Category: Enron

Introduction

Enron Company got involved in several financial scandals between the years 2001 and 2002. The most interesting part of the scandal, however, was the persistent denial by the top managers of the company of their knowledge on the same. The managers vehemently denied knowledge of the mischievous financial activities of their employees. The events of this incident shifted the attention on the role of communication in assigning the responsibilities to the employees by the management. It is believed that there existed a serious and fundamental disconnect between the employees and the management.

The Case Preview

Enron was formed in the year 1985 through the intervention of Kenneth Lay. It was a merger between a gas pipeline company named Internorth Omaha and a utility company called Houston Natural Gas. Enron grew so fast and within fifteen years, it was ranked the seventh most lucrative firm based on revenue. Its major trading line was the purchase of electricity from the generators and selling it to clients. The company began by first broking electricity. This was achieved by identifying areas with high demand of energy and building power plants there before selling them later before their values decrease and move on to new areas. With time, the company expanded further in terms of acquisition of new markets and employment of new members of staff.

It is reported that the company hired Arthur Anderson, LLP as an internal auditor and accountant in the year 1985. He was allegedly paid huge sums of money amounting into millions of dollars. In the year 1999, the executives at Enron sought to isolate losses from equity and derivative trades into special purpose entities. In December, 2000, the chief operating officer, Jeffrey Skilling, who also doubled up as the president of the company assumed the position of the chief executive officer, which had long been held by Kenneth Lay. Skillings stint at the helm was, however, short lived as he opted to resign in August, 2001 citing personal reasons. Consequently, Lay was re-appointed to the same position

During the same month of August in 2000, things became uglier when the companys vice president of cooperate development, Sherron Watkins, blew up the whistle. Through a letter, she wrote to Lay, the chief executive officer. She accused Enron of under dealings, improprieties and fraud due to issues such as the special purpose entities (SPE) case. Incidentally, Anderson Arthur was privy to this information. Apparently, Enron had made a loss of over $618 million, which was transferred to SPE in October, 2001. This loss was then publicly reported by the company as the net loss in the third quarter. Things escalated further by the end of the year when a reduction of $1.2 billion was made by the company to the value of the stakes of its shareholders. It later emerged that the company had engaged in activities such as inflation of profits and debts hiding, actions that were allegedly supported by the chief financial officer, Andrew Fastow.

The events that transpired from then on led to the formation of a commission of enquiry to investigate the activities of the company. Consequently, Fastow was sacked by the company and a revelation of $586 million losses within the past five years was made. This further led to the drop of the companys market shares to the levels below $1 in November, 2001. In order to satisfy the losses, the company was forced to transfer the stocks. This necessitated the company to become insolvent, after which it filed for bankruptcy in December 2001. Lay then resigned as the chairman and CEO in January, 2002.

It is also reported that Anderson had prior knowledge of what was happening and he also knew the financial condition of Enron but chose not to communicate conflicting information to the public. As the companys main book keeper and auditor, he misadvised the company on several occasions. For instance, through his guidance, shareholders equities that were recorded to have decreased were intentionally categorized as increases. The company even destroyed all the documentation materials related to it in October, 2002 under the instructions of Anderson. These actions by Anderson led to his induction in March, 2002 and later he was banned from auditing public companies. Other people who were to face separate charges regarding the insolvency of Enron included Fastow, Skilling, Lay and Ben Glisan Jr., who was the companys treasurer. A year later, the company indicated that it wanted to come out of the bankruptcy but in the form of two separate companies.

Enrons Case

The failure and collapse of Enron can be attributed to a number of reasons ranging from the organizational culture to poor management. The management and the board of the company opted to withhold the critical information that was otherwise necessary for the provision of checks and balances, which are important for ethical business practices. The company had a culture that facilitated the employees to push the limits. According to the Management Institute of Paris (MIP), Anderson and Enrons senior managers were the ones responsible for the failure of the company. They did this because of their lack of morals and ethics in leadership, besides creating a secretive and greedy organizational culture. They had a winner takes it all mentality. At the time when the company was going through massive losses, Anderson termed its financial position as fair, reliable and adequate.

