William A. Niskanen (July 2002) discussed the issues of collapse of the Enron Corporation, which is led to two broad concerns. Firstly, it’s reflected by weakness in the stock markets and the foreign exchange value of the dollar, even though almost all of the subsequent economic news has been better than expected. Secondly, this effect has already led to increased demands for regulation of accounting, auditing and corporate governance and increased criticism of any proposal for privatisation.
The articles highlighted that the major debacles of collapse of Enron because of a consequences of the combination of too much debt and some unusually risky major investments. Moreover, author described that Enron did not collapse because it break the rules but their broader interest in investment and financial weaknesses brought into the catastrophe. Author identified that there is something is seriously wrong in corporate America. General shareholders, now a majority of Americans, have a financial interest in correcting the conditions that led to these problems.
They are more concerned about maintaining the necessary popular and political support for a market economy has a special political stake in correcting these conditions. The authors further pointed that most of the related markets learn a lesson on or after the collapse of Enron. The primary business lesson from the experience of several companies is that it is unwise for highly leveraged company to trade in the very volatile markets for energy futures.
Furthermore, the collapse of Enron it’s cause by extensive use of SPEs (Special Purpose Entities) to increase the use of debt to finance specific activities. The articles further talk about the issues that has been broadly ignored in discussion about the implications of the Enron collapse is that the current U. S. tax code biases the decisions by all corporations in several ways that increase the probability of bankruptcy. The limitations of these articles are only focused on the government and political perspective.
It failed to highlight the important roles of Enron player that fall short to set out the corrective plan to prevail this debacle. Luis Frisoni Jr. (2002) inscribe that terrorist attacks of on September 11th have had a devastating effect on the US economy. Ever-greater shareholders expectations, analyst demands that companies produce outstanding quarterly earnings and highly questionable corporate practices have resulted in volatile stock prices, unrealistic valuations and unsettling confidence on rumours and gossips.
The articles highlighted that incidences of Enron and WorldCom and the question that have arisen from the corporate practises of market sees that public has become sceptical about the credibility of corporate financial statements. Authors believe that failure of Enron and WorldCom must goes to improperly manage by regulators, corporate management and auditors. The author illustrated that the main tasks should now be to established an adequate information model for market value formation, a new accounting and information model that will allow for maximum disclosure and transparency.
The Formation Factors of Value (FFV) that determine the capitalisation value, or market price of companies can be classified according to whether they are financial or non-financial factors. The article also describes that the traditional accounting techniques facing a problem in the capital market. Because it lacks specific, reliable information and generally accepted valuation criteria, the market produces but these evaluation are largely subjective.
The author mentioned that the stability and health of economies worldwide depend, ultimately, on the transparency and integrity of their respective regulatory and financial reporting systems. Besides the creation of a new accounting model on non-financial FFVs it is also vital that adequate corporate risk management systems are put in place. The author impressed that in future accountants must posses the qualities, abilities and qualifications in order to operate successfully in a technology-enabled, global marketplace and revamp the current professional education syllabus accordingly.
The limitation of the article is that the authors were only looking at non-financial factors to solve the internal accounting control. It failed to emphasise on credibility of shareholders and corporate financial elements. John Conley (Aug, 2002) describes the importance of weather risk management in US market. Enron is the seventh largest company in the United States and it was the largest and most dominant trader in the weather risk transfer market before this giant US company collapse.
Furthermore, its bankruptcy put a sizable hole in the available capacity to insure, trade or hedge weather risks. “No uncertain terms that the weather risk trading market would power on in effectiveness for the energy industry, at the very least, remaining untainted by the tentacles of scandals wrapped around almost every other aspect of Enron’s business (Harvey Padewar)”. After all, the result of Enron collapse was not unaffected the global market because of the expanding and the preventive action taken by several financial body worldwide.
The articles mentioned that the loss of Enron to the weather risk management market was felt on two fronts, which are capacity and publicity. ” There was a lot of anxiety in this market and we’d all been in Enron shadow as far as the number of transaction and market dominance over Enron collapse (Lynda Clemmons)”. “Undoubtedly, Enron played a key role in developing and leading this market but Enron’s troubles escalated, the other active traders began to cover their positions early in the autumn (Warren Isom)”.
The authors also discussed key research findings and granted that demise of Enron has not blunted the weather risk transfer and much of the business remains largely in the energy sector. “These companies know the exact dollar impact of deviations in the weather on their businesses (Chris Phelan)”. The author also describe that most companies have a risk management culture born from managing energy price exposures whereas managing weather risks was not a big leap of faith. However, the articles did not focus on implications of weather trading by foreign companies on Enron Trading.
Author also failed to highlight the consequences and impact of weather trading risk on small and medium company, which directly involve in Enron transactions. Asian Wall Street Journal (2002) describe that WorldCom intends to sell nonessential assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company. These articles report the company, which has $35 billion in annual revenue, now is nearly out of money and filed under chapter 11 of the U. S. Bankruptcy Code.
The protection filling entirely shields the company from its creditors. As apart of the court process, WorldCom creditors, including bondholders and banks, will jockey for payment. The articles further elaborate the bankruptcy almost certainly will wipe out common shareholders, who are last in line among stakeholders in such a proceeding. The analysts’ shows that WorldCom’s assets today may be valued at less than $15 billion compare to market capitalization of about $120 billion at its peak in summer of 1999.
