Enrons scandalous fall in the late 1990s is a classic example of how corporate can exploit loopholes in regulations to portray a rosy picture of performance and deceive investors. In the period between 1990 and 1998, the price of Enron shares shot by a whopping 311%.
In the year 1999, it rose by a further 87% while 2000 rose by 87%. For these years the index rose by a 20% and a decline of 10% respectively. In the end of year 2000 the share price for Enron were valued at $83.13. The company also registered a capitalization beyond $60 billion.
These figures were clearly exorbitant. This represented about six times the companys book value and 70 times the companys earnings. This indicted the very high expectations on the companys future. In fact it was rated the most innovative company according to the fortune magazine. However in a period of one year, the companys image was badly scared, share prices fell to almost zero.
The company did several things wrong which culminated in the downfall. First, it went into acquisitions using a team of financial market speculators mainly charged with the task of hedging the risks taken by the parent company in field operations. The team speculated in the market and earned lots of profits which made the top executives think that those earning could be depended upon.
Consequently, they retained this team as core contributors to the companys earnings but deliberately disguised their operations. This shows that had the top management accepted the hard facts that these earning were not reliable and could not be integrated in the company, then the company would have effectively avoided the scandal (Berlau, par5).
Secondly, the company through the leadership of Jeff Skilling adopted the mark to market accounting mainly as a way of covering up the operating losses made by the company. This provided another avenue enabling the company put up flawed financial and other reports which misguided the investors into overvaluing its stock prices.
This was through the overvaluation of earnings. Clearly, this model of accounting should not have been adopted as this was a clear source of flawed reports. There was also emphasis on developing special purpose entities outside the umbrella of the companys core business.
Little information on the operations of these entities was understood by investors yet their operations represented significant portion of the companys investments. This structural arrangement enhanced possibilities of deceit. All operations should have been conducted within companys defined tasks and incorporated in order to ensure integrity.
Clearly, officers at Enron acted in contravention of the laws and the scope of their authority. First, Jeff Skilling on rising to the top management insisted on the use of mark to market accounting. This form of accounting is legal but applicable in companies dealing in buying and selling of securities. This form of accounting is known to be very fatal for organizations whose core functions include building of projects.
It goes against the prudence principle of accounting. There were also numerous cases of extravagant expenditures and in the late years just before bankruptcy, it clear that most of luxuries enjoyed by officers were from external financing as the company was in no position to make any profits. Indeed the litigations which followed the collapse of Enron confirmed that officers acted outside the scope of their authority (Healy, par7).
The corporate culture at Enron strongly encouraged aggressive growth, risk taking and continued entrepreneurial creativity. Generally these can be described as excellent values aimed at driving the company towards high performance.
However, there were little or no checks on these values to ensure integrity and ensuring that there was adequate creation of customer value in addition to shareholder value. This lack of balance led to unchecked soaring price per share. These values soon became liabilities. There was also unreasonable emphasize on size and it could bully and intimidate others making the organizations culture grow into arrogance (Zinoman, par2-6).
Debts were hidden and the myth that the company could never fail was effectively propagated among employees. This enabled officers charged with decision making to engage in very risky ventures with Enron stock as they could bet on the fact that Enron stocks could never fail. In general, officers clearly neglected their responsibility of oversight and engaged in criminal activities as a result of greed.
There are two main irregularities established on the actions between the sellers of securities and Enron. First the SEC under the leadership of Arthur Levitt gave leeway to the dubious practices at Enron by giving exemptions from some security laws which were meant to guard investors. They also did not raise alarms on the off balance sheet transactions which could not be captured in the share pricing of the company.
Indeed, Enron was liable for the actions of its agents and employees. This is mainly because the management was responsible for offering incentives towards the behavior portrayed by the officers in execution of their duties. The decisions on the
Works Cited
Berlau John. Who cleared that Enron exemption? Under Arthur Levitts direction, the SEC gave Enron exemptions from securities laws, opening the door for business practices that cost many their lifes savings. March 4, 2002. Web.
Healy Paul and Palepu Krishna. The Fall of Enron. Journal of Economic Perspectives 17(2) Spring 2003. Web.
Enron Pipeline Company came into being in 1985 with its main role of delivering gas to firms at a cheap price. The company later diversified by engaging in energy brokerage and did business in electrical power and related products (.docstoc.com, 2013).
Reasons for the Collapse of Enron
Two major reasons led to the collapse of Enron under lay and skilling. As per the case study, the reasons included corruption among the leaders and failure to abide by the established regulations. Lay had declared that he was knowledgeable concerning legal, moral and ethical ramifications of being at the helm of an organization. However, his conduct did not portray his knowledge at all.
Lay and Skilling oversaw the creation of a corrupt alliance among composed of Lay, Skilling, Fastow and a number of business people dealing with the company (.docstoc.com, 2013). Deep-seated corruption among the leaders without the knowledge of their junior staff led the company to insolvency. Values espoused by leaders and juniors as well matter a great deal. The leadership displayed negative values of selfishness, extravagant and rigidity and these led them to misuse the companys resources through corruption.
Undermining the Foundational Values of the Enron Code of Ethics by the Leadership
The top leadership undermined the foundational values of the code of ethics in various ways. The top leadership consisted of Jeff Skilling, Ken Lay and Andrew Fastow. Their conduct displayed utter contempt for the code of ethics, which emphasized such values as esteem, communication, probity and distinction.
For instance, Skilling failed to communicate effectively after an investigative journalist asked him to explain Enrons financial statements, which were almost inconceivable according to the journalist. Skilling casually dismissed the journalist as unethical instead of communicating effectively. Later on, some top executives met the journalist to clarify the issue of the financial statements but it was a flop (.docstoc.com, 2013).
Enron espoused a decentralized structure, which made it hard for information to flow freely to all stakeholders. Information was a preserve of the few and Fastow made it worse when he tried to hide the fact that Enron was trading to avoid becoming insolvent.
In addition, Lay insistence that he had no idea of what was transpiring implied that the leadership was not committed to communicating (.docstoc.com, 2013). Lastly, Enrons top leadership designed sub standard performance and pay systems that encouraged the executives to rob the company through increasing the value of their contracts.
Employees Expectations
Lack of communication especially to the lower cadre employees meant that they had no idea of the rampant corruption in the company (.docstoc.com, 2013). In addition, the company used to pay them promptly thus they could not be any suspicious. Therefore, the employees expected continued and sustained growth in the company as well as provision of their benefits and promotions.
To the employees, Skilling, Lay and Fastow were good leaders because the three succeeded to conceal their corrupt deals. In addition, the company had continuously won various awards and the audit reports reported no malpractices in the accounting processes (.docstoc.com, 2013).
As long as the channels of communication were not clear, the employees in Enron would not be any suspicious, looked upon the leaders to steer the company to prosperity in terms of profits and staff growth through allocation of benefits like incremental salary, and paid leave. The happenings of the company remained hidden to the employees until it was clear that Enron faced imminent collapse after the whistle blowing.