The managers of this company tended to misconstrue the reality. Incidentally, the managers had apparently built a model of success in their minds and were determined to brush aside any news, which tended to contradict their mentalities. They also chose to pay no heed to their perceived problems instead of addressing them. Worse still, the managers were very harsh to their employees, thereby instilling fear in them. This discouraged the employees from reporting the actual problems that the company was facing and this was enforced by the management. The company believed in a risk taking culture that encouraged and affected the SPEs program. When the program started running into losses, the management personnel deemed it fit to keep it a secret and greedily decided to keep the profits to themselves. When they discovered that they had run into problems and difficulties, the company opted to implement the ad hoc strategies with the aim of quickly fixing its problems.

The fact that Enrons scandalous deals were exposed by an insider perhaps after being short-changed in some of the dealings portrayed the manner in which greed run through the company. This case was not only a blow to the investors who lost their billions of dollars through the under dealings, but also to the SEC regulations, which had to be amended. Another casualty in the case was the notorious accounting firm of Arthur Anderson.

After the collapse of the company, many players came to the conclusion that the initial success stories that pervaded under the CEO, Kenneth Lay, were because of the existence of the federal legislations that deregulated the energy sector. Lay is also said to be in good terms with senior republican figures that helped him raise funds besides influencing the passage of favorable legislations. Apparently, Lay started off well for he had a broad revolutionary goal for the company. In addition, he diligently carried out the corporate social responsibility of the company for he was sufficiently philanthropic. This earned Enron the recognition of the Council of Economic Priorities that awarded the company the Corporate Conscience Award in 1996. It was credited for uplifting respect, integrity, communication and excellence.

Despite receiving the award, open communication was not given much consideration within the company. All the messages, which seemed dissident, were ignored by the management. There were visible claims of boldness, free, wheeling ethical climate, confident values and ambitions. In this regard, employees who were highly skilled and ambitious worked in decentralized structures where supervision or oversight was hardly available. The company had an aggressive obsession to increase its profits hence the tireless exploits for new opportunities in India, Great Britain and South America. However, it is interesting that all these activities were being driven and pushed by Skilling and Fastow with the exclusion of the CEO, Ken Lay, whose disconnect from the company seemed apparent. This fierce pursuit for wealth encouraged the company to overlook its core principles of respect, integrity, communication and excellence. At the end the existing corporate models were broken significantly making the company to start running at a loss. But in order to retain its presence at the New York stock exchange, the company opted to hide its losses and shuffled its debts through very dubious accounting procedures. Apparently, all these procedures were within the bounds of the law.

It is also important to note that the collapse of the company was a big blow to the provision of power within its areas of operations. This then gave rise to the question of competition in the industry especially in India, where its branch was the sole provider of electricity energy. Competition is needed by ensuring that the process of bidding is transparent. Some analysts have argued that the companys management was encouraged to behave as it did due to the lack of a serious challenger either from within the region or from other parts in the world. The company also adopted a policy of fear toward problems. It adopted a culture of repelling bad news. This in essence created self persuasion and self censorship among the management personnel making it difficult for them to come to terms with the fact that the company was experiencing losses.

Conclusion

Enron was started on good business ethics of corporate social responsibility. At a time when much emphasis was put on the observance of these ethics, the company thrived well and was actually experiencing a tremendous growth. However, due to some mischief, the managers and some of the company employees decided to run its affairs based on deception. The result is that the companys communication channels were closed encouraging more deception to thrive, which later led to its collapse. Therefore, it is important that transparency prevails in all the decisions of a company, no matter how displeasing they might be.