These articles mentioned that the first thing WorldCom will do now that it has filed will be to ask the bankruptcy court judge to approve a $2 billion bank loan in the form of senior secured debtor-in-possession financing. Furthermore, WorldCom intend to sell nonessential assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company. The articles also illustrate that it has secured $750 million of the $2 billion to use in the interim and plans to continue serving its residential and businesses customer.
However, they faces a major challenge to hang on to creditors, as some have begun voicing concern that the company’s financial condition could affect service. One of the stipulation the banks made is that WorldCom hire a chief restructuring officer to marshal WorldCom through what has the potential to be a overwhelming reorganization. Articles also mentioned that another step would be for WorldCom to seek authority to pay bills outstanding to some creditors so-called critical trade vendors before it pays bills owed to other creditors. That step is taken to ensure good relations and critical service.
The limitation of these articles is fail to mentioned the flow of the secured loan from bank. Articles never mentioned the purpose of the loan whether to be payback to creditors or as an expansion of the WorldCom. James E. Orlikoff and Monte Dube (June 2002) describe that recently the American Governance & Leadership Group and the law firm of McDermott held a national teleconference that presented the case for expanded liability and accountability for non-profit corporations as a result of the business failure of the AHERF, Enron and WorldCom Debacle.
This article focuses on the main points of this teleconference and the valuable advice of several non-profit governance and legal experts extended to boards and CEOs who would like to avoid having their organization become the next AHERF, Enron and WorldCom. The authors commented that new awareness among the populace the fundamental question that was raised by the high-profile debacles was this incredulous layman’s question of, “Where was the board? “.
The articles describe there are few things how this organisation affect not-for-profit years, firstly this organisation has already changed, in part, the landscape and the ground rules for not-for-profits and secondly they know from history that bad facts make bad law and expecting in increasing scrutiny from not-for -profit stakeholders. The authors mentioned that there should be nothing wrong with a dissenting vote. The fact thet there is a cultural inhibition to dissent is a very significant warning sign of ineffective governance processes.
Furthermore, authors believed that this marketplace vulnerability is an even greater risk for healthcare organization boards than the potential risk boards than the potential risk of liability. Boards have to be very careful not to over-react to the AHERF-Enron-WorldCom lesson, focusing on micromanagement and focusing on retrospective monitoring of what has occurred. Another concern created by the fallout from AHERF-Enron-WorldCom is the fairly recent reluctance of qualified individuals to become board members because of the risks involved. Whereby this is happening in both the corporate and non-profit sectors.
However, the questions of who ensure the system integrity and monitoring the board of directors from the fraudulent aspect were departed. Andrew Hill, Joshua Chaffin and Stephen Fidler (March 2002) describe that there is a growing suspicion that at the heart of the once-mighty energy trader was a financial hole while questioning of Enron directors and officials. Authors mentioned the combination of aggressiveness accounting, off-balance-sheet deals and nagging of employees and advisers, allowed Enron management to create a virtual company with virtual profit.
The articles examine that Enron inflated revenues, for example by treating the turnover of trading through its online subsidiary as revenue. Enron reinforce profits by booking income immediately on contracts that would take up to 10 years to complete. In addition, Enron shifted debts into partnerships it created and in effect controlled, even though defined by auditors as off balance sheet which masked the poorly performing assets with rapid deal making. According to Prof.
Frank Partnoy, Enron entered into derivatives transactions with these entities to shield volatile assets from quarterly financial reporting and to inflate artificially the value of certain Enron assets. The articles determine that in the case of assets, such as long-term energy contract, in which there was no transparent trading, Enron had to estimate fair value. Enron pointed the judgment is necessarily required in interpreting market data and the use of different market assumptions or estimation methodologies may effect the estimated fair value amounts.
The articles highlighted that Enron forecast a $36. 8m profit over the 10-year deal and used Mark-to-market accounting to book $23. 4 m before it had ever turned on Quaker’s lights. Under accounting rules, such treatment is permitted for commodities, such as natural gas and electricity but the rules are more restrictive when it comes to services. Authors added that the profits from these activities are supposed to be booked on a more conservatives “accrual” basis. However, the articles were failed to identify the actual format of financial accounting standard.
The article should have sought to present a more off balance sheet items. Emerald (2002) describe that unethical, immoral or downright illegal dealings that go on within an organisation was the frightening substance in Enron scandal. As business ethics becomes of increasing concern, take a look the validity of establishing a policy for whistle blowing. Articles mentioned that Sherron Watkins playing a role as a whistleblowers at Enron scandals. But even when CEOs or directors play no part in unethical behaviour, they have still been known to dismiss whistleblowers as troublemakers.
The survey shows from the external perspectives that tend to see whistleblowers in a positive light, but it is only retrospectively that they are transformed from company pest to public hero. The articles further focuses on Corporate Social Responsibility reports and shareholders accountability and the role of the employees. Articles mentioned that this is the time for introducing code of ethics for whistle blowing to protect both the organization and the employee.