Enrons Corporate Culture
Enrons corporate culture promoted unethical decisions and actions in various ways. First, the culture failed to promote the values envisaged in the code of ethics. It culture was defined by the companys insistence on a decentralized structure, the methods of staff appraisals and the pay systems (.docstoc.com, 2013).
This laid the foundation for rampant corruption since it became hard for anyone to understand comprehensively how the whole company was moving forward. As such, any malpractice would go unnoticed in most of the units. In addition, the company lacked a functional control system, which made it possible for top executives to embezzle funds through misrepresentation of the value of their contracts.
The Role of Investment Banks
It is still not yet clear if the investing banking community contributed to the ethical collapse of Enron since the United States District Court for the Southern District Texas found the banks with no liability whatsoever (.docstoc.com, 2013). However, several actions by the banks continue to fuel the debate with some people maintaining that the banks were guilty of the collapse of Enron.
It is possible that the banks had foreknowledge of the dealings in Enron but went ahead and gave loans to the company with the aim of winning business from the company. J.P. Morgan and Citi deliberately lowered the lending rates to get more business from Enron and this in itself is unethical (.docstoc.com, 2013). The banks ought to play an oversight role concerning the bank but they abdicated this role by failing to regulate the company even during their scandalous dealings (.docstoc.com, 2013).
References
docstoc.com. (2013). Enron Unethical Business Practices. Web.
When the financial reports were made available after the 1999 fiscal year, it was tough to ignore the ascendancy of a company touted as a Wall Street darling (Keller, 2002). I heard about Enrons extraordinary story in the past three years, but I never paid attention to the details, because I became a finance journalist following not only the billion-dollar companies, I was more interested in companies that are bringing in innovative solutions in terms of communication, transportation, and knowledge acquisitions. However, the Enron topic keeps coming up in my radar. Last month, after Enron posted historic revenues, I made a decision to write about the company.
A quick overview of the last three financial reports from 1999 to 2001 raised a lot of red flags within the inner sanctum of my journalist-trained mind. However, the only thing that kept me sounding the alarm was the auditors signature at the end of each report, it says that he works for Arthur Andersen, probably the largest and most respected accounting firm in the planet. Nevertheless, something smells wrong with this company, and my gut instinct says to use all the investigative tricks in my bag in order to uncover the truth. At the end, I came up empty, but it does not mean that others should stop examining Enrons books in order to reconcile the abnormal numbers the company is probably using to prop up the companys perceived value.
The Revenue Model
Alarm bells were ringing in my head when I saw the financial highlights of the report for the 2000 fiscal year. It says that the company was raking in revenues in excess of $100 billion. It is not the fact that the companys revenue stream was generating that kind of sales, because there are other companies that can also boast the same type of income-generating capacity, albeit Enron belongs to a rarefied group of companies with a revenue model that has this kind of financial power.
It is not the $100 billion revenue that really bothered me, but in terms of how Enron was able to reach this point in a relatively short period of time. Four years ago, the company reported a revenue of $13 billion. However, the following year, Enron posted close to 50% growth when the revenue stream ballooned to $20 billion (Lay & Skilling, 2000). The same thing recurred the following year. It seemed to cool off in 1999 when the growth was only 30 percent allowing the company to declare a $40 billion revenue stream. However, the real issue was the report that was made a year later when the company grew more than 100 percent (Lay & Skilling, 2000).
The Merchant Model
It does not require a math wizard to figure out that Enron needs to justify the multiplication of resources, assets, income generating capabilities, and innovative marketing processes, because the absence of new models or new ways of making money does not satisfy the stringiest critics when it comes to the need to explain the companys spectacular growth. In simple terms, we need to ask what the company is selling and how is it selling these products, because the only way to justify this kind of growth is to have a great product or having the ability to sell a good product quickly all over the world. Enrons merchant model is based on establishing networks for the efficient delivery and sale of natural gas. It does not have an innovative product. It does not have a cheaper alternative to petroleum or natural gas.
EnronOnline
The companys 2000 financial report included a section describing a new business platform called EnronOnline. This platform was supposed to explain how Enron cornered the energy market, and therefore, allowing the executives to explain the multiple growth spurts. The only problem is that no one outside the company really understood how the EnronOnline platform works in the real world. While I was doing the research for this piece, I stumbled upon an article that echoed the same concerns. Bethany McLean (2001) made the startling revelation that even some of the brightest and most experienced men in Wall Street had no idea how to explain Enrons current revenue and merchant model.
Market-to-Market Accounting
One can make the argument that Enron is feeling the pressure to perform at the highest level on a year-to-year basis, so that executives are pressured to devise more creative ways to make more money for the company. For example, McLean (2001) made another startling discovery, which is Enrons use of an interesting accounting technique called market-to-market valuation. In the said accounting method, contracts based on derivatives and Enrons so-called wholesale business must be recorded based on the contract or derivatives market price at a given point in time (Thomas, 2002). The problem with this technique is that the price of fossil fuel or energy products fluctuates from time to time. For example, if there is a problem in the Middle East, the cost of petroleum skyrockets. In my opinion, the market-to-market scheme is a legal loophole that unscrupulous executives can use to increase the perceived value of a particular stock.
Analysis of Sustainable Cash Flow for 2000 and Commentary of Liquidity at the End of 2000
Enron executives are not fond of disclosures regarding the risks that they are taking in order to sustain a profitable run. For example, they do not highlight the fact that they need to spend or borrow a great deal of money to invest in unrelated business endeavors like broadband and transportation services. It is interesting to point out that Enron is piling up debts, the companys debt-to-capital ratio is already up to 50% from 39% the previous year. If one combines this information with the revelation that the companys cash flow was negative if not for the $400 million tax breaks, this leads to the suggestion that the company is not liquid as many have thought (Keller, 2002). If creditors are coming to collect today, I doubt if Enron has the cash to pay all its obligations.
Conclusion
There are so many red flags, and for me, the only thing that kept Enrons boat afloat was the presence of a world-class accounting known all over the planet as Arthur Andersen. However, in other aspects, it is difficult to believe that the company has the capability to generate enough cash to fund its obligations in the short term. Thus, Enron executives are always talking about the future, because the current cash flow is perhaps telling a different story, a problem so big, it has the potential to destroy the hype of a $100 billion dollar company. I suggest caution in dealing with Enron.
It is hard not to think about the Enron and Arthur Andersen debacle when looking into the ever increasing complexity of compliance frameworks (Cole, 2014). Although many people were shocked by the white-collar crimes committed in one of the biggest companies in US history, one can also argue that Enron executives were not immune to such temptations. They tasted power and the financial benefits that comes with managing one of the fastest growing companies in the 1990s (Hays & Ariail, 2013).
