Background
Enron case study dwells upon one of the most known scandals in business ethics and financial world. Founded in 1985 as a result of the merger between Houston Natural Gas and Internorth, Enron Corporation starts trading natural gas commodities in 1989. Throughout the 90s,the company was considered one of the most innovative and attractive for investment companies in the country. Renown for its unique business model and trading businesses, the company benefitted from a positive image, shareholder trust and external financing (Li, 2010). With a number of changes in leadership from Jeffrey Skilling to Kenneth Lay, who occupied Chief Executive Officer (CEO) positions during the period, and manipulations in the governance structure such as the shift of Richard Causey from Arthur Andersen to Enron as the assistant controller, the company over the period of 1990-2001, in October 2001, the organization, which appeared to be successful and stable, based on previous audit and public reports, declares the total loss of USD 638 million in the third quarter of the same year with the total drop in shareholder value of USD 1.2 billion. The reduction is attributed to the write-offs, related to the failed broadband and the water-trading businesses of the corporation. This resulted in hedge-inflated values, leaving the company with hundreds of million debt.
The inquiry by the US Security and Exchange Commission into the Enron finances, launched several days later starts the external investigation. While the company announced that the management will cooperate with investigation and attributed the challenges to the partnership with Fastow and his contribution as the finance chief, the outcome of the scandal resulted in the bankruptcy of Enron Corporation and its major partner, Arthur Andersen, one of the largest in the US and globally accountancy and audit companies (Li, 2010).
Ethical Issues and Values
There are several major causes of the Enron Corporation, which contributed to the disaster of the entire situation. It is evident that the company developed a strong and multifaceted machination scheme, involving a number of individuals with various interests and agendas as well as the lack of personal and professional ethics. First of all, it is important to look at such element as truthfulness. It is possible to argue that the lack of truthfulness of the senior management with regards to the financial health of the organization was justified by the preservation of personal interests of individuals in the top positions of the company. While the duty of the management is owed to good faith and the disclosure of the situation to all the interested parties, the management kept the situation hidden to protect their reputation and compensation. Secondly, the conflict of interests among the interested parties further contributed to the collapse of the company. With the compensation policies in place, the company even further endangered the situation. Additionally, the interest divergence was further enhanced by the conflict with its external partner Arthur Andersen.Finally, the revealed accounting fraud was the major contribution to the portfolio of Ethical issues, related and considered in the scope of Enron scandal. As a public organization, Enron was subject to governmental regulations and external audit, and to preserve its image, the employees of the company were forced to forecast unreal high future cash flows, boosting the share price and shareholders´ expectations.
The above outlines the actions, which were taken and, in any cases, not taken to preserve a number of personal interests of the top management in both, Arthur Andersen and the Enron Corporation itself. The example of the actions of the management and testimony from the involved parties, such as the statement of Arthur Andersen about the destruction of the documents by Kenneth Lay in January 2010, the statement of Mintz that Fastow and Kopper invoke the Fifth Amendment Rights and Duncan´s pleading guilty for destruction of justice outline the complexity of the ethical issues.
When it comes to the conclusions about who was responsible for the scandal, one can look at the situation from an individual and corporate standpoint. As companies actions are originated from individual decisions of the management, then the CEO Kenneth Lay, Jeffrey Skilling, and Andrew Fastow violated the provisional ethics and are personally responsible for the situation. On the organizational level, as the actions of the managers are lined and seen as corporate in the situations, when these individuals act on behalf of the company, the judgment is more complex. The shareholders of the company did not know about the secret plan and manipulations of the above-mentioned individuals and, thus, it is not possible to attribute the fault for the occurred to the entire organization.
Consequences and Outcomes
As a result of the scandal, major damages occurred for the individuals and groups, involved in the case. While the individuals, involved in the scandal from the management side of the organization are the mot visible "participants" of the case, the effect of the situation have had impact on many other individuals and groups in the society and community, which have to be considered when looking at the consequences of the Enron scandal.
First of all, the management of both companies, Enron Corporation and Arthur Andersen were personally and professionally damaged as the reputation of the company and the individuals as professionals affected their careers. Additionally, these individuals in many cases faced criminal charges and were punished according to the law with financial penalties and imprisonment. Moreover, particular individuals, such as Cliff Baxter, gave their life in a self-inflicted gunshot as a result of the personal reaction to the situation and involvement in the case.
Enron Corporation and Arthur Andersen companies bankrupt and leave the market, leading to one of the biggest in the history scandals in business Ethics and accounting. The charges faced by the company, groups of management and individual managers include fraud, money laundering and conspiracy and forging the earnings and balance sheet and cash flow statements.
Recommendations
It is evident that there should be a healthy balance between the culture and corporate governance of the company. As a consequence of the lack of focus on the corporate culture and values among the employees, the organization collapsed and endangered and damaged a number of individuals and corporate partners. Stronger focus and fostering of the ethical culture and external control over the actions of the managers of the Board of Directors and Non-executive directors could lead to the earlier reveal of the fraud and prevent the situation from growing to the size it reached in a given situation. The major recommendations to the situation include the following (Gillan and Martin, 2007). First of all, more comprehensive and effective control system over the action of executives. One of the ways to reach it is the rigid governance structure with stronger control mechanism over the senior nd middle management. Secondly, Dembinski et al (2005), illustrates the format of the “Mark to Market”, plan developed and implemented by Skilling to be able to boost the share price in a short run (Sadler, 2003). The reality shows that such plan would not be able to solve the situation in the long-run, outlining the lack of morality in the actions of the management. It is recommended that the in such situations the decisions of the companies to pump the artificial investment in the company on a large scale are assessed externally and, preferably by the USSEC before approval.
When it comes to the learning outcomes for the contemporary business world, the case of Enron is a major example of the organizational failure in terms of personal and professional ethics, accounting and finance principles as well as the corporate governance. Managers and shareholders can benefit from understanding how the decisions on the delegation of authority and the choice of the corporate governance structure can determine the stability and risk management of the organization as a whole. The government and the local authorities can benefit from understanding the fraud mechanisms in accounting and finance system and address the risks through effective external control mechanisms and audit. Finally, accounting professionals and the management, in general, have an example in front of them, which outlines the duties and responsibilities of their profession with regards to their partners and stakeholders. The benefits from the short-term gains can significantly underweight the damages in a long term and destroy the career and personal life in case of unethical and immoral practices.
References
Sadler Ph (2003). Strategic Management. 2nd Edition. London: Kogan Page Limited
Li, Y. (2010). The Case Analysis of the Scandal of Enron. International Journal of Business and Management. Vol 5(10). 1-5.
Gillan SL, & Martin JD. (2007). Corporate governance post-Enron: Effective reforms, or closing the stable door?. Journal of Corporate Finance, 13(5): 929-958. (December 2007).
Dembinski, P.H., Lager, C., Cornford, A., and Bonvin, J.-M. (2005). Enron and World Finance. A Case Study in Ethics. London: Palgrave McMillan.
