What Contributed to the Financial Collapse of Enron Term Paper

IntroductionAccounting is the language of business. It allows executives to share and articulate the performance of a business from a financial perspective to shareholders. It also provides management with valuable insights into the overall success of their business franchise relative to peers in the industry. It is this financial information that help to inform and solidify business strategy and future initiatives. Shareholders use this information to evaluate the overall effectiveness of both management and their respective business strategy. When reviewing the figures shareholder and other stakeholders believe these figures to be reported in good faith. In fact, thanks to Enron, management must now sign documents that attest to their truthfulness. Prior to Enron, investors, regulators, and shareholders believe this information to be presented truthfully and in a manner that reflects the true underlying performance of the business. As history has shown, many companies, including Enron, did not deserve such trust (Cruver, 2003).Accounting standards themselves are in a precarious position. Due to the overall variability of business, accounting standards must provide a certain degree of flexibility. They cannot be too rigid as it would restrict certain businesses from representing their true value to shareholders in a prudent and ethical manner. They also cannot be too loose, as companies could potentially take advantage of the rules to allow companies to appear more profitable than they really are. Because of this, accounting standards such GAAP must strike an interest balance between rigid standards and truthfulness. Unfortunately, Enron encapsulates many of the arguments that prevailed related to having more flexibility standards. In this instance Enron mispresented its financial performance materially using many rules that were deemed fraudulent at the time. The company for example heavily used off-balance sheet transactions that enhance debt but never appeared on the balance sheet. The company also relied heavily on special purpose entities that obfuscated the overall corporate debt and performance of the business franchise. The company acquired other companies to help hide decline performance to investors. Finally, on the more egregious side, the company committed outright fraud by paying auditors to show a profit on its accounting books. Due in part to the flexibility afforded by the accounting rules of the time, the company was able to deceive investors for many years. It ultimately bankruptcy, the loss of many jobs, and a decline in the overall integrity of the capital markets.Define the problemTo begin, Enron was founded in 1985 through a merger to two regional natural gas companies in Houston, Texas. Though multiple acquisitions the company quickly became a global energy, commodities, and services company. Following the mergers, Kenneth Lay, who had been the chief executive office of Houston Natural Gas, became Enron\'s CEO and chairman. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey. Once Skilling became CEO, the culture and moral of the organization began much more entrenched leading to the eventual downfall of Enron. At its high, Enron employed over 29,000 people and had revenues of over $100 billion dollars.Unfortunately, these revenues and ultimately profits were achieved through unethical and fraudulent means. As it relates to defining the problem, the most obvious issues were with management. As it relates to Enron, management perpetrated and ultimately allowed unethical practices to help the company appear much more profitable…

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…within a highly competitive industry.In this instance, the decision should be to implement all the above resolutions. Although this will result in negative publicity, lost jobs, lost customers, a lower share price, and angry stakeholders, it the correct action to take relative to the alternative of bankruptcy. The actions outlined above are very simply but very difficult to implement within a culture that was predicated on unethical practices.To implement the decision, the board must first instituted new governance standards that are the highest in the industry. They should also engage third party consulting firms to ensure that polices and procedures are in place that allow for seamless integration of these standards within the organization. The investor relations team will give investors and other stakeholders monthly updates as to the progress of these initiatives. Next, as it relates to implementation, would be to hire and train an internal and independent audit committee. This committee will be charge with auditing the overall processes within the organization and highlight any questionable activities. Management will then have 1 week to address the questionable activity immediately. All email and correspondence related to the unethical or questionable act must be retained within corporate databases to ensure the overall integrity of the process. As it relates to the implementation linked to corporate debt, the company could refinance the debt at a lower prevailing interest rate. The company should cancel any future expansion opportunities that are not currently being worked on. The company will next suspend the dividend payout until the debt is at a level deemed adequate by the new management team. Cash flow from operations will be used primarily to maintain the companys competitive position and then used to pay down debt. If needed maturity will be extended to longer durations to allow the company more flexibility…