Enron was the second largest company in US history to be declared bankrupt. Recently, the Congressional committees have analyzed the company in order to establish the cause of its fall. Although the cause has not been determined with precision, some of the vital elements that caused its downfall are clear. The Companys former CEO and the former Chief Finance Officer implemented ideas that led to significant problems. The crisis that was initiated could not be legally fixed. In addition, the idea of creating asset-light company backfired and the company had applied immense risk management and trading skills to the asset-facilities owned by the third parties. In maintaining a raise in capital and credit rating, Enron ensured that it had relocated most of the assets in order to realize a positive financial statement. There was the expansion of expertise in the energy-trading sector, which was aimed at increasing the revenue outlay for the company (Madura, 2009). This was to be attained through the instigation of telecommunication broadband system. The problem that the company was subjecting itself is trying to achieve long-term goals and objectives in a shorter span of time. Its investment in fiber optics proved futile, as the market for these products collapsed. Although the whole organization was involved in its drastic fall, the risk management team did not perform its functions to the latter.

According to Madura (2009), Enrons financial risk management tools were appraised due to its sophisticated nature in assessing risksthat was before it capsized. Risk assessment was a vital element in Enrons organization as it enhanced effectiveness of business plan and regulated competition in the environment. The establishment of long-term operations was supposed to be hedged in order to cushion the organization against any instability in energy prices. In hedging the organizations risks with the distinct purpose subsidiaries, Enron was able to retain its risks effectively. However, management was not able to put into consideration the complex transactions (Cheeseman, 2010). Other risk factor that Enron ignored was the ineffective support or enforcement of an entitys values or ethical standard in performing its activities.

Enron was not the only company that fall prey of inefficient risk assessment techniques, many companies are still undertaking fraudulent activities without the auditors knowledge. In order to assess risk effectively, determination of the risk response is vital. The organization should consider mitigating the identified high-risk events before undertaking any operation in the economy. It should be observed that the objective of risk management and assessment is to obtain a reasonable guarantee that regards the achievement of strategic goals. Many organizations struggle with their risk response by considering and developing many controls in the system. The focus should be on mitigation of high-risk events; therefore, providing management with reasonable guarantee that the companys financial statements are free from misrepresentation and are reliable.

In conclusion, risk assessment is the vital activity in an organization. Risk management department was responsible for the fall of Enron. However, risk managers need to articulate to the risk assessment techniques in order to be successful in its operations. All the organizations should appraise the risk-based approach while investing. The organization should determine the control activities that exist in the entity and establish strategies that will enhance risk mitigation. In the case where control activity is unavailable, implementation should be considered.

References

Cheeseman, H. R. (2010). The legal environment of business and online commerce: Business ethics, e-commerce, regulatory, and international issues. (6th ed.) Upper Saddle River, NJ: Pearson Prentice Hall.

Madura, J. (2009). Financial Markets and Institutions. London: Cengage Learning

A lot of discussions have been put forward concerning whether business corporations have a mandate for social responsibility or not. It is however agreeable that no business thrives in isolation. Businesses require the market and employees, thus any organization must have some interaction with the surrounding community. The term corporate social responsibility (CSR) refers to the role that business organizations have towards creating a healthy and prosperous surrounding  community/environment. Frederick (2002: p. 306) suggests that the CSR of a particular organization is the measure of the organizations social responsiveness.

The discussion on business ethics and responsibilities of business towards the community has been witnessed where many philosophers support the argument, while others reject the responsibility. The term ethics may be defined as the study of morality that enables the formulation of specific rules and principles that determine right and wrong for a given encounter. On the other hand, rules and principles form ethical theories (Crane and Matten, 2007: p 8).

Some philosophers argue that the only responsibility of a business corporation is to increase profits without any concerns about social issues. Contrary to such arguments, the supporters of the stakeholders theory hold that businesses have a responsibility beyond the stakeholders including the employees, customers, community, and the environment at large (Jones, Parker& Bos, 2005: p. 5)

Business organizations participate in the different CSR through ethical practices. The term ethical practices refer to the right rather than the wrong practices towards helping society. Ethics aim at establishing a moral guideline towards the conductance of appropriate behavior. It is expected that the behavior should be conducted in a manner that professional standards will be met (Social Responsibility and Organizational Ethics, 2009: Para 1). Several theories have been put forward that tries to justify the social responsibility of organizations.

