Enron was the second largest company in US history to be declared bankrupt. Recently, the Congressional committees have analyzed the company in order to establish the cause of its fall. Although the cause has not been determined with precision, some of the vital elements that caused its downfall are clear. The Company’s former CEO and the former Chief Finance Officer implemented ideas that led to significant problems. The crisis that was initiated could not be legally fixed. In addition, the idea of creating asset-light company backfired and the company had applied immense risk management and trading skills to the asset-facilities owned by the third parties. In maintaining a raise in capital and credit rating, Enron ensured that it had relocated most of the assets in order to realize a positive financial statement. There was the expansion of expertise in the energy-trading sector, which was aimed at increasing the revenue outlay for the company (Madura, 2009). This was to be attained through the instigation of telecommunication broadband system. The problem that the company was subjecting itself is trying to achieve long-term goals and objectives in a shorter span of time. Its investment in fiber optics proved futile, as the market for these products collapsed. Although the whole organization was involved in its drastic fall, the risk management team did not perform its functions to the latter.
According to Madura (2009), Enron’s financial risk management tools were appraised due to its sophisticated nature in assessing risks—that was before it capsized. Risk assessment was a vital element in Enron’s organization as it enhanced effectiveness of business plan and regulated competition in the environment. The establishment of long-term operations was supposed to be hedged in order to cushion the organization against any instability in energy prices. In hedging the organization’s risks with the distinct purpose subsidiaries, Enron was able to retain its risks effectively. However, management was not able to put into consideration the complex transactions (Cheeseman, 2010). Other risk factor that Enron ignored was the ineffective support or enforcement of an entity’s values or ethical standard in performing its activities.
Enron was not the only company that fall prey of inefficient risk assessment techniques, many companies are still undertaking fraudulent activities without the auditor’s knowledge. In order to assess risk effectively, determination of the risk response is vital. The organization should consider mitigating the identified high-risk events before undertaking any operation in the economy. It should be observed that the objective of risk management and assessment is to obtain a reasonable guarantee that regards the achievement of strategic goals. Many organizations struggle with their risk response by considering and developing many controls in the system. The focus should be on mitigation of high-risk events; therefore, providing management with reasonable guarantee that the company’s financial statements are free from misrepresentation and are reliable.
In conclusion, risk assessment is the vital activity in an organization. Risk management department was responsible for the fall of Enron. However, risk managers need to articulate to the risk assessment techniques in order to be successful in its operations. All the organizations should appraise the risk-based approach while investing. The organization should determine the control activities that exist in the entity and establish strategies that will enhance risk mitigation. In the case where control activity is unavailable, implementation should be considered.
References
Cheeseman, H. R. (2010). The legal environment of business and online commerce: Business ethics, e-commerce, regulatory, and international issues. (6th ed.) Upper Saddle River, NJ: Pearson Prentice Hall.
Madura, J. (2009). Financial Markets and Institutions. London: Cengage Learning