Thus, there was pressure to keep up the good work, or in their case, to keep up appearances. The most shocking part is not the criminal activity of unscrupulous corporate leaders at Enron, but how they were able to get away with it for so long. It was a punch in the gut for many regulators when they discovered that Enron was able to deceive so many for an extended period of time because of the help of the accounting firm Arthur Andersen (Hays & Ariail, 2013). The Enron and Arthur Andersen debacle justified the ever increasing complexity of auditing requirements, such as the new ruling from the Public Company Accounting Oversight Board or PCAOB that mandated the disclosure of the engagement partner that handled a particular audit. It is important to find out if the revelation improves the quality of the auditing process and level of accountability as perceived by the insiders and corporate leaders of the accounting firm in order to garner support for the new measure.
PCAOBs New Rule
Before its fall from grace, Arthur Andersen was a revered accounting firm (Hays & Ariail, 2013). Due to the integrity of former leaders, the company became a gold standard in the world of auditing firms. Without a doubt, Enron benefited from its association with Arthur Andersen. Shareholders, creditors, and other stakeholders found a higher level of assurance every time they remembered Arthur Andersens stamp of approval on Enrons financial statements. However, after several decades of success and expansion into the global market, Arthur Andersen underwent a transformation that resulted in a hybrid business model that allowed the firm to act as Enrons auditor, and at the same time, the energy companys consultant (Hays & Ariail, 2013). The Sarbanes-Oxley Act of 2002 was specifically crafted to address the legal loopholes that were uncovered during the corporate fraud trials concerning Enron and Arthur Andersen (Hays & Ariail, 2013).
A decade or so after the Enron and Arthur Andersens corporate scandal, numerous laws and regulations were ratified or implemented in order to prevent a repeat of the accounting-related problems that rocked the financial world at the turn of the 21st century. However, there is no such thing as being overly cautious in the world of corporate finance. It is imperative to keep developing new standards in order to keep up with unscrupulous business leaders thinking of new ways to beat the system. However, the PCAOBs new set of requirements was the byproduct of the repeated clamor for greater transparency and accountability (Securities and Exchange Commission, 2016).
In December of 2015, the PCAOB adopted a new rule that requires audit firms to make known the name of the audit engagement partner assigned to an audit assignment in favor for a publicly traded company (Securities and Exchange Commission, 2016). Based on information released by the PCAOB, the engagement partner is also the person in-charge or the primary leader of the team handling the auditing process (Petherbridge & Messier, 2015).
Possible Disadvantages of the New Rule
It is difficult to see any type of advantage or disadvantage in implementing the new disclosure requirement. This assertion is based on the need to investigate the ramifications of the new rule from the audit firms point of view (Cole, 2014). They already have access to this information. In fact, they know more about the engagement partner as opposed to an outsider seeking to learn more about the professional background of the lead auditor assigned to a particular auditing assignment (Brown, 2015). However, if forced to identify one disadvantage, one can argue there could be a minimal disadvantage in overlapping work or duplicate work. It has something to do with the added paper work, depending on the specifics of the new rule.
The Advantages of the New Rule
The disclosure of the engagement partners name has no significant impact on the quality of the audit process, it does not enhances the accountability factor of the said auditing protocol (Cole, 2014). There is no significant change or benefit because even in the absence of the new ruling, a well-respected and effective auditing firm already employed a strict and thorough documentation process. In other words, they employ an efficient and reliable monitoring convention in order for them to connect a specific engagement partner to a specific audit report. The availability of digital technology and other sophisticated storage system makes it easier to store and retrieve information. In other words, this critical information is already within the grasp of the auditing firm.
There is no added benefit for the accounting firm in the context of transparency, such as having access to more information regarding the professional career or business endeavors of the engagement partner. The firm does not need to know this type of information, because the firm already had access to this type of data even before the new rule came out. The firm does not get any benefit, such as improvement in the quality of the auditing process, because the firm handles the vetting procedure or the background check even before assigning a project to the engagement partner. The firms is able to do this because the engagement partner is an employee of the firm. The accounting firm is aware of any potential conflict of interest or any appearance of irregularity. Thus, the audit already completed the due diligence aspect of the process, and the corporate leaders are not going to assign a particular engagement partner to a specific auditing project if they are not sure of being able to get the highest audit quality and ensure a high level of accountability (Public Company Accounting Oversight Board, 2015).
The improvement in audit quality and accountability is something that is gained by investors and stakeholders examining the future viability of a publicly traded company. If the audit firm made a mistake in assigning someone to a particular project, the firm will never find any fault in that decision, because they made the decision on the basis of existing information within the firm. However, if there is a conflict of interest or any type of problem, the person performing due diligence will be the one who will spot the problem or irregularity (Petherbridge & Messier, 2015). Thus, this new rule only benefits the investors and regulating agencies.
Conclusion
From an auditing firms point of view, there is no added benefit for complying to PCAOBs new rule regarding the high level of transparency related to engagement partners or lead auditors. More often than not, audit firms have greater access to critical information regarding the work history and business dealings of the engagement partner, because he or she is an employee of the said audit firm. Thus, there is no significant impact when it comes to audit quality and accountability. Audit firms are not going to assign an engagement partner if he or she is not a perfect fit for the said auditing job. However, investors are regulating agencies are going to benefit from the new rule, because they are able to have greater access to information that enables them to understand if there is any conflict of interest or similar problems.
References
Brown, R. (2017). Regulation of corporate disclosure (4th ed.). New York, NY: Wolters Kluwer.
Cole, C. (2014). Audit partner accountability and audit transparency: Partner signature or disclosure agreement. Journal of Accounting and Finance, 14(2), 84-101.
Hays, J., & Ariail, D. (2013). Enron should not have been a surprise and the next major fraud should not be either. Journal of Accounting and Finance, 13(3), 134-143.
Petherbridge, J., & Messier, W. (2015). The impact of PCAOB regulatory actions and engagement risk on auditors internal audit reliance decisions. Journal of Accounting and Public Policy, 35(1), 3-18.
Public Company Accounting Oversight Board. (2015). PCAOB adopts rules requiring disclosure of the engagement partner and other audit firms participating in an audit. Web.
Enron Corporation, having been founded in 1985, was one of the largest integrated natural gas and electricity companies in the global economy. It was generally involved with natural gases and liquids handling the marketing and transmission of these products all over the world (Alvesson, 2002). It was also one of the largest independent producers of electricity providing for the needs of both private and public markets all over the world. This couples with its involvement in the solar and wind renewable energy sector allowed it to be allocated one of the largest gas-related risk management contracts in the world. It also managed on of North Americas largest oil and gas exploration centers, modernizing the utilities industry through a series of pioneered innovative trading products leading to a surge of economic growth that characterized the face of the company in the early nineties (Sims & Brinkmann, 2003).