In the current business issues there has been witnessed the case where the fall of large and prosperous business organizations have been caused by the lack of the corporate business responsibility. On the other hand some companys success has been linked to their efforts in contributing to the responsibility and strongly upholding of the code of ethics. Social contract theories suggest that the managers of different companies have the mandate of formulating policies that are aimed at contributing to the social responsibility.

The issue of corporate social responsibility and business ethics has been in focus in recent times especially in USA after the collapse of Enron Company. The social contract theory illustrates that the corporate society in a form of contract with the business organizations that gives the managers of the organizations a mandate to make policies that portrays CSR. However, since the corporate society is unable to protect their interests due to lack of an explicit contract they only rely on the decisions that are made by the management of the companies in order to ensure that their interests are met.

This paper discusses the different ethical issues that were involved in the USA based company, Enron, which collapsed in 2002 after being declared bankrupt following a corporate fraud case where the top management passes policies and undertook deals that were aimed at benefiting themselves. This case shows how the corporate social responsibility which is anchored in business ethics contributed to the failure of this reputable company.

Enron case study

Enron was one of the worlds largest companies involved in the production of gas, oil and electricity in the United States of America. During its existence, the company was portrayed as beacon of success and prosperity in the worlds corporate level. The top management of the company was to be answerable to a board of directors that was charged with the responsibility of ensuring smooth running of the company through its partnerships, ventures, and investment decisions. In 2001, Enron Company collapsed for the reasons drawn from its failure to uphold business ethics which has been termed as the largest corporate fraud case of all times. The fall of Enron was witnessed through the loss of jobs by the employees and loss of investors money due to corporate greed (Berenbeim, 2002: p 1)

Although the case of Enron can be attributed to political influences, a lot of evidence has shown that the top executives intentionally manipulated a lot of the resources in the company for personal gains rather than for the corporate gains. It is thus possible to outline that the case in Enron company is a case involving business ethics in the fact that the managers were charged with the responsibility of not only of looking at the interests of the company as a business entity but also the interests of the corporate society. It has been claimed that the business entities must be accountable both to the corporate society as well as to the stakeholders on the issues relating to business ethics. Some aspects of business ethics include, releasing standard and quality goods and services to the consumers at fair prices, better pay for the employees, accountability by the management, environmental conservation measures, protection of customers interests etc.

This paper addresses the various ethical issues related to Enron Company including truth and disclosure, fiduciary duties of the managers and directors, whistle blowing, bribes and gifts and agent principal relationship.

Truth and disclosure

Business competition in the market should be ethical. Although the market in which Enron traded its products is a capitalistic market i.e. where one puts every effort to maximize individual gains, it unfairly interfered with the rights of other players in the market. According to Crane and Matten (2007; p 378) some of the unethical business practices that relate to the competition in the market include; negative advertising of other companies products, stealing customers, predatory pricing and sabotage. Enron Company, which is a petrochemical and energy generating industry through its marketing policies contributed to unfair competition to other producers of similar products in the market thus interfering with their performance.

The stakeholders who form an important part of the corporate society in any company have the right to be disclosed on the financial position of any company. In Enrons case, it is reported that the stakeholders were deceived of the actual position of the company financially. This was affected through illegal amendments of the financial statements that were presented to the general public. In addition, it is claimed that while the public was being reassured of protection of their stock through electronic media, the companys management was actually selling the stock. According to Higson (2003: p 194) in his corporate financial reporting theory shows that the business organizations have the responsibility to disclose the right information to the stakeholders and the public in general concerning their financial position. Further, he argues that social reporting or corporate social responsibility is designed to discharge social accountability.

The case of Enron shows unethical practices where, although the management undertook to report to the stakeholders and the public on the financial aspects of the company, it was actually disclosing the wrong and untrue statements.

Reporting as a responsibility of any business company is essential in the fact that it enables the general public and more so the stakeholders in making decisions that directly relate to their investments and interests in the company. Higson (2003, p 197), indicates that one approach to reporting is to provide investors with all the pieces of information that can reasonably be provided so that they can arrive at their own estimates of underlying financial performance. At some instance, the actual position of Enron Company was that it was bankrupt. This position had not been communicated to the stakeholders who could have made decisions to avoid the damages caused as a result. The fact that untrue and misleading statements were released to the public damaged the companys reputation. This is due to the negative perception of the corporate ethics the company had already committed in which case; Enron management completely disregarded their corporate responsibility for individual gains (Berenbeim, 2002, p 2).

