Enron was an energy-trading company established in 1985 in Houston, TX, as a result of a merger of two companies, Internorth and Houston Natural Gas. Led by chairman and CEO Kenneth Lay, the company developed to reach a high spot in the ranking of Fortune’s magazine list of the top 500 US companies. By 2000, Enron employed more than 20,000 workers and posted revenue of US$ 111 billion (Dharan and Bufkins 97). However, on December 2, 2001, Enron made a bankruptcy protection claim under the Chapter 11 in New York court, thus initiating one of the most controversial corporate scandals. The controversy was associated with the company using special purpose vehicles (SPVs) in order to hide significant dept and toxic assets from creditors and investors.
Identifying Weaknesses Within the Company
Enron has been characterized by a large number of internal control weaknesses. The two serious flaws that the company had encountered were that the Chief Financial Officer was exempted from a policy concerning conflicts of interest, while internal controls over SPEs were more a sham but not in substance. Specifically, many financial officials within the company did not have enough training and professionalism for their jobs, while the assets, specifically foreign ones, were not secured physically. Enron was weakened in its performance because of the lack of scheduling associating with the tracking of daily cash and debt maturities.
In addition, off-balance sheet debt was ignored by the management despite the remaining obligation to pay, which resulted in the company-wide risk being disregarded. Overall, the internal control controls at the organization were inadequate, ant of the contingent liabilities were not disclosed, and the individuals responsible for overseeing the relevant accounting processes ignored such weaknesses.
Threats Within the Company’s Internal and External Environment
Due to the significant impact of external auditors on the collapse of Enron, it is important to consider the threats to the company’s internal and external environment as related to accounting. The first threat is the self-interest threat that takes place when auditors have monetary and other interests that may prevent them from taking action that would have adverse results for the audit firm. The second threat was concerned by the use of non-audit services, which represent any service other than an audit offered to a customer by an auditor (Ojo 2). A post-Enron implication is the decreased use of auditors as consultants and non-audit services with a rising perception of independence of auditors (Ojo 2).
Analysis of Findings
There are several important findings associated with the collapse of Enron. First, the organization’s Board of Directors was ineffective at fulfilling its fiduciary obligations toward the corporation’s stakeholders. Second, the highest-ranked executives at the company wanted to get as much money as possible and only acted in their personal interest and self-preservation. Third, even though many of Enron’s employees were witnesses to the wrongdoings of their executives, not many of them came forward to expose the issue. Finally, the company failed by outsourcing its function of internal audit instead of working to establish a functional mechanism of internal audit (Cuong 585). Moreover, the organization’s external auditor implemented some questionable accounting and fraudulent reporting of the finances.
Analysis of Systems and Evidence Found
The evidence pointing to the failure of Enron is concerned with the findings listed previously. The company’s governance system and culture facilitated the failure as there was not enough regulation established to ensure that individuals were held accountable for their actions (Cuong 587). Instead, the management of the company acted in self-interest, with Enron’s CEO and CFO securing significant amounts money as compensation while the company was nearing its bankruptcy claim (Giroux 1207). It was implausible that senior management did not know of the fraudulent acts, but they chose to keep silent because of the badly-practiced corporate system of governance and culture.
Forensic Recommendations and Outcomes
In order to avoid failing as Enron did, an organization should look at the abovementioned mistakes and implement a different model to prevent a financial collapse. It is important that a board of directors at an organization establishes a system of governance that does not allow for fraudulent acts being overlooked. The stakeholders should act in the interests of their organization rather than themselves personally. In addition, a CEO cannot be allowed to have a dual role and also be a chairman due to the findings that such a duality rises the risks of fraudulent acts and the manipulation of earnings (Sharma 105). Finally, it is recommended to either prohibit or restrict auditors from providing non-audit services to their clients.
Review of the Case Study Analysis
The case study illustrates the significance of corporate governance and the results of the poorly-established and managed culture. The shortcomings of Enron show how greed and the lack of accountability could undermine the financial success of an organization within quite a short period of time. The issue provoked further research into analyzing the impact of a CEO role’s duality within the corporate governance system of a company.
Cuong, Nguyen. “Factors Causing Enron’s Collapse: An Investigation into Corporate Governance and Company Culture.” Corporate Ownership & Control, vol. 8, no. 3, 2011, pp. 585-593.
Dharan, Bala, and Willian Bufkins. “Red Flags in Enron’s Reporting of Revenues and Key Financial Measures”. SSRN Electronic Journal, 2008.
Giroux, Gary. “What Went Wrong? Accounting Fraud and Lessons from the Recent Scandals.” Social Research, vol. 75, no. 4, 2008, pp. 1205-1238.
Ojo, Marianne. “Avoiding Another Enron: The Role of the External Auditor in Financial Regulation and Supervision.” MPRA Paper no. 1147, 2006, pp. 1-11.
Sharma, Vineeta. “Board of Director Characteristics, Institutional Ownership, and Fraud: Evidence from Australia”, Auditing, vol. 23, no. 2, 2004, pp. 105-117.