The company also underwent a series of expansion programs that were made possible by the governments deregulation of market prices in the sale of natural gas. This allowed the company to increase the price of their products allowing them a higher revenue margin that increased their profitability. As a result, the company was a huge opponent in the governments bid to reintroduce regulation processes and succeeded through a series of lobbying mechanisms to maintain the free market (Sims & Brinkmann, 2003). Problems within the company arose when the magnitude of company losses was obscured from the stakeholders giving them the false perception that the company was still making profits.
The corporate governance structure within Enron was weak and questionable. The relationship among corporate governance intermediaries had failed because the company indeed had a board of directors and well qualified external auditors but the company still managed to increase it revenue to the unsustainable levels.
An in depth analysis into the business ethics of the company revealed that the company seemed to report more income and cash flow with inflated asset values while liabilities were not accounted for (Sims & Brinkmann, 2003). This among others were some of the reasons that the company went into bankruptcy dragging along with it investors money through a fall in stock prices. Revenue recognition by the company was done in a biased manner, overlooking the common method of reporting revenue. Because the company was involved in the provision of wholesale services and risk management, it was allowed to act as an agent in the provision of goods and services to the consumer. Instead, the company decided to generate its accounts as if trading in the buying and selling of goods and not as a service provider.
Enron was facing a crisis impending losses and a drop in market share price; but instead of acknowledging this fact and mentioning it to the Board and other members, it decided to look for other methods to inflate it revenue base. It was the first company to employ mark to market accounting that would enable it account for its long-term contracts. Being that this future figure was difficult to project, investors were given false and misleading reports, which in turn had to be done year in year out to ensure that the investors could note continuous and ongoing growth within the company. Their method of reaction to this type of crisis (Sims & Brinkmann, 2003) was poor because instead of coming clean after the error, they would attempt to make up other accounting lies to cover up for their previous lies (Alvesson, 2002). This reaction method resulted in the creation of a chain of problems for the company leading to its eventual failure.
These were not true sales and should have been defined as loans but were instead defined as sales hence increasing the companys accounting revenue. Other limited partnership companies were also formed by Enron so that these companies could buy out the poorly performing stocks within the company and show a reduction in total losses as a result of these stocks (Sims & Brinkmann, 2003).
Initial compensation and reward systems for employees within the organization sought to reward the most productive employee resulting in a series of dysfunctional corporate structures that drove employees to focus on sales maximization at all costs. Volume deals were more valued that the actual quality of cash flows or profits with focus on the companys stock price.
Employees were paid generous bonuses and were some of the top 200 highest paid employees in the world making the companys attention cost centered with extravagant and rampant spending throughout its system (Alvesson, 2002). It is even noted that the companys auditor, as a result of the high amount of money that he was paid to audit the companys accounts, overlooked a few significant details to the advantage of the company. In fact, accountants were hired into the firm specifically to devise ways of allowing the company to save money and may have employed the use of some accounting loopholes allowed in the accounting field. The criteria of selection and dismissal of employees was also an interesting aspect within the company (Sims & Brinkmann, 2003); employees were hired based on their classroom achievements.
It is widely known that Enron only hired the best graduates from the leading financial schools, colleges and universities making it performance driven as it could get the best business strategies from these people. This may have instilled greed and performance driven unhealthy competition among students all over just so that they could get into the company (Alvesson, 2002). The existing staff would also resolve to unethical methods in order to achieve success. The overall objective for the implementation of criteria for employee hiring and firing was disregarded as employees were hired and fired into the organization to suite whichever lie they wished to propagate at the time. Employees were fired when they were seen to not be performing on the company profit scale while others were hired on dummy projects when they wished to promote investor confidence in the scale of production within the company.
Attention focusing (Sims & Brinkmann, 2003) was very limited in the company as witnessed in the companys Financial Board of Directors. This board that comprised of well educated members of society was not able to have a meeting long enough to focus their attention on why the company was making huge profits and what these limited partnership companies were. Auditors were also unable to focus on the companys financial reports to identify the significant cancelled projects that were still in the companys accounting books and as a result of lack of focus, the company suffered losses that the investors were unaware of. Failure to reinforce the aspects of organizational culture within an organization can lead to problems within the organization in light of ethical behavior among employees within Enron.
References
Alvesson, M. 2002. Understanding Organizational Culture. New York. Sage.
Sims, R. and Brinkmann, J. 2003. Enron Ethics (Or: Culture Matters More than Codes). In Journal of Business Ethics 45: 243-256. Amsterdam. Kluwer Academic Publishers.
The documentary investigates the most significant financial fraud in US history. The top of the company has enormous power and is practically not controlled, and it aims to make easy money. Because the companys actual production was in decline, Enron bet on the market of energy futures and derivative securities (Benke, 2018). In addition, they had to fake financial statements and look for other, easier ways to make money. Hundreds of subsidiaries were opened in offshore zones, through which electricity transactions took place, inflating the cost of electricity for Enron (Bhaskar et al., 2019). Then the corporations expenses began to be written off to these firms, thereby improving the reporting of the main one. Despite the short-term success, the companys history has become one of the most significant because many people lost their jobs, and the company was forced to close with a big scandal.
Companys History
Enron gained worldwide fame and high ratings for its operations as an electricity trader. The main problem of the electricity market was the complexity of the sale procedure: suppliers were interested in short-term contracts with changing prices, and consumers were interested in long-term contracts with fixed costs (Gibney, 2005). In addition, electricity suppliers experienced significant cash gaps, so they demanded prepayment for supplies. Consumers made the payment only after receiving the service (Bhaskar et al., 2019). Enron has taken on a mission to reduce the conflict of interests of both parties and close financial debts by acting as an intermediary or electricity trader. To do this, it was necessary to find proper funding.
The Beginning of the Collapse
To pay off the suppliers, Enron accumulated debts and issued securities with the right of repurchase. The company was able to attract more than $250 million, including from the Pension System for civil servants (Benke, 2018). However, the company could not hold on to the trust of investors for a long time since it traded securities without backing up any assets, then a new fraudulent scheme was invented. With many unprofitable projects, the company showed a considerable profit. The thing is in shadow accounting: the corporation attributed its gains to long-term fixed contracts with gas buyers before the money arrived in the account (Gibney, 2005). The companys mistake was the publication of a press release with quarterly financial statements. The company received $400 million and wrote off $1 billion (Bhaskar et al., 2019). Investors became interested, and the companys shares collapsed, which led to its bankruptcy and further investigation of the whole situation. They presented the company as a successful one, which has no debts, and there are only different ways to make its investors rich.
