Background of the Case
Enron Corporation was on 3rd December 2001 cited as the biggest audit failure which led to its subsequent bankruptcy. Enron reported financial had sustained institutionalized, systematic, and creatively planned accounting fraud to portray skewed figures regarding their share value to the shareholders (Baesens, 2015). Before its bankruptcy, Enron had about 28,000 workers and was a major power, communication networks, natural gas, and pulp and paper company which announced a $101 billion revenue in 2000 (Baesens, 2015). For six consecutive years, the company was given the “America's Most Innovative Company" title.
The bankruptcy came as a result of using accounting cover-ups, special purpose organizations, and false financial reporting by Jeffery Skilling after he was hired to develop a staff of executives. The group kept in secret billions of dollars of debt that the firm had lost through failed projects and deals (Baesens, 2015). The Chief Financial Officer Andrew Fastow and a section of the members of the executive committee misguided Enron's Audit Committee and Board of Directors regarding perilous accounting practices.
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Enron’s shareholders filed a lawsuit after the company’s stock price dipped to less than $1 as of novemer 2001. The lawsuit was valued at $40 billion as the share prices had been $90.75 in June, 2000 (Cianci, Clor-Proell, & Kaplan, 2018). An investigation was begun by the U.S. SEC. A few days later, Enron’s rival company, Dynegy, offered to buy the assets at a throw-away price. This negotiations failed, and Enron filed for bankruptcy at the end of 2001, under Chapter 11of the US Bankruptcy Code. The group of shareholders lost about $74 billion leading to its bankruptcy. The employee were also affected immensely they lost their jobs and pension aids.
Probable Interventions to avert the situation
Enron’s situation would have been prevented so that its image would not be tarnished after the real position was relayed to the public. The greatest mistake committed by the management was the slow follow up of the activities by the accounting department. One of the errors to correct was taking immediate action against the department that started the fraud instead of supporting the fraud spree (Tunley, Button, Shepherd, & Blackbourn, 2018). The situation would have communicated a different somehow positive picture to the shareholders. Most of them would rally behind the efforts of the management to cleanse the rot in the Company.
After the ejecting the fraudulent accounting department, the management should have applied a strong culture with honesty, integrity, and ethics as to help avoid the Enron scandal. The main players in the implementation of the above are the managers and the CEO as they are the image of the firm (Cianci, Clor-Proell, & Kaplan, 2018). The management would have made it a routine that all employees and departments interact with aspects of the company’s values through the meetings, discussions and company activities. The process would have taken longer to repair the situation, but it would have ensured that the company stuck with some shareholders who would help it rise again.
Finally, there should have been disclosures, accountability, and transparency on the part of the management immediately if understood the situation was out of hand. The case would have revealed the intent of the firm to tackle the blunder by flushing out the harmful elements and maintaining the clean ones (Tunley et al., 2015). For instance, the accounting firm, Arthur Andersen LLP which approved Enron’s fraudulent partnership and was the “Auditor” and “Consultant” to Enron would have been sued. The situation would have led to the regulation of the auditing process to avoid gaps in organization reporting.
References
Baesens, B. (2015). Fraud analytics using descriptive, predictive, and social network techniques: A guide to data science for fraud detection . Hoboken, New Jersey: John Wiley & Sons, Inc.
Cianci, A. M., Clor-Proell, S. M., & Kaplan, S. E. (2018). How do investors respond to restatements? Repairing trust through managerial reputation and the announcement of corrective actions. Journal of Business Ethics ,1 (2)1-16.
Tunley, M., Button, M., Shepherd, D., & Blackbourn, D. (2018). Preventing occupational corruption: utilising situational crime prevention techniques and theory to enhance organisational resilience. Security Journal , 31 (1), 21-52.
