Analysis Of The Success And Fall Of Enron Company In Terms OF Reputation

According to an article from the Harvard Business Review, a company’s reputation is based upon the interactions between stakeholders of the company in categories such as “product quality, corporate governance, employee relations, customer service, intellectual capital, financial performance, handling of environmental and social issues.” An important question is: Can an entity build a good reputation, have a lapse in one of those categories, and survive? In this paper I will discuss the rise and fall of the controversial company Enron.

Enron will forever be known as one of the biggest accounting frauds in the practice. Many accounting courses will include a lecture on how NOT to have another Enron scandal. Enron was founded in the year 1985 as a merger between two gas companies. Enron made their revenues by buying, selling, and trading energy online. E-commerce was just beginning at the time, and Enron was at the right place at the right time. Their revenues were astounding. They started out simply as a merger between two gas companies but ended up being a bigger company and having larger revenues than both of them. Things were going great for Enron. They even instituted their own values statement in the form of the acronym RICE in their code of ethics. RICE stands for:

• Respect – Enron values to treat others as they would like to be treated.
• Integrity – They collaborate with customers and prospects openly and truthfully.
• Communication – Communication is important. As a team, they must communicate to move the company forward.
• Excellence – They will not stop until they are the best. Continually setting goals will help them reach their target.

This acronym hung in as banners at the headquarters to remind employees how they should act. Enron was doing so well they were recognized by the famous Fortune magazine. They were even voted as one of the top companies to work for and received a nomination for being the “most innovative company in America” for six years in a row. Enron was also developing a great reputation with consumers in the United States. They came out with new ideas and even made developed their own online commerce website for trading energy. Shortly after that, Enron decided to go public. Their stock price was a measly $40 per share in January 2000. Cite source. Seven months later, their stock price reached an all-time high of $90. A high share price reflects high shareholder confidence in a company. After looking at their exponential growth and earnings over a short period of time, everyone wanted a piece of Enron. They were earning billions of dollars at their peak. Or so their financials showed.

After doing so great and being recognized for it for so long, how could they mess up? Enron pushed the envelope on trading energy, selling broadband, and how to be creative in their accounting practices. It started with their arrogance. As per their values statement, Enron was committed to excellence. They were not interested in anything less than that. They built a reputation upon leading the industry. Enron started feeling the pressure when companies started entering the sector and taking some of their market share. They knew to make their company more appealing to potential creditors, investors, and shareholders, they would have to increase revenues and decrease their debt and expenses. The way they chose to do this was not by paying off their debt or reevaluating assets. They chose to achieve this by creating special purpose entities and shifting their debt to that entity. The entity would receive funding from a bank, and Enron would not have to report that debt on their financials. They would, however, count this money loaned to them as revenue. They did this with many special purpose entities. They would also book contracts (with or without the intention of fulfilling them) and count them as revenue before completing them. It took a while for this to be caught. The public started getting suspicious whenever the CEO Kenneth Lay disposed of almost 63, 000 shares, resigned, and appointed a new CEO. It was getting harder and harder for Enron to keep up with hiding their debt and raising their share price. Enron finally crashed on December 2, 2001. They filed one of the largest bankruptcies in history. Their share price dropped down to ten cents in January 2002.

Stockholders in Enron lost tremendous value in their portfolios. Employees at Enron were devastated. This was supposed to be a great company. This scandal shocked the world. Enron did not only ruin their reputation, but they also ruined the reputation of their auditing firm, Arthur Andersen. Arthur Andersen did not do their due diligence to Enron or Enron’s shareholders. Their job was to sign off and develop an opinion Enron’s financials. They knew there were bad things going on in their accounting practices but signed off on the financials anyways. However, there was one good thing that came from the Enron Scandal: the Sarbanes-Oxley Act (SOX). It provides accountability on higher officials in the company for the company’s financials. It also provides rules for independence of auditors and rules on disclosures concerning financial statements.