Mass Dismissal of Employees
In addition to the fact that investors lost significant amounts of money invested in Enron shares, employees who worked at the company suffered greatly. Thousands of employees lost their jobs after the company went bankrupt (Paulsen, 2002). The laid-off workers were stripped of any benefits and health insurance after Enrons closure. Some employees have invested their funds in the companys shares. One of the conditions of the management when buying shares was a temporary ban on the sale of shares, which subsequently led to the fact that the shares depreciated, and people lost not only their jobs and health insurance but also money (Paulsen, 2002). Realizing that so many people have lost their jobs and insurance that allowed them to be treated to help relatives, the film makes viewers feel confused and desperate, probably what those dismissed employees felt. This is because thinking about those people, some may try to put themselves in their place and understand how terrible the dismissal was and how hopeless their situation became.
The signs in the film show that the company was striving for growth, and big earnings, but in the end, they were waiting for one of the most global falls in history. The history of Enron has served as a lesson to many companies and even authorities. Later, the Sarbanes-Oxley Act was signed in the United States, which limited the possibility of repeating the Enron scheme (Bhaskar et al., 2019). The law imposes strict requirements on securities issuers to control and disclose financial statements. The companys executives were charged, which led to imprisonment for some of them, and the companys founder Kenneth Ley could not live to serve his sentence. He died of a heart attack (Benke, 2018). Subsidiaries were closed, and people were laid off, investors never got their money back.
Conclusion
In conclusion, the once successful Enron electricity supplier company went bankrupt and entered world history. The company issued and sold its shares, inviting investors to cooperate who invested large amounts of money in the purchase of shares. Enron had several subsidiaries that had their claims for sale. The financial frauds of the company were revealed, and the value of the shares fell sharply, which caused the bankruptcy of the enterprise. During the closure of the enterprise, not only people who invested their funds in the shares suffered, but also a considerable number of employees were dismissed. People received small payments but still were deprived of work, earnings, as well as health insurance, and other benefits. Enrons bankruptcy has gone down in history and has become one of the most striking examples of a company committing financial fraud.
References
Benke, G. (2018). Risk and ruin: Enron and the culture of American capitalism. University of Pennsylvania Press.
Bhaskar, K., Flower, J., & Sellers, R. (2019). Financial failures and scandals: From Enron to Carillion. Routledge.
Gibney, A. (2005). Enron: The smartest guys in the room [Film]. Magnolia Pictures.
Enron Company experienced a crisis to its collapse in the year 2001 which was culminated by application for bankruptcy. The firm was characterized by malpractices in its administration that led to embezzlement of funds by top officials and a subsequent accounting cover ups.
The major cause of the collapse of a once prominent company was its selfish leadership that disregarded managements elements such as organizations theories and behavior leading to inappropriate culture and ethics and practices.
Introduction
Organizational theory refers to the study of organization with the aim of identifying themes into an organizations objectives. Organizational theory ensures that issues facing an organization are resolved and responsibilities undertaken.
This paper seeks to discuss organizational theory with respect to Enron Company that was forced into collapse. The paper will look into the issues that faced the company leading to its collapse. The paper will then analyze the problems and then look into organizational behaviors and theories that affected the company.
Problems encountered at Enron Company
Enron Company was characterized by a number of problems in the form or malpractices that led to the eventual collapse of the entity. The collapse was a result of a long time venture into unchecked practices by the company through its executives.
These practices were for a long time concealed from the public and the companys stake holders such as its investors. The company started by ensuring that it was not under regulation by the government. This meant that the practices and records of the company were exempted from scrutiny that is normally done over business entities.
Under the deregulation, the companys executives were permitted to maintain agency over the earnings reports that were released to investors and employees alike (Laws 1).
As a result of the deregulations, Enron was able to make biased representations of its records to parties who could be interested in such data. Information about losses and debts by the company were not fully reported portraying an untrue status of the company.
Consequently the accounts, which were presented by the company, continually attracted more people to the company in the form of investors. The application for deregulation by the company seems to have been a planned move to help it conceal its malpractices that was to follow the grant.
The company was then reported to have a high level of misrepresentation of its records to its investors and potential investors. As a result, the unreal profitability status of the company stimulated its then existing and potential investors into putting money in the company.
These increased supposed investments were embezzled by the companys executives rather than being put into the company and further misrepresentations made. Apart from intentionally concealing its true financial status, the company also engaged in practices that were fraudulent in nature.
The company for example posed an energy crisis in the state of California in the year 2000. The major issue that faced the company was however the embezzling of funds by the companys executives. As people were busy investing the company, the management was on the other hand looking for avenues to channel the companys finances into pockets of individual executives.
Money that was meant for use on the companys activities and interests as well as those due to the companys employees was misappropriated by the companys top brass. It is actually this embezzlement that led to the companys insolvency (Laws 1).
The company was also characterized with high level of dishonesty in the delivery of its services and goods to its consumers. Enron is for instance reported to have been inducing problems in transmission of electricity in order to gain more revenues as it posed to solve the unreal problems.
Accounting malpractices such as reduced tax payments, inflated incomes and profits and inflated stock piece and credit rating (Tesfatsion 1). The companys money was then channeled by the management to their accounts or those that belonged to their friends of relatives (Tesfatsion 1).
Root Causes of the Problems at Enron
The Enron Company was driven into collapse by a number of factors that fuelled its malpractices. One of the causes of the malpractices was the competitive nature that the company had, or was assumed to be having. The firm had strived to be one of the best and gained favor with the business community, including the press that helped in refining the companys image.
The company, having been ranked among the countrys top ten firms, had to look for avenues to keep its feet on the economic ground and avoid at least as much as possible any eventuality that could lead to its collapse. It is this need to protect its gained untrue competitive status that the company had developed which fuelled its cover up avenues.
The company could not afford to compromise its credit rating which would translate into its stock prices and its investors attitude. The desired competitive culture is therefore responsible for driving the organization into actions that were meant to protect the firm but which later spilled to its collapse.
This particularly led to the companys engagement in partnerships that were not actually at the firms interest such as profitability, but to help the management in hiding the true status of the organization. It similarly led to adoption of compromised accounting practices that were also meant to hide the true status of the company (Garsten and Hernes 107).
The environment that was created in the Enron Company that forced it into its desire to competitive was a significant development into the subsequent practices that compromised the business. It was actually this desire that led to the companys loss of ethical practices as anything had to be done in order to protect the organizations hidden secrets.
Though unethical values can be checked and controlled easily in an organization that has an ethical top brass that is ready to influence and control ethics in the organization, it is very difficult to first of all detect and then even control such practices if they manifest in an organizations top management.
In Enron, the problem was an organized scandal that was planned and started by the organizations founder and then fuelled by the companys executives.
Since its such leadership that should create, reinforce or change the organizations culture through attention, reaction to crises, role modeling, and allocation of rewards among others, a compromising leadership in the organization was a cause to its problem (Garsten and Hernes 107).
A good ethical leadership could have for example advised against the practices that were going on in the firm or even informed the public of the happenings. The organizations reward system, or its lack of reward system to its employees was another factor in the resultant problem that was later to be realized.
While the top management ripped the firm of its finances through embezzlement, the firms other employees were not taken care of in terms of rewards or motivation. Consequently, they were discouraged and probably lost interest in working for the company.
