Business_Failures

Business Failure Paper Jenna Fox University of Phoenix LDR/531 – Organizational Leadership Michael Ventrone Business Failure Paper Enron was established in 1985 when, Internorth, a natural gas company based in Omaha Nebraska, merged with Houston-based Natural Gas Inc. Enron employed approximately 22,000 employees and was one considered of the world's leading electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000 (Wikipedia, 2010). Within this paper, I will discuss the business failure of Enron and the issues surrounding the collapse. Enron began trading natural gas commodities in 1989 and electricity in 1994 and in just a few years, became the largest natural gas merchant in North America. The company made widespread use of the internet and quickly became a recognized and reputable powerhouse within the natural gas and electricity industries. During the mid 1990s, Enron tried to capitalize upon earlier achievements in the energy markets by expanding and diversifying into global commodities trading. Guided by the strategic advice provided by world-renowned business consultants McKinsey and Company (McKinsey), and the leadership of its former CEO, Jeffrey Skilling (a former employee of McKinsey), Enron transformed itself from an energy company to a risk management firm that traded everything from commodities to derivatives (American Journal of Business, 2002).          Around 1990, Enron started acting as a liaison for the 30 day contracts, known as Gas Bank, and gathered multiple contracts from various producers and then offered long-term, non-negotiable priced contracts to local utility companies. In essence, Enron was putting the risk upon itself, for a fee and this was the turning point for entire natural gas industry. In the coming years, Enron had branched out and was serving as a liaison for electricity, oil, and even paper. In just 15 years, Enron became America's seventh largest company. In February of 2001, Fortune magazine names Enron the most innovative company in America for the sixth straight year in a row. According to American Journal of Business (2002), Enron, once the world’s largest energy company, was ranked number seven by Fortune magazine in April 2001 in Fortune’s ranking by market capitalization of the five hundred largest corporations in the United States. Enron experienced ups and downs throughout the course of the business cycle; however, on October 16, 2001, Enron became one of the most talked about corporations, as they became one of the most extensive and most expensive accounting scandals. Enron’s executives found themselves conducting unethical practices: accounting loopholes, special purpose entities, and poor financial reporting. Furthermore, they were able to conceal billions in debt from failed deals and projects. Andrew Fastow (CFO) and other executives were clever to deceive Enron's board of directors and audit committee of high-risk accounting issues (American Journal of Business, 2002). That year Enron released its third quarter earnings; in which consisted of the following: Net income of $393 million dollar, up from last year's earnings of just $292 million. In addition, Enron releases a $638 million third-quarter loss and unveils a $1.2 billion decrease in the value of shareholders’ stake. At that point, Enron recognizes the Securities and Exchange Commission (SEC) has begun a formal investigation of their activities and business practices. The SEC assumed the losses Enron reported were being concealed in the partnerships. These questionable partnerships, revenue-reporting practices, and general corporate philosophy caused enormous distrust and doubt amongst everyone. Kenneth Lay (CEO), unsuccessful explained the $1 billion dollar special accounting charge, or expense, which created actual results for the period to a $644 million loss. Stock price went into a spiral, dwindling from $36.00 per share to $0.26 per share within a matter of six weeks. On December 2, 2001, Enron filed for bankruptcy. Furthermore, Enron laid-off over 4,000 employees. Enron has since become a popular symbol of corporate fraud, corruption, and scandal. Without a doubt, Enron’s accounting practices were fraudulent and devious. In one case, Enron sold to the Raptors an asset near the end of a reporting quarter, and then bought it after the next quarter had started. It seems that Enron's rationale for the sale and repurchase of the assets was to get them off its books to avoid being required to report a loss on a decline in value of the asset. There is also the loophole of gross trading revenue. Energy companies are able to report revenue equal to the total dollar value of trades that they facilitate, rather than just reporting the commissions on those trades. That is why Enron was able to report an unbelievable $95 billion from its wholesale services segment. Hence, Enron diverted far from its core business practices and ethics, as they took on projects and risks that were outside their expertise. Enron's accounting practices were deceptive, unethical, and unscrupulous. All of Enron’s credibility, validity, and reputation diminished within a matter of seconds. In light of the Enron fiasco, congress has since made promises to develop, improve, and enforce disclosure standards in accounting, auditing and regulating practices. Regulations have since changed and impacted businesses across the nation. According to Business Pundit (2005), the government has the following responsibilities: • To enforce taxes or regulations that account for negative externalities of doing business that does not accurately get reflected in the market. • Sarbanes-Oxley (SOX) o Law enacted in 2002 that requires public companies to assess the strength of their internal safeguards to ensure that their financial statements are accurate. o SOX ensures the reliability of publicly reported financial information • • • • • • Increase the amount of information companies [pic] have to disclose so that investors, customers, etc. can review it and make their own decisions Leadership/Management Failure Enron failed to exercise their duties. During the years leading up to the demise of Enron the authority of the corporation did not implement their responsibilities. Based on the background of this scandal, there were some management and leadership issues during the scandal and during the revelation of the scandal. The committee overseeing the auditing of the financial records should have been judgmental on the work being done by the auditing staff, however with the continued increase in stock earnings the audit committee did not feel it needed to investigate the accounting practices being used. The board at Enron was also very lenient with supervising their management team and accepted what information was given to them from the executive team at face value with no questions being asked. The employees unfortunately were also caught up in the downfall that Enron suffered. Enron employed over 100 employees just in their legal and accounting staff. It seems that the majority of these employees were working with the support of the managing team, who in turn was supported by the top executive. As with the leadership team the methods used by the employees were in no doubt used because of the high incentives they were receiving. The employees were receiving large salaries which helped to hide the large corporate debt while also reporting increased earnings. Conclusion In conclusion, Enron’s collapse was not just the outcome of the behavior of its executive team alone. The failure and final bankruptcy was based on sources from both outside and inside of the organization. Inevitably the demise of Enron was due to the inequality in the structure with in all levels of the organization. The conduct of Enron represents the requirement of organizations to evaluate their business practices, both internally and externally. It’s vital for organizations to abide by governed legislations when conducting business, regardless of the industry. Keeping in mind that ethical business practices will impact the organization is imperative. Reference Business Pundit. (2005), Post Enron, Retrieved March 16, 2010 from http://www.businesspundit.com/post-enron-regulations-the-good-and-the-bad/ Robbins, S. P., & Judge, T. A. (2007). Organizational behavior (12th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall. The Social Impact of Failure: Enron. (Fall 2002). American Journal of Business, 17(2), . Retrieved from http://www.bsu.edu/mcobwin/majb/'p=199 Wikipedia. (2010), Enron, Retrieved March 15, 2010 from http://en.wikipedia.org/wiki/Enron Yukl, G. A. (2006). Leadership in Organizations (6th ed.). Upper Saddle River, NJ: Pearson/Prentice Hall