Collapse Of Enron Samples for Students †MyAssignmenthelp.com

Question: Discuss about the Collapse Of Enron And Necessity Of The Reforms In Corporate Governance After Enrons Collapse. Answer: Introduction: The assignment is a discussion on collapse of Enron. The assignment begins with a brief description of the company along with the mention of the main causes that led to the collapse of the company. Through the assignment one will be able to find that the lack of transparency in all its activities was the sole reason for its collapse. There is also a second part to the assignment that deals that talk about the necessity of corporate governance reform on a worldwide basis Reason for Collapse of Enron The company Enron formed in the year 1985 due to the merger of Houston Natural Gas and Internorth and was the first nationwide pipeline for natural gas (Benston Hartgaves, 2002). With time, the business focus of the firm shifted from transportation of regulated natural gas to energy trading markets that were unregulated. The guiding principle for this was the greed for more money through buying and selling of financial contracts linked to the value received from energy assets than being the actual owner of the assets. Enrons problems arose not because of its energy operations but its other ventures like the investments in the Internet and high tech communications (Healy Palepu, 2003). Enron saw a flourishing future in the internet therefore during late 1990s it purchased the service providers and online marketers, constructed a communication network based on fiber optic and thereby created a market that traded communications capacity based on broadband. The company entered these markets during boom and paid higher prices thereby initiating a heavy load of debt for financing its purchase. The crash of the internet industry in 2000 dried up revenues from the investments thereby keeping the debts constant. The company also recorded for losses in certain foreign operations where it expected to make profit in the new markets that remained deregulated. However, due to local politics there was a blockage in the sharp increase in price as anticipated by Enron. The companys response to the problems was the main reason behind Enrons major financial scandal. Rather than disclosing its actual condition to the public investors, the company issued false accounts (Ailon, 2012). Moreover, Enron tried to disguise its bank loans as derivatives of energy trades for concealing the extent of indebtedness of the company. However, when the actual figures came to the forefront more than 80% of its profits vanished thereby resulting in collapse of the company. Thus, the major issues responsible for Enrons collapse are as follows: Accounting and Auditing Issues The auditor of Enron, Authur Anderson, turned blind eye towards the accounting practice that was improper but got actively involved in forming a financial structure that was complex and transactions that led to deception. Issues Related to Pension Enron sponsored for its employees a retirement plan where they contributed a portion of their payment. Therefore, in December 31, 2000, around 62% of assets against the companys retirement plan comprised of Enron stocks held by many employees. This led to an increase in the share prices of about 80$/shares in the year 2001 and a sudden drop to 70 cents in January 2002. This led the company to wipe out some of the existing retirement plan that led to questioning of the regulation and laws that governs such plans. Issues Related to Corporate Governance The top management of Enron indulged in selling shares of the company worth billions of dollars but tried to keep its financial problems under wraps so that it does not get revealed to the public (Crowther Aras, 2013). Issues Related to Securities Analyst The securities analyst of a company does research and make recommendations for buying, selling or holding which is followed by most public investors. Enron required the support of such analyst due to the continuous infusion of funds from the financial markets. Their decision of selling Enron shares after its sudden fall also remained responsible for its collapse. Issues Related to Banking Enron had banking issues with some of the prominent banking companies like J.P. Morgam and City group which also contributed partly to its fallout. Issues Related To Energy Derivatives Enron involved in dealing with derivative contracts that were based on the oil, gas amd electricity as a part of its energy business (Pavel Encontro, 2012). The contracts allowed the buyers in avoiding or hedging risk involved with increase or decrease of energy prices. The unregulated markets that Enron traded in without any reporting requirements left scope for little information about the profitability of the company from the energy derivatives. Thus, involving in trading of derivates also contributed to the companys collapse. Corporate Governance Reform after Enron After the Enron Collapse measures reforms in corporate governance took place for ensuring greater transparency of the existing accounting and auditing firms between the investors or owners and the management (Kim Lu, 2013).The reform in the corporate governance was necessary for ensuring precision in the responsibilities undertaken by the companies towards the employees, customers, employees, shareholders, business partners and communities where they operate. The meltdown of the company resulted in the initiation of Sarbanes Oxley Act 2002. The act was move towards right direction but it fell short in addressable of certain critical reforms that were advocated by corporate accountability group like the enhanced independence of the board, abolishment of the staggered boards, increased disclosure of environmental and social issues and staggered board abolishment. However, this was overcome by the formulation of new rules for strict disclosure practice and corporate governance put forward by National Stock Exchange (NASDAQ) and Securities Exchange Commission (SEC). The NASDAQ also put forward that the listed companies should have board committees and board directors who are independent in addition to the rules imposed by the Sarbanes-Oxley Act on non audit service and accounting firms. However, the controlled companies are exempted from the requirement of an independent board. Such companies are the ones where another company or a group or individual holds voting power which is more than 50%. Although such controlled companies relying on exemption must make it a point in disclosing its annual meeting proxy and the basis of its determination. The exchanges also make sure that the non management directors meet at executive sessions that are regularly scheduled but without the presence of management. Conclusion: Thus from the discussion in the assignment it is concluded that giant companies like Enron that had huge profit margins suffered a major collapse due to its unplanned moves, lack of foresight and transparent means of actions. The meltdown of Enron has thereby necessitated reform in the corporate governance worldwide ensuring that companies hold an accountability of the every move that it takes. References: Ailon, G. (2012). The discursive management of financial risk scandals: The case of Wall Street Journal commentaries on LTCM and Enron.Qualitative Sociology,35(3), 251-270. Benston, G.J. Hartgaves, A.L. (2002), Enron: what happened and what can we learn from it, Journal of Accounting and Public Policy, 21(2): 105-127 Crowther, D., Aras, G. (2013). Introduction. InThe Governance of Risk(pp. ix-xii). Emerald Group Publishing Limited. Healy, P.M. Palepu, K.G. (2003). The fall of Enron, Journal of Economic Perspectives, 17(2): 3-26. Kim, E. H., Lu, Y. (2013). Corporate governance reforms around the world and cross-border acquisitions.Journal of Corporate Finance,22, 236-253. Pavel, T., Encontro, M. (2012). The Enron scandal.Chalmers University of Technology Financial Risk, Goteborg.