Free «Enron Corporation and Its Failure» Essay
Table of Contents
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- Enron in the 1990’s
- Andrew Fastow and the effect of the legal system
- Effects of law on Enron failure
- Accounting reforms after Enron’s failure
- The Code for Corporate Responsibility and citizenship
- The auditing profession
- PART II
- California Civil Code section 1770
- Related Business essays
Enron begun as northern natural gas company, in 1930 by other three companies, which included North American Light & Power Company and United Light & Railways Company each with 35% share capital in the new enterprise, while Lone Star Gas Corporation had the remaining 30%. The company's establishment came just a few months after the 1929 stock market crash; it was such an unfavorable time to start a new venture. As a result of deregulation of the united states energy markets in the 1990, Enron corporation was provided with an opportunity which included buying of cheap products (energy) and selling it in the market with a floating price. However, some few aspects of the Great Depression worked in favor of the company. Initially, consumers were not enthusiastic enough about natural gas as a cooking fuel, but its low cost made them to accept it during tough economic times. High rate of unemployment fetched a ready supply of cheap labor for the company to build its pipeline system. In addition, it was at a time of inception of the 24-inch steel pipe, which could transport more than five times the amount carried by 12-inch pipe. The company grew rapidly in before the World War II, doubling its capacity in two years of its incorporation. It managed to avail the first supply of natural gas to Minnesota (Dembinski et al 2006).
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Enron in the 1990’s
Before it filed for bankruptcy in 2001, this company was one of the largest integrated natural gas companies worldwide. It was engaged in marketing natural gas globally and operated one of the biggest natural gas transmission systems. In addition, it was one of the largest developer and producer of electricity serving both the emerging and the industrial market. Supply of solar and renewable energy was another activity the company engaged in the market. The company was almost monopoly wholesale marketer of electricity and natural gas besides being the biggest oil exploration company in the region. The innovative techniques of Enron significantly modernized the utilities industries. After a significant capital, build up in the 1990’s, the company begun to fall into difficulties. It had managed to acquire a ranking of number seven on the Fortune 500 companies. The company’s stockholders were concealed much of the company’s losses. This happened at a time when Andrew fastow was the company’s chief accountant. Its folded merger with Dynegy Inc. brought it to financial struggle and its bankruptcy was the biggest in American history (Dembinski et al 2006).
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Andrew Fastow and the effect of the legal system
Andrew fastow was the former chief financial officer of Enron Corporation, a company with its headquarters based in Houston, Texas. Fastow was quite familiar with the market under which the company operated. This fact drew the interest of Enron Corporation’s CEO (Jeffrey Skiing) and its founder Kenneth Lay, who were interested in keeping the company’s stock price up. This ambition crept in spite of the corporation’s true financial position. Fastow, as one of his duties, designed a complex web of companies that did business with Enron Corporation. He had two main reason for doing this, raising money for the company and hiding its huge losses in their quarterly financial statements. The effect of his move was to make the audited balance sheets to appear debt free, while in reality there was a more than 30 billion dollars debt. To the outsiders, the company appeared to be a debt free, independent entity. The funds created thereof were the write-downs of Enron and guaranteed no loss of money. On the other side, Fastow appeared to have a personal financial stake in the recess funds created either directly through him or through a partner. Fastow and other six got involved in this financial gaming, they were either the employees of the company or with spouses at Enron, walked away with at least 42 million dollars on investments this figures sometimes made overnight, while the deceived partners MacArthur Foundation and Arkansas Teacher Retirement System were depreciating in value (McLean 2003).
A congregational committee summoned Fastow to explain his failure. He declined to testify to testify citing self-incrimination of his Fifth Amendment right. According to his spokesperson, fastow acted with full awareness and approval of the company’s CEO and its founder. This was also inclusive of the company’s external and internal editors and the company’s legal advisers (The Association 1985).