Fiduciary duties of the directors and managers

One of the major obligations of a manager is to protect and uphold companys code of ethics. The board of directors of Enron Company allowed such breach to their code of ethics when they allowed the companies chief financial officer to serve as a general partner. As a matter of fact, the managers of any company should render their services to the company in good faith and in full disclosure of their undertakings (Berenbeim (2002, p 3)

The Financial Accounting Standards Board (FASB) provides that an investor with over 3% stake in partnership with a company cannot be regarded as a subsidiary partner, even if the company supplies the other 97 percent of the capital. In this case, the CFO had been linked to a company that was a major partner with Enron. However, even after the disclosure of this fact, the board of directors took no action in correcting the situation. Thus the management was not acting in the interest of the stakeholders but on their interest. Managers have a fiduciary relationship with the stakeholders who include the suppliers, customers, employees, the community at large and also the management which acts as the agent to the stakeholders. In addition, each stakeholder has a right to take part in decision making and determining the future of the firm (Norman, 2004: p 4).

Bribes and gifts

In order to conceal the evidence in the fraud, Enron had to issue out bribes and gifts to accountants, lawyers and analysts. The fact that issuance of bribes is an unethical business practice, the management of the Enron company tried to protect their actions from public scrutiny (Berenbeim, 2002: p 3). Bribery is one of the unethical business practices that heightens corruption and misappropriation of funds in an organization. Managers who are corrupt will use bribes to conceal evidence that can implicate them on fraud cases and also to perpetrate mismanagement of the firms resources.

The agent principle relationship

The management and the directors are the agents mandated to maximize value of the shareholders and other stakeholders. In this situation, one individual (agent) act for and in the interest of the principal. In this case the theory of principal agent is portrayed where the Arthur Andersen Company was hired to do the auditing of the company. This decision was carried out in the interest of the top executives who wanted to cover up the fraud practices. Later, the company was closed down after one year to destroy the evidence implicating Enron management with the scandal. Although the auditors were hired by the directors of the company, their work involved direct agency to the stakeholders of the company and therefore the stakeholders were to rely on the report presented by the auditors in order to understand the financial position of the company.

Whistle blowers

Whistle blowers publicize fraud issues in companies that are in the interest of the company. Companies that uphold ethics encourage whistle blowing. In the case of Enron, it was witnessed that the whistle blower of the fraud that was going on was sacked from the company. Whistle blowing is identified as a last resort to protect clients, employees or the organization against its self destruction due to unethical deals. It can be concluded that, in the various scandals that surrounded the collapse of Enron, many people were aware of the unscrupulous deals. However, it was only later that Sharon Watkins disclosed the unethical practices that were taking place in Enron. This prompted the dismissal of Watkins from the company. After this case, the Sarbanes-Oxley Act of 2002 was passed in the corporate governance law which provided whistle blowers with protection (Haynes & Boone, 2003: Para 3). In addition, in order to further protect the investors and other users of financial statements of companies, the Securities And Exchange Commission (SEC) was formed that was charged with the implementation of the reforms that were formulated to prevent cases similar to Enrons.

Conclusions and recommendations

The case of the collapse of Enron Company relates to the ignored business ethics and the corporate social responsibility by the company. Many conclusions can be drawn from this case which is regarded as one of the worlds largest corporate fraud cases. First, any company has an obligation to all of its stakeholders and the corporate society in general. The case of Enron portrays a situation where the interests of these groups were not met. The decisions by the executives were wrong and illegal. Although the company had a well laid code of ethics, the management of the company was unable to hold its integrity when it violated the same code of ethics. Secondly, the success or failure of a company is partly subject to its relationship with the corporate society and partly due to the efficiency of the internal management. Enron managers were thus not acting for the interests of the stakeholders but for their own individual gains.

