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Introduction
The failure of Enron due to unethical practices had served as a lesson for the entire world. Firstly, it was first of its kind and secondly, there was a chain reaction of wrong actions to cover up smaller misdoings. Every field of study tried to find out the real reasons of failure of Enron as a corporate. Some claimed it to be financial failure, some as leadership failure, some as cultural failure and some as corporate governance failure. This case is one of the basics to understand corporate social responsibility and implications of failure to do the same. The key issues of the Enron Scandal consists of lack of transparency in actions of the top management that paved way for creative accounting. Using creative accounting the management hid the losses by opening new alternate entities. Creative accounting is not punishable per the American Law. This served as an escape point for the accountants . Enron's operations were marked with moral contradictions for it did not have separate firms for counseling, supervising or auditing. But there was no action taken by the law.
The company indulged in breaking the rules with the deregulation of the derivative market in order to enhance its capital structure in the books. But it was not strong actually. It risked the financial strength of the company to cover up the wrong decisions by seeking anonymity privilege. The different levels of employees had varying personal interests in the company that did not particularly align with the organizational goals and objectives.
The Stakeholders
Given the above issues in Enron, the company was declared to be a bankrupt. It had impacted various stakeholders like the investors, shareholders, citizens, trade affiliates, employees and the authorities. The different ways in which people were impacted with the issues were the loss of employment to pay- off the losses towards the bankruptcy. The loss to the investors not only in monetary terms but also their trust in the company. As the American law could not preemptively identify the problem in Enron, the citizens' and corporate trust in the law dampened. Banks were also not trusted with and suspected of collusion. Auditing firms' actions were questioned and some even lost their credibility.
Analysis of Outcome
The failure of Enron had the following outcomes:
Punishment: The Company was declared to be bankrupt and file bankruptcy. It was considered to be the biggest audit failure. The employees and the investors were compensated by law. The audit firm was penalized and lawsuits were filed for the irregularities of the audit firm.
Intervention of Legislation: The Sarbanes- Oxley Act (SOX) 2002 emerged. The law ensured to have a strict guideline for all the corporations to follow corporate governance, audits and the norms. The act also required the companies to make appropriate disclosures; failing to do the same would lead to dire consequences. Creative accounting was to be limited with defined scope for the same. The Act stressed on the importance of corporate governance through various perspectives.
Red Flags
In case of Enron, there were no red flags. There were no thresholds or points that could reveal the unethical practices being followed by the key decision makers in the company. The case of Enron reveals that the unethical practices are evident at the top levels i.e. in the decision making process. Therefore, it is vital to have checkpoints or red flags at that level. The impact of the decisions made gets propagated across the organization. Therefore, that should be evaluated in advance and red flags be defined by setting the thresholds. It acts in the interest of the stakeholders who appoint the management to act in the larger interest . Besides, there is no revelation process or bonus for the employees who understand that wrong or unethical practices are being followed within the organization. Lack of admittance furthers the unethical practices. Similarly, concealment of fraudulent behavior only aggravates the actions. Therefore, whistle- blowing activity for right cases should be encouraged.
Lasting Implications
The case of Enron has a lasting impact on the analysts and corporations as well. Unethical practices in accounting and overlooking of facts by the audit firm are the prime reasons of failure. The formation of the SOX Act has been the key implication of Enron's Scandal. The act ensures that the personal interests of the management do not overshadow the organizational goals. The act had strict measures to fine tune the audit, compensation and board of directors' composition. Prior to its failure, there was no such Act or law as to govern the misconduct of the organizations. Compliance of the SOX Act 2002 later became a mandate for the organizations. This Act was the point of reference for actions to be taken in case of violation . It is recognized by the major concerned authorities like the SEC, IFRS, etc.
References
Gherai, D., & Balaciu, D. (2011). From Creative Accounting Practices and Enron Phenomenon to the Current Financial Crisis. Annales Universitatis Apulensis Series Oeconomica, 34- 41.
Grinstein, Y., & Chhaochharia, V. (2007). Coporate Governance and Firm Value: The impact of 2002 Governance Rules. Johnson School Research Paper Series No. 23-06.
Harrison, J., & Wicks, A. (2013). Stakeholder Theory, Value and Firm Performance. Business Ethics Quarterly , 97 - 124.