His accusations were of misstating or causing the misstatements of the financial condition and operational results of Enron and disclosures relating to its performance. He pleaded guilty in a court to two counts of conspiracy which he forfeited amount nearly 24 million dollars. He spent more than five imprisonments for stock and security fraud. He decided to share his story with other business students in the world. To begin with, he was a graduate of Northwestern University’s Kellogg School of Management.
Effects of law on Enron failure
It was barely a month before filing of Enron Corporation’s, bankruptcy in December 2001. The widely recognized firm and widely regarded as one of the fastest growing, most innovative, and best-managed businesses in U. S. In the collapse, stakeholders, including thousands of its workers who held company stock in their more than 401(k) pension accounts, lost billions of dollars. Investigations may take time to conclude, but Enron’s failure raised financial oversight issues with outreaching applications. More questions arise on why the watchdogs failed to bark (Dembinski et al 2006).
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Thus, the accounting principles and system failed to provide a clear picture of the firm’s true and fair conditions. The auditors and board members were unwilling to challenge Enron’s management. The Wall Street stock analysts failed to focus on the trouble ahead the rules governing employer’s stock in company retirement (Rapoport 2009).
Accounting reforms after Enron’s failure
Most of the corporations and accounting firms largely escaped real regulations before, and thus the law created a panel to inspect and regulate them. The board reports forced major firms to change their old practices it assumed having accomplished its mission. The argument was that Constitutional Congress should have empowered the president or someone else he directly appoints to make the appointments of the corporation’s board of directors. However, that dispute over the appointment powers might of less importance. Nevertheless, on passing the Sarbanes-Oxley Act, the Congress did not put in a severe clause. Therefore, this raised the panorama that the entire law may over a sudden fall at the same time. In the foregoing, the importance of corporate executives and audit corporate controls were to certify that among other things, the financial statements were accurate (The Association 1985).
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However, the financial reform bill expecting to pass appears more likely to repeal the obligations of audited financial controls in most public companies. This leaves the body more effective to those with over $75 million revenue. The bill also appears to grant the corporate board’s one of their highest desires by blocking planned Security Exchange Commission rules. These are the rules aimed at allowing dissident stockholders to put director candidates on the ballots. Instead, it ought to allow no such nominations except if the dissident owned not less than 5% of stock, which is a very high level indeed (The Association 1985).
The Code for Corporate Responsibility and citizenship
Under the corporate law, the main purpose of their establishment is to make money for its shareholders. It is included in the law as a corporate duty imposed on directors. The rule commonly referred to as the doctrine of shareholder primacy. In case the management fails to satisfy this duty, the shareholders can sue the directors. Therefore, the main purpose of a corporation becomes the marching orders for all those who work for it (Dembinski et al 2006).
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The Code targets to bring these costs in the heart of the corporation. Some argues that this code will reduce the corporate profits, but that is not the case. In order to accelerate their competitiveness, public companies will look for alternative ways to reduce their costs opening a virtual floodgate of investment. However, The New York Stock Exchange has adopted some reformed corporate responsibility rules. Majority of the board of any company listed on their bourses are bound to be independent of the corporate management (Rapoport 2009).
The auditing profession
A legislation was enacted that created an oversight board with new authorities to oversee all accounting firms. However, biased disagreements over the new leadership of the board, led to resignation of its chief after a few days of its enactment (McLean 2003).
However, having made all these reforms in establishment and governance of corporate bodies, some legal experts argue that not all these changes are necessary. Enron Corporation’s board met all these criteria for impartiality at the time its financial crisis. They argue that the extent to which these reforms usher in a period of better management by the board and corporate management, and better auditor’s performance will only be due to these new laws and regulations. It is only because of cultural changes in the boardroom that the auditing firms and management can work properly (The Association 1985).
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California Civil Code section 1770
"Unfair Methods of Competition and Unfair or Deceptive Acts or Practices"
Examples of deceptive acts and unlawful acts in:
1) Passing off goods and services as those of another.