The question of upholding business ethics in any business requires that the top management develop an organization culture that allows people to challenge ideas, plans and suggestions. Although people knew about the fraud that was taking place in Enron, the companys culture did not allow people to question the events that were taking place. As a result the mess as a result of the scandal eventually led to loss of jobs and peoples investments when the company collapsed. Research has shown that for businesses to successfully address ethical problems, they have to base their policies on the organizations culture on top of mandate of the law. Thus, for organizations to show adherence to the CSR they must invest in anti-corruption programs and strategies than entails the adoption of a culture of compliance with the ethical practices.

The government should act in the interest of the stakeholders, thus stiff penalties should be put in place by the government through its legislation to enable fair business practices that uphold morals. Although Enron had a code of ethics to be followed the management went forward breaking the same code. The government should put emphasis on the moral practices as a means of protecting the interests of the stakeholders. In addition the share holders should take the responsibility of monitoring the business activities taking place. Although the business ethics theories put the management accountable to the stakeholders, the stakeholders should take up the responsibility of challenging the activities of the businesses. This can be enhanced where the legislations are regulated to include a larger representation of the stakeholders in the decision making processes. The corporate fraud cases can be attributed to the fact that corporate social responsibility and business ethics theories focus only on the attention of the organization to the stakeholder and not the vise versa. In the case of Enron, employees lost their jobs and investors lost their money. This poses a challenge to strong holders of the CSR concepts where in addition to focusing on the responsibility of the organization to the corporate society and environment the concept should be adjusted to include the responsibilities of the stakeholders to the organizations to ensure that the organization prospers while their interests are taken care of.

In order to create harmony in the running of organizations where CSR initiatives are strongly held the concepts should include the actions to be taken against managers who fail to take the interests of the stake holders more seriously. Thus, it is not enough to have a code of ethics in the companies but what is most important is the integrity with which the ethics are upheld in the companys corporate culture.

In order to address the issue of agent and principal relationships the governments and other relevant authorities should work to implement legislations that prohibits auditing firms from offering consultancy services to the companies they engage in auditing. The important of such a legislation can is evident if the relationship between Enron and Arthur Anderson is closely analyzed. The later collapsed after one year of the collapse of Enron. This means that in offering auditing and consultancy services Arthur Anderson did have its own individual motives while advising Enron on some business issues.

Reference

Andrew Higson 2003 Corporate financial reporting theory and practice. Newcastle, SAGE

Berenbeim, R., 2002. The Enron ethics breakdown. (Online). Web.

Crane, A. & Matten, D., 2007. Business ethics: managing corporate citizenship and sustainability in the age of globalization. London, Oxford University Press.

Frederick, R., 2002. A companion to business ethics. Malden, Blackwell publishers limited.

Haynes & Boone. 2003. Corporate Governance, Ethical Conduct and Public Disclosures in the Post-Enron Era. (Online). Web.

Jones, C. Parker, M. Bos, R. 2005. For business ethics. NY, Routledge.

Norman, W. 2004. What can the Stakeholder Theory Learn from Enron? (Online). Web.

Social Responsibility and Organizational Ethics. 2009. Business Ethics. Social Responsibility and Organizational Ethics. (Online). Web.

The main perpetrators in Enron’s fraud scheme were Kenneth Lay, Jeffrey Skilling, Andy Fastow, Louis Borget, Thomas Mastroeni, Lou Pai, and Tim Belden. In addition, the accounting firm Arthur Anderson, the law firm Vinson and Elkins, and various banks were also involved.

Kenneth Lay was the founder, chairman, and CEO of Enron. He convinced shareholders to invest in the company by making false public statements about the company’s performance. When he realized that the company was failing, he sold his stock while at the same time told his employees to purchase more. While Enron’s stock was plummeting before it declared bankruptcy on December 2, 2001, the top executives were able to sell $1 billion in stocks, while the employees’ stocks were frozen so they could not sell them.

