Enron Scandal Summary

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(Last Updated On: May 20, 2017)

Enron Company founded in 1985, by merging gas companies. Kenneth Lay was the founder of the company, first founded in Omaha Nebraska and then it moved to Houston Texas. Mr. Kenneth Lay was the CEO and chairperson of the company, he hold a Ph.D. in Economics. The company shortfall started when they lose $90 million in just five days. However, the auditor of the company ignores it; auditor misreported the net worth of the company. Mr. Lay wants to show the higher earnings, for this, he hires a graduate from the Harvard Business School named Jeff Skilling. Treating natural gas as valuable assets was his idea. Jeff Skilling imposed a condition to work in the Enron company is that he will follow a new accounting policy. The concept behind the new accounting policy was a market-to-market basis. Through this method, management can decide any value, which they find it suitable for their assets. This new accounting method was very subjective. By approval of this accounting system, the executive manager shows higher earnings in the financial statements and got the huge amount of bonuses. It will take 10 years to achieve that amount of earning showed by the executives. Jeff skilling also introduced the corporate culture in the organization. There is Performance Review Committee, the performance below the scale were fired from the job. Mr. Lay said that we have a very strict culture. Jeff Skilling try to increase the confidence of the investors, for this, he used Media and PR campaigns. These campaigns show the positive image of the company that is why share price of the company is increasing day by day.

 

As stock price is increasing, day by day the employees also invested in the company. The company started a natural gas power plant in India, but the cost of the electricity was so high. People cannot afford it, due to this company bear a loss of $1 Billion, but on the other hand, the executives already showed the unearned income in their statements and got a huge amount of bonuses. In 2000, the company tries to trade bandwidth, through this they will stream videos but they also face loss in this project too of $53 million but executive had also shown the unearned income from this project and take large amounts of bonuses. The company was unable to make their financial statement.

 

The communication methods used by the company are media and PR campaign, media is showing a positive image of the company and increasing the confidence of the public in the company. PR campaign is also a method to show the positive figure of the company and future earnings. By this company employees also invested in the company because the sale price is going up and up but it was just bloom and after that company falls. The company reached $90 share price at its peak.

Analysis & Reasons for failure

The main reason behind the failure of the organization are as follows:

  1.  They have not provided the right information to their stakeholders.
  2.  They showed unearned income in their financial statements and get high bonuses on this information.
  3.  Lack of information, they have not prepared their Business Financial statement.
  4.  Not providing the right information, as they face loss in different projects but they did not show it.
  5.  Nobody was allowed to speak against the company.
  6.  Always showing the positive image of the company on media.
  7. One of the main reason of the failure is not showing the correct information to the investors and other stakeholders.

  

Conclusions & Recommendations

By studying the history of the Enron organization, I have come to know that there is lack of information. The information provided by the management is completely wrong, they showed the results according to their desires and get high bonuses on this. To prevent this problem happen in future, there should be a system, which will provide transparent reports to the stakeholders. Investors should be fully aware of the company financial position and the accounting policies used by the company. There should be no hidden information from the stakeholders. Effective business communication plays a vital role in the business success.

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