CASE STUDY 1 Enron Among the most disappointing and tragic examples of this is the case...

 

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CASE STUDY 1 Enron Among the most disappointing and tragic examples of this is the case of World Championship Wrestling which, hanks to a combination of mismanagement and bad luck, was forced to fold in 2001. Among the most controversial companies of the past decade Is the Enron Corporation - which, Incidentally, folded the same year as the aforementioned WAC. Despite having been lauded by Fortune magazine as America's most innovative company for 6 years in a row, Enron was nevertheless beset and eventually done in by the same problems that doomed WAC, and then some. The interplay of its complex business model with a slew of unethical practices forced Enron to take certain drastic measures, such as the exploitation of accounting limitations to manipulate balance sheets to present a fabricated depiction of good performance on its part (Healy et al, 2003). Such a lack of transparency on Enron's part with respect to its financial statements indubitably contributed to its demise - a fact attested to by multiple sources. According to Badmouth (2003), the intent of these dubious practices was to inflate asset values and to keep liabilities off the books. Unfortunately, as can be seen from Enron's downfall, this can be observed to have backfired in a major, major way, and the equally questionable behavior of its officers did nothing to help. According to McLean et al (2003), Enron's executives, most notably Kenneth Lay, Jeffrey Killing and Andrew Fast were the biggest culprits, through their negligence as well as direct action. Killing and Fast in particular were infamous for pressuring their fellow executives into hiding Enron's debt in order to better meet Wall Street expectations. Most of the acts they perpetrated in this regard entailed obscuring and obfuscating the true state of things through rampant manipulation of balance sheets and financial structures. Andrew Fast in particular holds the greatest fault as Enron's chief financial officer. As mentioned in Time Magazine (Seaports, 2002), he and his cohorts made millions from their investments, even others around them were all but left destitute in the process. One of Enron's disgruntled energy traders put it best in saying that he cost the company half a billion dollars while he made his millions. While he was at it, he also made liberal use of his power and position in order to silence weightlessness and cow those he saw as potential threats. Under his tenure as chief financing officer, Enron continued to look attractive for investors even as it struggled to cover its massive debts brought on by failed deals and projects. Stock price was the primary focus, to the detriment of everything else. Eventually the situation escalated to the point that even Lay, whose implicit trust in Fast had never wavered, had to take notice. Shortly after, Andrew Fast was removed from his position as chief financing officer and, together with his wife Lea, would go on to be sentenced to 10 years in prison without parole (Said, 2004). However, the damage had been done, with Enron's stock plummeting to $16. 1 within the week. Moreover, the departure of both Fast and Killing only served to make it harder to examine the company's practices. By tens time, ten meals AT Enron as a corporate entity was very much imminent (Norris, 2001). It should boggle the mind Just how this was able to happen, given how Enron had been known to have an especially skilled and knowledgeable audit committee. According to Lubing (2002). the committee included such figures as a former accounting professor and dean, presidents and chairmen of both government-owned and private institutions, and was notable for its overall greater competence marred to what one could normally expect from an audit committee. In theory, then, Enron's audit committee should have been able to prevent or at the very least head off the scandal. Unfortunately, as Healy et al (2003) pointed out, this turned out not to be the case. For one thing, the committee was said to have made a habit out of meeting for only an hour and a half each time, while cramming way too many topics for discussion into those meetings, resulting in each point not being given the attention and focus it deserved. Not only that, the committee was also unable to properly question auditors n accounting issues concerning Enron's special purpose entities, as well as the management of Enron itself, thanks in part to the pressure being brought to bear against it. By November 28, 2001, Enron was slated to have at least $23 billion in liabilities borne of outstanding debts and guaranteed loans, with its stock falling to $0. 