersen CEO Joseph Berardino. They questioned Berardino on his firms auditing and Enron’s overstated profits. He told the SEC that Enron’s audit statements were misleading. When Andersen’s Houston partner David Duncan found out that the government was doing an investigation in financial statements, he had Enron documents destroyed. Because of that, Andersen fired David Duncan.

Arthur Andersen played a significant role in auditing errors resulting in profit gain for companies that they worked for. Last year the SEC fined them $7 million dollars for improper professional conduct. They overstated Waste Management’s earnings by $1.4 million dollars. That was the first successful case against any auditor in over 20 years. Andersen angered many Sunbeam shareholders when they made another error in inflated earnings statements. They paid $110 million dollars to Sunbeam shareholders to settle lawsuits. Both Sunbeam and Waste Management admitted the fraud and then restated their earnings.

Arthur Andersen was accused of overstating client’s earnings. They were caught and fined $7 million dollars. They also were caught when they destroyed documents for Enron. For this reason they had to stop auditing public companies by August 31st.

Ethics should have been a major factor in some of the decisions that Kenneth Lay made. But unfortunately, I do not think that they were. It was not only Lay, though he takes most of the blame. There were many people behind him who should have spoken up when things where ethically wrong. Sadly, no one did. Enron stole people’s money for years and the people who knew didn’t say a thing about it. Someone should have done the right thing and spoken up. One man I can think of that could have used some ethics is Jeffery Skilling. He might have realized something was going on and he did not want to take part in it so he quit. Ethics should have always been on their mind and if it were, maybe they would have stopped inflating their profits before they even started.

On December 6, 2001, Enron investors file a lawsuit against the executives accusing them of fraud. The events of these five months brought about great change for the company of Enron, all of its employees, and the many countries, populations, and publics Enron touched.

Although Enron employed 20,600 people, and influenced many lives outside of that, there are five people playing key roles in the energy company's collapse. Kenneth Lay is the most influential chairman for the company, and Robert Bennett is the lawyer representing the company. Sherron Watkins and Maureen Castaneda were both workers who have first hand accounts of wrong doings at the company, and Jeffrey Skilling is an ex-chief executive for the company.

Enron should have taken responsibility for the events leading up to the downfall. Most importantly, Enron should take responsibility not only for the problem, but also for solving it. Instead, blame was shifted onto Arthur-Andersen and finger-pointing became a common practice for Enron's executives.

Honesty should have been the policy for Enron executives. Yet, for years Enron lied about its financial situation. The shredding of documents and lying to their own internal departments were attempts to obscure facts and mislead the public.

I think that companies are headed in the right direction to stop fraud. In the past year more than 100 companies have hired “Ethics Officers” they help teach employees ethics and when to apply them. If most of the major companies do that, I think it will stop any fraud before it gets out of hand. I also think it has to do a lot with greed. If the CEO of a company is a greedy person then maybe he will try and inflate his profits and make the company pay for some things of his. That would be a difficult thing to stop, but if we could stop that then I do not think we would have anything to worry about. People just need to think ethically and people would have nothing to worry about.

Bibliography

1. Enron Corporation. Business Overview. From Tippie at http://www.biz.uiowa.edu/webcasts/PDF/GAO_Enron%20Corporation.pdf

2. Enron and Andersen: The Story so far. From New York Society of Certified Public Accountants at http://www.nysscpa.org/enron/overview.htm
Order custom essay now!