Though the company was making losses due to its poor investments and embezzlements, there is a possibility that reduced efficiency of the companys workers must have as well contributed to the firms loss making (Garsten and Hernes 110).
Sims records that the Enron Company was also a victim of its own culture of greed that was formed after the energy industry was deregulated. The firm then went into experimental activities that stretched its workers through continuously raised standards that forced the workers off ethical values.
The high targets that were set for the workers were at the same time not healthy as they were forced to overstretch their capacities (Sims 150).
Analysis of the Problem: Organizational Theories
The failure by Enron Company leading to its collapse was based on the firms deviations from principles that ought to have guided it through to its success peak.
The short term objectives that the organization relied on that for instances forced its workers into unethical measures in order to meet the companys high standards and the accounting malpractices that the firm employed fell short of professional expectations of management.
Organizational theories that help managers into understanding their activities were for example greatly ignored by the organization. Motivational theory for instance provides that a management should understand the terms of contracts of its employees under psychological considerations.
Any alteration to such terms should be undertaken in a way that will motivate the employees. On the contrary, the firm contravened its employees psychological contracts by continuously hiking their targets. Role theory on the other hand provides that an organization recognizes the efforts that employees are putting with respect to their roles.
Management should therefore ensure that roles are allocated in a manner that is not oppressive because this can cause conflicts among employees. Personality theory also explains the eventuality of the firm. The type of individuals that ran the company was characterized by a high level of impatience with respect to their targets.
The bright guys at Enron wanted a faster achievement of objectives for the firm as well as for themselves. This is why the firms employees were driven to high targets even if they were to break rules. The top officials also had to make their way to quick wealth even at the expense of the firm.
Personality theory explains that these traits never lead to long term success. The firms can therefore be said to have ignored organizational theories (Barzilai 1).
Organizational Behavior
Organizations behavior refers to peoples reactions with respect to an organization. Reactions such as thoughts, emotions and actions within or around an entity form the behavior. The actions of Enrons management that was evidenced in their embezzlement of funds, malpractices and disregard to employees form behavior that led to the collapse of the firm (McShane and Steen 1).
Conclusion
The Enron Company was faced by a scandal that was caused by the firms management. It is revealed that the management was driven by selfish motives that aimed to enrich the top individuals and disregarded the organization and its other stakeholders. Cases of unethical behavior, poor organizational culture together with disregard to organizational theories and behavior contributed to the firm fall.
Enron was one of the largest corporations in the United States before a series of malpractices led to its collapse in 2001. Enrons corporate culture contributed hugely to its crumbling by creating an environment that encouraged unreliable financial statements, insider trading, and fraud. Enron also collaborated with partners such as banks, auditors, and attorneys to engage in unethical dealings that turned sour, thus leading to the companys move to file for bankruptcy. Furthermore, Enrons top executives, including Andrew Fastow, the companys former Chief Financial Officer, played a crucial part in facilitating questionable accounting practices. With these brief highlights, in addition to exploring ways in which Enrons organizational culture contributed to its bankruptcy, this paper finds it crucial to identifying the extent to which this companys partners led to its collapse. As it will be revealed, Enrons key executives played a significant role in causing financial problems that culminated in its fall.
The Contribution of Enrons Corporate Culture to its Bankruptcy
The adoption of a healthy corporate culture leads to the success of an organization. On the other hand, the embracement of toxic organizational customs brings about disaster. According to Soltani (2014), circumstances that prompted Enron to file for bankruptcy in 2001 suggest the existence of a counterproductive corporate culture. The companys mode of operation disregarded the importance of internal financial controls. According to an article by Morgenson (2017), internal financial controls facilitate the establishment of policies that seek to secure an organizations assets from getting lost. However, Enrons corporate culture overlooked the significance of observing accounting practices that would enhance not only the safety of its assets but also the companys financial performance.
This counterproductive corporate culture destabilized the functionality of the controls environment by supporting insider dealings that damaged this organizations financial performance, a situation that eventually resulted in bankruptcy. This culture ignored various biblical teachings presented in the book of Leviticus concerning the impact of false statements. In particular, Moses, the author of this book, asserts, You shall not steal, nor deal falsely, nor lie to one another (Lev. 19: 11 New International Version). As Ferrell, Fraedrich, and Ferrell (2017) reveal, private partnerships organized by Enrons executives influenced the acquisition of significant debts, the concealment of losses, and the inflation of revenues.
Extensive debts incurred by Enron presented the companys corporate culture as one that had failed to reinforce its financial systems, for instance, by implementing sound policies. As a result, executives saw the need for hiding substantial losses incurred by Enron due to insider dealings and fraudulent activities. The companys finance department created unreliable financial statements that displayed overstated profits with a view to attracting unsuspecting investors. However, according to the Bible The Lord detests dishonest scales, but accurate weights find favor with him (Prov. 11: 1). Top managers at Enron overlooked the essence of honesty in business. Consequently, piled-up pressure from concerned stakeholders uncovered questionable accounting practices undertaken by Enrons high-caliber executives. These discoveries indicate that Enrons corporate culture indeed influenced its bankruptcy position in 2001.
How Enrons Bankers, Auditors, and Attorneys Contributed to the Companys Demise
Enrons financial partners, especially auditors and bankers, played a huge part in influencing the companys collapse. As Soltani (2014) reveals, banking institutions, including J.P. Morgan Chase & Co. and Citigroup, offered Enron multimillion-dollar loans that helped this company to hide its failing financial position in return for heavy fees and interest payments. Although banks were aware of the deceptive accounting approach adopted by Enron, they supported this malpractice by issuing loans that further created a disguise of the companys financial position. Enron then altered its financial statements by recording these loans as income as opposed to liabilities. Such a situation undermined the stability of the balance sheet, hence proving that Enron was crumbling.
Arthur Anderson, Enrons former auditor, played a crucial part in its collapse. As Alleyne, Hudaib, and Pike (2013) uncover, Arthur Anderson regarded Enron as its largest client since it generated an income of between $50 million to $100 million in the form of consulting fees. Furthermore, according to Azibi and Rajhi (2013), this auditor never raised concerns over all questionable accounting practices at Enron. Instead, this finance partner approved the companys fraudulent transactions with banks among other parties. Therefore, this accounting firm contributed to the collapse of Enron by turning a blind eye on all ongoing malpractices in a bid to continue benefitting from consulting fees.
Moreover, attorneys who worked for Enron engaged in unprofessional conducts that influenced the demise of this company. In-house lawyers declined to raise legal concerns regarding fraudulent transactions within the organization under investigation. Additionally, according to McLean and Elkind (2013), outside law firms, including Andrews Kurth LLP and Vinson & Elkins LLP, allegedly had knowledge about Enrons financial malpractices. Hence, it suffices to conclude that attorneys were part of the scheme that triggered the collapse of Enron.