61 at the end of the days trading. Only two days later, Enron's European operations filed for bankruptcy, leaving 4,000 people jobless in what was, at the time, the largest bankruptcy in the history of the United States (Benson, 2003). While this would be eclipsed by World only a year later, this does nothing to diminish the catastrophic consequences of Enron's bankruptcy, especially with respect to the 4,000 who were left Jobless. QUESTIONS: 1. Explain the Whistle-Blower role in the above case. (5 marks) CASE STUDY 1 Enron Among the most disappointing and tragic examples of this is the case of World Championship Wrestling which, hanks to a combination of mismanagement and bad luck, was forced to fold in 2001. Among the most controversial companies of the past decade Is the Enron Corporation - which, Incidentally, folded the same year as the aforementioned WAC. Despite having been lauded by Fortune magazine as America's most innovative company for 6 years in a row, Enron was nevertheless beset and eventually done in by the same problems that doomed WAC, and then some. The interplay of its complex business model with a slew of unethical practices forced Enron to take certain drastic measures, such as the exploitation of accounting limitations to manipulate balance sheets to present a fabricated depiction of good performance on its part (Healy et al, 2003). Such a lack of transparency on Enron's part with respect to its financial statements indubitably contributed to its demise - a fact attested to by multiple sources. According to Badmouth (2003), the intent of these dubious practices was to inflate asset values and to keep liabilities off the books. Unfortunately, as can be seen from Enron's downfall, this can be observed to have backfired in a major, major way, and the equally questionable behavior of its officers did nothing to help. According to McLean et al (2003), Enron's executives, most notably Kenneth Lay, Jeffrey Killing and Andrew Fast were the biggest culprits, through their negligence as well as direct action. Killing and Fast in particular were infamous for pressuring their fellow executives into hiding Enron's debt in order to better meet Wall Street expectations. Most of the acts they perpetrated in this regard entailed obscuring and obfuscating the true state of things through rampant manipulation of balance sheets and financial structures. Andrew Fast in particular holds the greatest fault as Enron's chief financial officer. As mentioned in Time Magazine (Seaports, 2002), he and his cohorts made millions from their investments, even others around them were all but left destitute in the process. One of Enron's disgruntled energy traders put it best in saying that he cost the company half a billion dollars while he made his millions. While he was at it, he also made liberal use of his power and position in order to silence weightlessness and cow those he saw as potential threats. Under his tenure as chief financing officer, Enron continued to look attractive for investors even as it struggled to cover its massive debts brought on by failed deals and projects. Stock price was the primary focus, to the detriment of everything else. Eventually the situation escalated to the point that even Lay, whose implicit trust in Fast had never wavered, had to take notice. Shortly after, Andrew Fast was removed from his position as chief financing officer and, together with his wife Lea, would go on to be sentenced to 10 years in prison without parole (Said, 2004). However, the damage had been done, with Enron's stock plummeting to $16. 1 within the week. Moreover, the departure of both Fast and Killing only served to make it harder to examine the company's practices. By tens time, ten meals AT Enron as a corporate entity was very much imminent (Norris, 2001). It should boggle the mind Just how this was able to happen, given how Enron had been known to have an especially skilled and knowledgeable audit committee. According to Lubing (2002). the committee included such figures as a former accounting professor and dean, presidents and chairmen of both government-owned and private institutions, and was notable for its overall greater competence marred to what one could normally expect from an audit committee. In theory, then, Enron's audit committee should have been able to prevent or at the very least head off the scandal. Unfortunately, as Healy et al (2003) pointed out, this turned out not to be the case. For one thing, the committee was said to have made a habit out of meeting for only an hour and a half each time, while cramming way too many topics for discussion into those meetings, resulting in each point not being given the attention and focus it deserved. Not only that, the committee was also unable to properly question auditors n accounting issues concerning Enron's special purpose entities, as well as the management of Enron itself, thanks in part to the pressure being brought to bear against it. By November 28, 2001, Enron was slated to have at least $23 billion in liabilities borne of outstanding debts and guaranteed loans, with its stock falling to $0. 61 at the end of the days trading. Only two days later, Enron's European operations filed for bankruptcy, leaving 4,000 people jobless in what was, at the time, the largest bankruptcy in the history of the United States (Benson, 2003). While this would be eclipsed by World only a year later, this does nothing to diminish the catastrophic consequences of Enron's bankruptcy, especially with respect to the 4,000 who were left Jobless. QUESTIONS: 1. Explain the Whistle-Blower role in the above case. (5 marks)

Answer rating: 100% (QA)

The WhistleBlower role in this case would be to report the unethical practices of Enrons execu... View the full answer