One of Enron’s major problems stemmed from lack of self-governance. A company linked with the US government it is not surprising that Enron was not monitored frequently. Let alone was able to fool the masses. The primary role of a company’s board of directors is to protect its shareholders interests. In the case of Enron, members of the Board of Directors manipulated numbers to steal profits that were based on questionable accounting. When the stock started to plunge, officials sent out a company wide memo freezing all employees from selling their own stock options in the company, claiming “a change in management” was under way.
At the same time they clandestinely sold off their own stock options costing millions of Americans their retirement savings. Enron’s corporate executives abused their power to illegally increase their own wealth. United States government link to Enron was clearly known through, most notably George W. Bush and Dick Chaney, as Enron was one of their largest contributors to their campaign in 2002. Thomas White, the current Army Secretary, and also a former Vice Chairman of Enron Energy Services attempted to privatize energy utilities that would supply energy to the armed forces.
A venture like that would be extremely beneficial to Enron. Upon a thorough investigation of White, they discovered he nearly 400,000 shares of Enron stock. When White sold his shares he made out with a profit of twelve million dollars. White phone records reveal 30 phone calls linking him with Enron employees. These suspicious actions strongly incline some form of insider trading. Thomas Whites actions show a strong correlation of Enron’s tie to the government. Is it possible our government knew all along?
Many doubt such a large conspiracy but blame selfish motives of employees that thought they could get away with such a scheme. An additional dilemma to be considered was Enron’s relationship with the infamous accounting firm Arthur Anderson. Paying the company 51 million dollars a year in services for both auditing and consulting, the company was responsible to check and make sure that all business processes were running efficiently and correctly and that all the financial books were in order. Realizing that Enron was manipulating numbers, Anderson’s committed a critical mistake.
Accounting firms are successful primarily because of their integrity. By agreeing to fix the number and hide documentation of its biggest client, Arthur Anderson gave up its most important attribute, its good name. When all the information surfaced, Enron’s Directors and Officers Liability insurance withdrew their protection coverage. They claimed that Enron lied to them hence voiding the policy. This left Enron completely open to lawsuits from creditors and shareholders. But the Enron fiasco provided no single entity or person to blame for the deception.
Thus a blame game would soon ensue and continues through legal action and litigations. Enron debacle has awoken owners and created a known precedent for integrity of honest hard working accounting firms. Correctly assessing overall risk is crucial to create success. Effective risk management strategies require an ability to control risk and provide relative information to determine new future strategies. It is essential that managers understand the sources of risks, potential costs, how to classify, and how to evaluate loss exposures.
Management also needs to create strategies to minimize the overall risk of the firm. First of all, managers must be able to recognize the source of the risks and how they affect business. Enron believed that they could control almost any risk through insurance and hedging contracts. They knew that the risk had upside, as well as downside, potential, but did not look fully into these methods. By using insurance and hedging, Enron did subside some risk, but it actually hid a lot more of it.
This is a problem because the risk was still present for Enron and its shareholders, yet not very many people knew about it. These methods were also costly, and didn’t fully alleviate Enron of the potential risks. The risk manager should have came up with an effective risk management strategy assuring that the risks were controlled, not hidden, and providing a foundation for any future strategies. Valuation is a method that needs to be incorporated to ensure the assets are valued at the correct market price and balance sheets and income statements are properly managed.
With valuation a company can monitor and create funds available for emergencies and ensure the firms hedges transactions. Another way a company like Enron can evaluate key risk factors is meeting economic obligations and liabilities. Once a risk management team can offer solutions to a variety of economic perils they will become adequately prepared. By identifying possibilities of loss a company can prepare for situations that make subject the company to unnecessary losses.
In the case of Enron, corrupt employees cost the company millions; the number of people in on the conspiracy makes its crucial to have a staff of employees with integrity and moral conscious. Perhaps Enron’s risk management team was on the take, the numerous problems Enron created stemmed from bad leadership. Enron needs to reevaluate its Key Personnel, Net Income values and possible business interruption loses. By declaring bankruptcy Enron at least ensured temporary survival of the company.
In light of the disaster Enron will have to restructure its risk management initiatives and hire responsible employees. Enron’s debacle will become an event that every company will learn from thus reinforcing better risk management techniques in minimize loss exposures. “Risk Management” has become a very commonly used term. It incorporates many fields and helps recognize and cope with uncertainties, in order for companies to be better prepared for any unlikely and likely event Enron and other companies must diversify their staff’s with numerous experts in many fields.