Enron collapsed because the people who were the custodians of the company decided to act fraudulently and deceive the public about the real state of affairs.
They opened up offshore bank accounts where they kept prying eyes off the books of accounts. By overinflating the profits they manage to maintain the share prices at levels way above their real value. By engaging in insider trading, they enriched themselves and when the company finally collapsed, thousands of employees lost all their savings and pensions.The top brass were arrested and tried on various counts. Their blatant misuse of the company’s assets and outright dishonesty caused ripple effects throughout the industry and the nation.
The auditors were recruited in the fraud and they continued to issue reports that gave Enron a clean bill of health when quite the opposite was true. For the public the lessons learnt are numerous. The employees lost a lot of their savings when the company went down because most of what they had invested was in Enron stock.In future, people should not trust one investment outlet as their sole financial nest. Spreading of ones risk is a better option.
Further, the pension scheme the company had been not backed by the state thus it was not guaranteed. Workers should insist that their pension schemes are managed by institutions delinked from the company. Further the pension should be in the form of cash rather than stock options. If stocks are given out, liquidating them would be advisable as the future may wipe out any value they had.Close scrutiny of financial statements is what stake holders should ask of their company’s heads. This should be backed up by independent auditing firms that will give the accounts more credibility than if the internal and company auditors did the job themselves.
The Sarbanes Oxley Act of 2002 went a long way in closing the loopholes that allowed executive officers to operate public companies like their private property. The separation of powers between the executive officers and the board of directors reduced the possibility of connivance between the two.Further, by ensuring that companies adopt certain accounting principles, the level of financial dishonesty was drastically reduced. It is no longer easy for companies to operate offshore bank accounts for purposes of hiding losses and stashing away ill gotten funds. Whistle blowers are needed more than ever before.
To stop those in authority from perpetrating fraud, the workers must be encouraged to speak out regardless of the circumstances. The aviation inspectors that spoke out recently about lack of maintenance checks on planes were doing the whole nation a favor.Even if reprisals are taken against them, they will go down in the annals of history as having prevented a major disaster. It is important for the workers to be honest in their dealing with the company.
Fraud can only take place with the connivance of the all people in the leadership structure. Stakeholders should not be compromised to let inaccuracies go unquestioned inn AGM’s. The management should exhaustively, deal with all queries and failure to address investors concerns should be met with probes led by statutory bodies mandated by the state.The collapse of Arthur Anderson LLP is a lesson to accounting firms as to the fate that awaits them should they abet fraud.
The numerous lawsuits facing the former giant in accounting are testimony that crime does not pay. To ensure that scandals like that of Enron do not occur again, there is an urgent need for companies to open themselves to closer scrutiny. There should be quarterly financial reports released to the public about the state of affairs in the company. Further, there should be no conflict of interest in the companies.Chairpersons should not hold the posts of C. E.
O. as this will tempt them to serve their own interest rather than those of the company. Insider loans should be discontinued and allowances and bonuses approved a by AGM’s before implementation. External auditors should be changed after serving two terms as this will curb their familiarity with the accounting staff.
Consequently, chances of collaboration with company staff to commit fraud will decline. The chairperson and the board of director should be people without a stake in the company. Their impartiality will be higher and professionalism will be upheld.
