Enron Corporation, a company founded in 1985 and grew rapidly, gained wide media coverage as it hit a share price of $US90.75 in 2000. The company spread its business to various sectors over its short course of growth. The growth was attributed to its former CEOs Kenneth Lay and Jaffrey Skilling. However, the real picture was different, for Skilling and his team through their unethical accounting practices had been cheating Enron’s investors. They kept the firm’s huge debt hidden with intent to maintain the reputation of the company. Skilling and his colleagues verbally attacked the industry analysts and some of the Enron employees who had already expressed their doubts regarding the company’s actual financial position. Finally, by the end of the 2001, the firm’s share prices plummeted from $US90 per share in mid-2000 to less than $1. The result of this drastic drop in stock prices was that investors lost an amount worth $11 billion. Despite Dynegy’s (Enron’s competitor) proposal to take over the organization, Enron Corporation filed Chapter 11. The case had profound impact on the accounting practices of the United States, because the Federal government passed a number of laws such as Sarbanes-Oxley Act after this incident so as to improve its corporate governance policies and to stop corporate frauds. Today US companies emphasize on corporate governance laws and internal check systems to avoid accounting irregularities and unethical business practices. Since Enron scandal had far-reaching effects, modern organizations can learn several lessons from this corporate failure. This paper will analyze the case of Enron and identify the factors that led to this large corporate failure.
1. How did the corporate culture of Enron contribute to its bankruptcy?
One of the major problems with the corporate culture of Enron was that the firm put extreme pressure on employees to improve organizational productivity. The company’s employee rating system would rate 20% of the total number of employees below the par every year, and those employees were to leave the organization. A culture of deception grew up in the organization because of its rigorous performance evaluation system. The situation forced employees to focus only on achieving periodical targets and improving individual productivity compromising ethical standards. There was no proper system to interpret the common goal or to motivate the workforce. Each employee accounted only for their personal performance, and ironically, this was measured on the ground of the number of targets they achieved.
Another negative factor with regard to Enron’s culture was poor communication across the organization. This issue facilitated easy environment for frauds to hide their errors, because employees were unusually uncooperative to each other. Enron’s workplace promoted employee competition, but failed to promote communication and knowledge sharing. Employees felt humiliated once they asked questions or wanted to clarify doubts. Enron employees were unwilling to share resources and information as they did not want to help or support each other. In the absence of resource sharing, employees pretended to be smart and error free even without understand their tasks. If teamwork approach had been encouraged in the organization, it would have avoided unnecessary competition and worksite conflicts minimizing chances of errors and unethical practices.
Enron’s culture gave unnecessary emphasis to financial goals. Financial achievements were the sole basis of all benefits in the company. Therefore, only individuals who could achieve their target got admired. As specified earlier, both employees and executives focused on achieving their targets rather than increasing shareholder values. Obviously, the firm had superior bargaining power when it was in a financially well position. However, it could not understand the concerns of its stakeholders.
Enron’s corporate culture was favorable for fraudulent activities as its CEO and other top executives silenced its employees to make personal financial gains. This was the reason why Enron discouraged its employees from raising queries regarding the fiscal position of the company. No one was able to question the decisions made by the company executives. Those who publicly expressed doubts about the company’s way of making profit were abused by Enron’s top officials. For example, Clayton Verdon, an Enron employee who commented on ‘overstating profits’ in an employee chat room was fired from his job.
2. Did Enron’s bankers, auditors, and attorneys contribute to Enron’s demise? If so, how?
Enron’s unusually high stock price was achieved through a set of fraudulent accounting practices initiated by Skilling and his team. Using accounting loopholes he created many special purpose entities and concealed big financial losses of failed projects. Skilling could mislead Enron’s audit committee with the unfair support of Chief Financial Officer Andrew Fastow and other high rank officials. Enron violated several accounting rules and SPE laws and altered accounting principles. It totally ignored the long term impact these unethical practices would have on its investors, shareholders, and employees. Enron’s accounting firm, Arthur Andersen also contributed much to Enron’s by failing to perform the roles of an auditor or consultant properly. Reports indicate that the accounting firm had charged huge prices for the services provided to Enron. Reports indicate that Arthur Andersen charged huge prices for the services it provided to Enron. As a professional accounting firm, Arthur Andersen could have performed its duties and responsibilities well, but by not doing so it played a major role in the Enron’s collapse. If Arthur Andersen, the auditor had identified and reported the issue on time, regulators could have avoided this corporate failure. As the case tells, “Enron’s auditor, Arthur Andersen, faced over 40 shareholder lawsuits claiming damages of more than $ 32 billion.” (“Enron: Questionable Accounting Leads to Collapse, p. 495). Andersen lost good volume of business in 2002 and a large number of its employees lost their job.
3. What role did the company’s chief financial officer play in creating the problems that led to Enron’s financial problems?
The U.S. Justice Department found Enron’s CFO Andrew Fastow accountable for inflating Enron’s profits; and other charges against him “included fraud, money laundering, and conspiracy” (“Enron: Questionable Accounting Leads to Collapse, p. 489). The CFO Fastow entered new business deals many of which were against the shared interests of Enron investors. Obviously, Fastow compromised his duties, responsibilities, and professional ethics with his financial greed. Fastow was inducted mainly based on Michael Kopper’s statements. Kopper was the company’s managing director. He played a key role “in the establishment and operation of several of the off-balance-sheet partnerships” (“Enron: Questionable Accounting Leads to Collapse, p. 489). Kopper assisted Fastow in money laundering and wire fraud. Federal officials seized $37 million from Fastow in an attempt to recover the money he earned illegally. According to Federal prosecutors, Enron’s failure was not much of ‘exotic accounting practices’. Fraud and theft operated by Fastow concealed $ 1 billion in Enron debt, and this directly led to bankruptcy. Fastow misinformed Enron and its shareholders through off-balance-sheet partnerships. The intention was ‘to make Enron appear more profitable than it actually was’ (“Enron: Questionable Accounting Leads to Collapse, p. 489). From these partnerships Fastow made about $ 30 million. Fastow had been known as a money wizard during the days of company’s high reputation. He cunningly created the strange financial vehicles with which Enron drove to business heights. Skilling wanted to tap all markets including energy, water, broadband and anything he found potential. Fastow’s tactic was that he created numerous special-purpose entities and transfered Enron's debt to an outside company while at the same time kept control of the assets that stood behind the company’s actual debt.
Conclusion
The Enron scandal clearly indicates how unethical accounting practices and poor organizational culture can contribute to the collapse of a growing firm. The Enron failure was the result of both illegal and unethical practices including wrong accounting practices, fraud, and theft. The Chief Financial Officer Fastow and Enron’s CEO played major roles in this corporate scandal. They practiced off-the-books partnerships to conceal the real debt status and deceitfully convinced investors that the company’s financial situation was fine. Enron’s personnel violated several accounting rules and SPE laws. They sacrificed accounting principles to meet their personal financial aspirations totally ignoring the long term consequences of such unethical practices.
References
“Enron: Questionable Accounting Leads to Collapse”. Case Study.
