The History Of The Enron Company Case

The history of the Enron company case

Throughout history, the economic aspect is directly linked to the political by establishing laws that govern financial markets, but in turn, contributing to business growth. The economic factor is one of the columns of the company under the capitalist system, this follows the progress and integration to global markets. As established and quoted, Colussi, neoliberalism is a particular form of globalized capitalism which was acquired in the 70s and 80s. This economic and political current establishes that the economy must be detached from free trade, with little regulation in a privatized way and with the least intervention by government policies. This prompted companies to merge and develop new projects. The Enron company spun or allowed us to glimpse that deregulation through this system allowed a large scale. Enron, was the 7th company with the highest global sales, being one of the first US companies in the energy industry. This company founded by Kenneth Lay, emerged from a fusion of Houston Natural Gas by Houston Texas and Internorth by Omaha Nebraska, which was founded in 1985;highlighting that in these years they were the first to deregulation of energy markets.

In the 1990s, Enron hires Jeffrey Skilling, an expert and advisor since 1988, Harvard graduate. The company managed to go from being a small gas company to the seventh company with the highest value in the United States. Skilling propelled an idea that was to create a “Bank”, whose purpose is to buy gas from several suppliers and then sell it to consumers with satisfactory long -term conditions.

Also, senior executives made the decision to offer a variety of financial and risk products. These strategies, led by senior executives, were successful, making 20% of the US market be monitored.

The success of the Enron company was an unpredictable, getting to use 20,000 people and managed to obtain annual sales of 100,000 million coming to position itself in the market of the way it did;However, this success was not easy to support and the "Credit Rating" levels. According to the Economipedia Portal (2015), the credit qualification is a score granted. This company was making it difficult to maintain this type of qualification, so it began to manipulate its accounting reports to continue offering the growth of benefits. The financial world is one full of great challenges that require analysis of the data presented by companies. There are many variables that impact and influence the behavior of global finances, human errors regarding the provision of price and information information that adversely affect the analysis and processing of the same for decision making, as can be seen from theefficient market theory article. The financial market is also affected by the financial bubbles that is a phenomenon that arises in the markets based on speculation and impacts through excessive and prolonged increases of the price of an asset, which exceeds the equilibrium value, this being what enronI was exercising to stay in the market and achieve economic benefits..

Andrew Fastow, executive vice president and financial director, described this strategy as “creating false benefits”, which consisted of safeguarding the value of the doubtful assets of the situation balance and transferring the information of assets and liabilities outside this accounting state. Eriksen & Urritia (2005), affirm that this strategy is achieved based on the following rules that were carried out by the company’s executives:

•  "Mark to Market Accounting". Financial assets are reflected in the status state (EU), so Enron adopted this system to assess energy contracts, adjusting the values, redirecting the profits and losses to the results account;using this strategy aggressively. This strategy allowed them to obtain flexibility in fixing prices for financial products (actions, bonds, etc.)
•  Creation of special entities. The company created a set of entities with the purpose of managing projects where assets were sold despite the fact that they should be consolidated. Through this position, investors and regulatory authorities were deceived, some managers pointed out about this non -ethical and legal practice;reviewing the level of risk that this entailed.
•  Balance debt movement. When new competitors began to emerge, Enron suffered quota losses in the market causing an adverse effect in relation to the growth rate. During that period it was very important. Enron aimed to seek help to financial institutions that facilitated complex financial transactions, lengthening debt deadlines and hiding income items.

Enron presented an exponential growth in the energy sector and over time it was inserted in the development of new markets in the communications sectors, risk management and insurance. This company reported liabilities that hired as sales, which resulted before investors seemed to be a profitable and sustainable company that had many sales income and few debts. Enron managed to develop a complex structure of a conglomerate of more than 3.000 United Societies through Holdings;This was propelled an environment where it was facilitated to hide and manipulate the benefits, since it was almost impossible to audit it through conventional methods. In addition, through information that emerges from an investigation by the Center for Responsible Policies, an independent non -governmental organization, between 1990 and 2002, Enron and its managers donated six million dollars to the political world, which suggests a seriousinterest conflict.

In 2002, the financial bubble exploded where all the contributions of most of the values that were in the “e-commerce” fell where several companies were involved, including Enron, Enron. Income inflation and manipulations of accounting practices, many illegal and non -ethical, triggered a great crisis in financial markets. Meneses, (2010), affirms that Enron’s bankruptcy is not merely a case of poor management or business negligence, but is the result of accounting manipulations that allowed them to sell overvalued actions. On the other hand, the company’s senior executives knew about the situation and made the determination to destroy evidence that confirmed the above, being the cheated investors.

Given these acts of corruption, they caused changes in legislative pieces that directly affected large corporations, because they establish the obligation to modify and delineate the way to carry out financial information. The United States Congress approved the Sarbanes Oxley (SOA) Law on July 30, 2002. One of the areas impacted through this law, is the establishment of norms regarding the consolidation of large companies, with the clear purpose of recovering trust in the investment market;This establishing harsh rules for regulatory agencies on companies that quote on the stock exchange;preventing financial information could be illegally altered by managers, understand CEO or CFO. Sarbanes Oxley (SOA) law, established under President G. Bush stressed that the law is a warning to every businessman who is not honest with financial transactions, he will be investigated and punished. The nerve purpose of the law is to recover the confidence of investors through reforms regarding the audit process, highlighting the auditor’s image being at a higher level in relation to internal controls. Some of the factors that make up the structure of the law are;Independence of auditors, corporate responsibilities, improvement in financial information, establish conflicts of interest, among others. Under this law, the Public Company Accounting Oversight Board (PCAOB), a collegiate agency under the non -profit legal entity, which is made up of five members;which can carry out investigations, visits and impose fines up to five million dollars.

One of the fundamental aspects of the law is to improve the quality of the audits, the companies that will offer these services must be totally independent to the investigated companies, and were clearly and specificly established what are the services that may not facilitate. The Director General (CEO), Director of Finance (CFO) and other managers who have similar tasks were established as responsible for financial accounts (CEO). On the other hand, SOA asks Security and Exchange Commission (SEC), to establish tools that consolidate the actions stipulated by the SOA law. One of the factors to be imposed regarding organizations is to ensure and evaluate the risks that internal controls have in financial reports;including, certificate of internal controls, reports in real time and above all, protection of individuals who denounce fraud. In addition, it is established that companies must submit a statement where the evaluation processes on the effectiveness of financial controls are disclosed.