The Contribution of Enrons Chief Financial Officer to the Companys Financial Problems
Andrew Fastow, Enrons former CFO, also undermined the effectiveness of this organizations controls environment, thereby subjecting it to financial difficulties. A CEO is responsible for managing an organizations finances by streamlining functions such as monetary planning, record-keeping as well as financial reporting. Nonetheless, Fastow failed to observe his role diligently by facilitating the creation of inaccurate records and financial statements. This former CFO collaborated with other top executives in the company for personal gains.
This ex-CFO concealed the financial position of Enron by providing unreliable financial records that contained inflated revenues. Furthermore, Fastow used unfair mechanisms to hide Enrons debts that had accumulated to over $1 billion (McNamara, 2015). Debatable accounting practices conducted by the CFO disguised the actual financial well-being of this company. Fastow produced inaccurate financial statements that ended up creating a misleading impression of Enrons financial health to woo investors.
Fastow also engaged in fraudulent activities that saw him earn over $30 million (Di Miceli da Silveira, 2013). This former CFO also took part in private partnerships that facilitated insider dealings and fraud. As such, Fastow knowingly supported transactions that damaged the financial condition of Enron to benefit himself as well as other executives in this energy company. Therefore, it suffices to conclude that he actively led to the collapse of Enron by observing unethical accounting practices for selfish gains.
Conclusion
The collapse of Enron marked the largest financial scandal witnessed in the U.S. in the advent of the 21st century. The corporate culture adopted by Enron led to the development of an environment that encouraged unethical accounting processes. As such, top executives at this organization engaged in fraud and insider dealings that undermined its financial position. In a bid to conceal fraudulent activities, top executives led by the companys CFO facilitated the creation of unreliable financial statements. They also partnered with banks, auditors, and attorneys to execute the scandal effectively. The need for self-enrichment among top managers as well as partners is considered the leading factor that pushed Enron to file for bankruptcy in 2001.
References
Alleyne, P., Hudaib, M., & Pike, R. (2013). Towards a conceptual model of whistle-blowing intentions among external auditors. The British Accounting Review, 45(1), 10-23.
Azibi, J., & Rajhi, M. T. (2013). Auditors choice and earning management after Enron scandals: Empirical approach in French context. International Journal of Critical Accounting, 5(5), 485-501.
Di Miceli da Silveira, A. (2013). The Enron scandal a decade later: Lessons learned? Homo Oeconomicus, 30(3), 315-347.
Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2017). Business ethics: Ethical decision making and cases (11th ed.). Boston, MA: Cengage Learning.
McLean, B., & Elkind, P. (2013). The smartest guys in the room: The amazing rise and scandalous fall of Enron. London, UK: Penguin Publishing Group.
McNamara, J. (2015). Fraud, accounting scandals and the effect on trade credit: Part II. Business Credit, 117(5), 46-47.
Soltani, B. (2014). The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of business ethics, 120(2), 251-274.
Enron: The Smartest Guys in the Room is one of the most captivating movies that touch upon numerous themes about people, their crimes, and their actions outcomes that lead to the greatest scandals in the business world ever. This documentary movie tells a story of how executives of the company earned about one billion dollars and their investors and numerous employees lost money, hope, everything. One of the possible ways to analyze the actions of people in Enron: The Smartest Guys in the Room is to use some theories ascribable to white-collar crimes. The theory of differential association serves as the brightest example. Its essence lies in the explanation of why some individuals promote various forms of deviant behavior and the reasons of why people become delinquent if they have an excess of law violations. White-collar crimes committed by the executives of Enron have to be analyzed from different perspectives to comprehend their thoughts, feelings, and emotions. The example when Arthur Andersen directed to destroy the documents that could hide the true state of affairs may be taken into consideration. This person had certain power and background knowledge that would be enough to hide the crime. Other people turned out to be the members of such situation when they realized they had no other choice. If they did not accept those conditions, they could be terminated and exposed. The intentions to change this world for better were the major ones of the executives of the company (Enron: The Smartest Guys in the Room, 2005). If people can hardly accept the reality and the changes that may improve the current world, Enrons executive have already found the necessary way and were ready to use their influences, their thought, and their connections to earn as much as possible. However, even white-collar crimes have to be punished, and such issues like peoples trust, hopes, and demands play a crucial role this time. Enron and its executives earned enough but their bankruptcy destroyed everything.
The notion of theories plays a very significant in current social life and business world. The theories of Social Disorganization and Rationalization have been noticed in the movie as well. As a rule, crime is a result of social disorganization or wrong ways of rationalization. The actions of David Duncan and other members of Arthur Andersens team and the destruction of the documents may also serve as a good example of how social disorganization theory and Advocates of General Strain theory in particular works and influence people. Duncan and other Enrons people were threatened because they could lose everything: their livelihoods, their rights of voice, and even their freedoms. This theory and the idea of how crimes should be committed to be able to influence human lives are considered as macro-level variables. It is because the possibility to influence once sphere of life and cause the differences in other different spheres. This white-collar crime touched upon certain spheres like economy on the micro-level. Enron admitted that greed was one of the brightest innovations of the world (Enron: The Smartest Guys in the Room, 2005). The representatives of Enron were pride, intolerant, and selfish. These human characteristics may become another point to comprehend crime causation and the ideas of why some people chose to commit this crime and some people did not want to follow this example. Social disorganization leads to the following: firms became larger and change own structures without considering the already existed norms, investors could not follow those changes and improvements that influenced their incomes, and the executives observed those changes, got benefits and influenced the development, and chose the ways of how to earn and cheat. This life and the world of business provide people with the varieties of possibilities. Enron used its chance, became the most famous firm among the whole world due to their earnings, and became the most famous failed organization with billions of dollars.
Enron: The Smartest Guys in the Room is full of examples, connected to the spheres of social psychology, sociology, and organizational behavior theory. One of the brightest social psychological concepts is the outcome that has to be between an individual and a situation. Firms bankruptcy as an outcome is closely connected to both the situation and individuals. General state of affairs in the country allowed to develop cooperation with several organizations and even with several countries simultaneously. It turns out to be that certain firms frauds may not be noticed and people can cheat earn as much as possible. Sociological concept of differential workers is another good example of how frauds may happen within one organization. Executives have enough powers to control workers actions and thoughts. If they want to achieve some purpose, they may use the abilities of differential workers and achieve success. The concepts organizational behavior theory like power are perfectly described in the movie as well. Jeffrey Skillings power over people allows him to not only control workers actions but also influence their freedom. Social-psychological theory shows how the relations between individuals and situations may be controlled. Enron executives become involved into the line of the events that cannot be broken. The principle of leadership in the company also allows its executives to follow their own demands: if they feel that one action may destroy the success of their company and other action is reliable enough to change the situation for better, the rest of the worker should certainly obey the orders and participate in the affair. In spite of the fact that people lose much to help the firm becoming prosperous and winning that cannot even believe that soon they will lose more, to be more exact, they lose everything. The social structural forces and employers influential abilities are properly explained in the movie and are aimed to prove that these characteristics of human actions do support illegal behavior only.