This is concerned with the rights of a trader to make a legal claim for protecting his business goodwill. This right is conferred by any given ordinance but results from common law. This action rise when a trader unlawfully acts misleadingly that his goods are those of another trader especially on unlawful imitation. Some common forms of such misrepresentation are; a) when a trader pretends that goods and services belonging to another trader are his- commonly referred to as inverse passing off. (b) When a trader dishonestly states that, another party who is usually a celebrity endorses his goods and services (McLean 2003).
2) Misrepresenting the source, sponsorship, or certification of goods or services
Misrepresentation of source is the commonest scenario a lawyer is likely to encounter in practice. The law requires that no firm, person, association or corporation offering for sale or selling any merchandise shall in any manner, represent that the article was particularly made for, or acquired directly or otherwise from the U.S government, its military or any agency that has been disposed of by the us government. For example, a buyer can be forced to buy an item or an article because of misrepresentation by the seller that the item’s origin is the united states, which in this case it is a misrepresentation. Such misrepresentation can give the innocent party a right to rescind the contract (The Association 1985).
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3) Misrepresentation of affiliation, association with, connection, or certification by another.
Affiliation is a business concern based on the power of control whether implemented or not. Such factors as common management, ownership and identity of interest are indicators of affiliation. Power of control may require the concerned parties to have a 50-50 or more ownership. Therefore, affiliation in business need to clearly spelt even to outsiders whom the company is trading. For example, a partner with a smaller share percentage may have less power than those with higher percentage. This may inhibit him from making some crucial decisions in running of the organization like entering in high risk contracts on behalf of the firm. Thus, if he goes ahead and enters in such an agreement he commits a fraud of misrepresentation of affiliation (Dembinski et al 2006).
4) Use of deceptive representations or designations of geographic origin in connection with goods and services
Deceptive misrepresentation of goods takes place under deceptive trade. This practice of deceptive trade occurs when a seller makes a false misrepresentation or statement about his merchandise and failing to disclose material facts about them. Example of deceptive trade is in real estate transactions. This happens when a tenant or a real estate buyer is deceived to buy an estate in a posh geographic location, only to realize later that the estate was not as described.
5) Misrepresentation that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits or quantity which they do not have or that a person has an approval, sponsorship, affiliation, status or connection which he/she does not have.
To prevent consumer fraud, the government has put in place necessary regulations that aim to deter sellers from merchandising on unapproved commodities. The law requires that all commodities check through the standard regulations of the country to ensure they meet the basic requirements. For example, unscrupulous trader takes to the market goods that are not up to standards that will have ill effects on consumers (Rapoport 2009).
6) Representing that goods are new, original, or if they have unreasonably deteriorated, altered, reconditioned, reclaimed, used, or secondhand.
In this misrepresentation, the buyer is deceived to buy a commodity thinking it is original or new. An example of this practice is when, company A, imitates the products of company B and fails to acknowledge that they are not original thus depriving the former from making a sale from the same (McLean 2003).
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7) Misrepresenting goods or services that are of a particular standard or quality, or those goods are of a particular model or style, if they are of another.
(9) Advertising goods with intent not to sell them as and when advertised.
This happens when a trader falsely advertises for goods with intentions to create demand. For example, a car dealer advertises for sale of cars but eventually turn down the customers. The price for the cars rises as the demand.
(10) Advertising goods with intention not to supply reasonably expectable demand, unless the advertisement reveals a limitation of quantity.
This rule protects the consumers from falsely misrepresentation of goods by a seller. For example, a seller makes an advertisement to meet a demand of 1000 units knowing well that he can only supply 400 units of a given commodity.
(11) Advertising for furniture without indicating that it is unassembled, if that is the case.
For example, a carpenter advertises for sale of a bed at $20, and a customer unknowingly buys hoping to have it assembled only to realize there are additional charges for assembly (Dembinski et al 2006).