Professional values, ethics, and attitudes. (AC 423)
QUESTION: With the advantage of hindsight, what advice would you have given the Enron Board to avoid the 2001 disaster?
1. Augustine Kupara
2. Tonderai Nyamadzawo
3. Simbarashe Chaka
4 Brighton Nzvuvu
5. Walter Danger
6. Simon Chigwanda
7. Ashley Murisa
8. Frank Garatsa
9. Presely Nheweyembwa
10. Peter Donald
11. Shingirayi Gwete
Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. By early 2001, Enron had grown into the 7th largest U.S. Company, and the largest U.S. buyer/seller of natural gas and electricity. It was heavily involved in energy brokering, electronic energy trading, global commodity and options trading, etc. in 2001 Enron started to show major signs of trouble by announcing a huge third-quarter loss of $618 million. On October 22, 2001, the Securities and Exchange Commission (SEC) began an inquiry into Enron’s accounting practices and later that year the company filed for Bankruptcy.
Key investigations revealed many shortcomings which include the use of complex & dubious accounting schemes to reduce Enron’s tax payments; to inflate Enron’s income and profits; to inflate Enron’s stock price and credit rating; to hide losses in off-balance-sheet subsidiaries; to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family; to fraudulently misrepresent Enron’s financial Enron also used complex dubious energy trading schemes for instance the “Death Star” Energy Trading Strategy which was aimed at taking advantage of a loophole in the market rules governing energy trading in California. This essay will attempt to advice the Enron Board to avoid the 2001 disaster with the advantage of hindsight by focusing on the major areas in the paragraphs which follow
THE BOARD OF DIRECTORS AND ITS FIDUCIARY DUTIES
The Board, as the head of the organization is supposed to execute its duties and roles professionally and make sure that the company is run efficiently and effectively. It’s supposed to exercise oversight over all the operations of the organization. These duties includes adopting of corporate strategy, annual budget and formal organisational structure, ensuring that risk management structures are in place, the company is complying with the relevant laws and regulations and that adequate controls are in place, to exercise oversight over management operations, to act as a communication channel between management and shareholders and to ensure that financial information of the organisation is reliable and credible. There is need to ensure that the board is properly structured so that t it adds value to the organization. This means that it was supposed to have a chair, at least one the members is financially literate and some of its members are non-executive directors. This would ensure that an independent perspective is brought into the board’s operations that would bring experience and expertise to the board The board supposed to follow its code of conduct in carrying out their duties. This ensures that all the activities it undertakes are in the best interest of the shareholders not themselves. For example, in carrying out their duties, all the board members are supposed to exhibit due care and diligence, to be honest and loyal, to exercise confidentiality on the organizational information and to disclose any conflict of interest. Some of the board members had financial interests in the Special Purpose Entities (SPEs) making large profits but they did not disclose this conflict of interest to the board. This would compromise their objectivity and independence in carrying out their duties. Some of the members of the board were not exercising due...
References: * Bob Lyke.CRS Report RS21120, Auditing and its Regulators: Proposals for Reform After Enron.
* JOINT COMMITTEE ON TAXATION, 2003 Report of investigation of Enron corporation and related entities regarding federal tax and compensation issues, and policy recommendations
* McLean, Bethany. 2001. “Is Enron Overpriced?” Fortune.
* Paul D. Miller, Brief History of Enron (accessed 27 November 2012) http://www.freegrab.net/enronhist.htm
* Paul M. Healy and Krishna G. Palepu, (2003) The Fall of Enron
* Powers, William C., Raymond S. Troubh and Herbert S. Winokur. 2002. “Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.”
* Steven C. Currall Marc J. Epstein 2003. Lessons From the Rise and Fall of Enron
* Watkins, S., 2002. Email to Eron Chairman Kenneth Lay,
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