Reference List
Gibney, A. (Director and Producer). (2005). Enron: The Smartest Guys in the Room [Film]. United States: Magnolia Pictures.
Enrons bankruptcy is considered to be one of the largest company bankruptcies ever: the companys CEOs, Kenneth Lay and Jeffrey Skilling were convicted of fraud and conspiracy, as they had cashed millions of dollars in stock before the company eventually collapsed, thus taking the earnings of thousands of employees (Rijsenbilt & Commandeur, 2013). Ethical implications for individuals included decreased trust in companies and future employees. The organization has lost its value, and its image was severely damaged as well. Society, in general, could view this situation as evidence that large, billion-worth corporations are led by CEOs who engage in fraud and are ready to exploit their employees for their own profit.
Terminal and Instrumental Values
Terminal values that could guide the leaders decision-making were social recognition, a sense of accomplishment, security, and a comfortable and exciting life (Gamble & Gamble, 2012). By using specific schemes to embezzle vast amounts of money, the CEOs of the company could be socially recognized for their top-ranking position and expensive purchases, thus creating a sense of accomplishment ( I have achieved more than the majority in this country ), ensuring financial support for them in the future, and spending that money on residencies and other property for a comfortable life.
Instrumental values, such as ambition and independence, could lead to such unethical behavior. It is possible that Lay and Skilling assumed they would be able to get away with the fraud (ambition), and due to their ties to the U.S. Administration and other highly influential people could secure themselves from an investigation (independence).
Applicable Ethical Theory
Virtue ethics would be the most applicable theory because it would have eliminated the early issues that led to bankruptcy from the beginning, such as various fraud schemes, lying to investors and other stakeholders, and mixing or changing accounting information so that the companys investments and profits would appear rising rather than crumbling. If the leaders of Enron placed the interests of the company and stakeholders/shareholders first, respected their followers, and would not engage in deceptive behavior, the company would be able to make profits, although not as large as presented in reports. Neither the CEOs themselves, nor employees, nor stakeholders would have to endure such damage after the companys bankruptcy. However, if Lay and Skilling were virtue leaders, one can assume they would not have founded Enron at all since its primary purpose was to enrich the founders only.
Different Cultures Perspective
The concepts of lie, fraud, and deception are universal, e.g., they are understood in a similar way across cultures. Usually, such behavior would be considered unethical. However, depending on the context, some cultures could perceive them differently. For example, May (2016) points out that the CEOs decisions would be perceived as less immoral if observers believed that the leaders were pressured to do so. Additionally, it is possible to assume that some would not perceive it as unethical as others because systems for fraud detection, responding, and reporting do not exist in some countries, and therefore it might not be viewed as a serious issue by the general society (May 2016). However, as the actions of the leaders were deliberately unethical and only focused on personal profit, it is unlikely that they would be considered as entirely ethical in any culture.
Sissela Boks Model
Boks model implies that a leader should ask themselves whether planned actions are right if there is a possibility to achieve the goal without raising ethical issues, and how taken actions will affect others (Gamble & Gamble, 2012). If Lay and Skilling used this model, they would have understood that their planned actions were not right or ethical. Seeking alternatives, they could decide not to continue the functioning of the organization at all since it hardly made any profit without fraud schemes, as stated by Rijsenbilt and Commandeur (2013).
This decision would lead to serious and mass unemployment, but at least employees earnings would not be affected. Alternatively, Lay and Skilling could leave the organization as it was but refrain from stealing money from employees and cashing it in stock. This way, the company would possibly go bankrupt again, but employees work would not be compromised, and the leaders themselves would not be sentenced to many years of imprisonment. At last, the understanding of the effect of their decision-making on the CEOs, employees, and stakeholders would probably result in more ethical and effective actions as Lay and Skilling would not be as reckless.
It is more than likely, of course, that both Lay and Skilling understood what consequences their actions could have but apparently hoped for a better outcome (for them and not for others). Therefore, the application of Boks model would have ensured a better future for the organization, the leaders, and employees, although one can admit that the CEOs would probably not cashed so much money as they did. However, as they were unable to use these profits and were imprisoned for stealing, ethical decision-making could still be a better option for them.
Strategies for Accountability
One of the strategies used in my organization is the requirement for detailed and relevant feedback. For example, leaders are asked to provide written reports about the outcomes of a project/a task they have completed with the team, and this data often includes financial statements, time spent on the task, the number of business trips conducted, etc. At the same time, this feedback is compared to employees feedback, and the employees are provided with the opportunity to submit these reports anonymously to the supervising manager. These feedbacks always contain the following questions (among others): Do you believe that this decision was ethical? , Would you suggest other, more ethical approach to [a task]? , Were there any actions you are disturbed with? , etc. As the leaders are aware of this feedback, they prefer not to engage in unethical decision-making as it is strictly penalized in the organization.
Before they are assigned to the position, all leaders are required to participate in workshops about ethical leadership. The effectiveness of these is then tested in the workplace environment, and leaders are obliged to take oral tests or case-study examinations related to ethics each six to nine months (depending on the leaders scope of responsibilities). As the organization strives to build a culture of accountability, its executives always ensure that the consequences of unethical leadership are explained as clearly as possible to employees (Steinbauer, Renn, Taylor, & Njoroge, 2014). If unethical leadership is reported and there is evidence that it actually occurred, the company uses reprimands or administrative leaves at first. If the behavior is repeated, the company reduces the leaders wage. After that, if repetition is again reported and investigated, the leader is likely to be fired. Although not ideal, this system of controlling the adherence to ethical principles works effectively.
Conclusion
Enrons bankruptcy occurred due to the CEOs ambition and desire to lead a comfortable and exciting life. If they decided to apply ethical leadership principles to their planned actions, the companys outcomes could be much better. Additionally, employees and stakeholders would not be so severely affected by this bankruptcy as well. It is advisable for leaders to either refer to ethical theories or apply Boks model if they are not sure whether their decision-making is ethical.
References
Gamble, T. K., & Gamble, M. W. (2012). Leading with communication: A practical approach to leadership communication. Thousand Oaks, CA: SAGE Publications.
May, O. (2016). Fighting fraud and corruption in the humanitarian and global development sector. New York, NY: Routledge.
Rijsenbilt, A., & Commandeur, H. (2013). Narcissus enters the courtroom: CEO narcissism and fraud. Journal of Business Ethics, 117(2), 413-429.
Steinbauer, R., Renn, R. W., Taylor, R. R., & Njoroge, P. K. (2014). Ethical leadership and followers moral judgment: The role of followers perceived accountability and self-leadership. Journal of Business Ethics, 120(3), 381-392.