Enron hired Jeffrey Skilling in 1990 and he became Chief Operating Officer in 1997. He then became CEO after Ken Lay moved to chairman. Skilling helped create the natural gas commodities market where Enron would trade on natural gas as if it were a stock or bond. Skilling used mark to market accounting (MTM), which allowed Enron to book potential future profits no matter how much money was actually earned. Arthur Anderson and the SEC approved the use of MTM accounting, which enabled Enron to manipulate its earnings and pay its executives’ bonuses based on reported MTM accounting profits.

The first Enron scandal was the 1987 Valhalla Scandal beginning, which involved two oil traders, Louis Borget, Enron Oil’s president, and Thomas Mastroeni, Enron Oil’s treasurer. They would bet on whether the price of oil would rise or fall and were always accurate in their prediction, which was suspicious because nobody is always correct. They also set up offshore accounts and kept two sets of books, so they could falsely show that the oil division was making a profit year after year. Nobody was able to figure out who owned the offshore accounts. After the board received an anonymous tip that Borget embezzled more than $3 million and deposited it into his personal bank account, auditors were brought in and notified Kenneth Lay of Borget and Mastroeni’s fraudulent schemes. Because these two traders were making Enron so much money, Lay did nothing about it.

Andy Fastow was the CFO of Enron who covered up Enron’s debts and losses using structured finance to keep the stock price high. Fastow created hundreds of companies to hide Enron’s $30 billion debt so it would appear as if Enron was more profitable than it actually was. Lou Pai was the CEO of Enron Energy Services. He charged personal expenses, including strippers, to Enron’s expense account and used the corporate jet for personal use. Although he made $100 million while at Enron and around $250 million from selling stocks when he left Enron in 2001, his division had lost almost $1 billion. This loss was hidden using mark to market accounting. He also used mark to market accounting to value current energy prices based on expected future prices. Tim Belden, who ran Enron’s west coast’s trading desk, took advantage of California’s deregulated energy market. He would create artificial shortages of energy by creating blackouts throughout California, which through the principles of supply and demand, would increase energy prices. He also devised a plan where Enron would export California’s energy to another state and then buy it back at inflated prices to drive up the price of energy sold to California residents.

The groups that were supposed to advise Enron were also involved in its fraud. Accounting firm Arthur Anderson did not do their due diligence while auditing Enron. They would issue unqualified opinions when they were aware that the financial statements contained material misstatements. They also obstructed justice by destroying documents when the SEC started their investigation. In addition, the law firm Vinson and Elkins, along with Arthur Anderson, helped Enron hide hundreds of millions of dollars of debt by creating partnerships that were not reported and provided no oversight into this corrupt behavior. Lastly, various banks invested millions in Enron and got involved in a few of its shady deals. For example, in 1999, Merrill Lynch pretended to purchase three Nigerian power barges from Enron, when in reality, it was actually a loan that increased Enron’s net income. Since Enron paid Merrill Lynch back five months later, it was basically a loan.

There were many red flags throughout Enron’s existence that are typically associated with fraud. During the Valhalla Scandal, Borget and Mastroeni were always able to correctly predict if the price of oil would rise or fall. By manipulating the books and setting up offshore accounts, they were able to show that the company was continually making a profit, which is inconceivable. Offshore accounts are usually set up by companies to hide their finances, and it was suspect that nobody was able to figure out who owned the offshore accounts. In addition, it did not make sense that blackouts kept occurring in California when there was plenty of power available. Another red flag was that management was not willing to discuss Enron’s financials and fully explain its finances. Enron traded at a 60 price to earnings ratio, which was more than three times higher than other companies in its industry. Lastly, it was suspicious that Jeffrey Skilling unexpectedly resigned on August 14th, 2001 six months after he became CEO and only a few months before Enron declared bankruptcy on December 2nd.

Enron’s frauds were detected from a number of sources. First, in 1987 during the Valhalla Scandal, Enron’s board received an anonymous tip that Louis Borget put more than $3 million of corporate funds into his personal bank account. On March 5th, 2001, Forbes published an article called “Is Enron Overpriced” by Bethany McLean which brought attention to misstatements in Enron’s financial statements. In August 2001, Sharron Watkins, an Enron VP, became an anonymous whistleblower by writing a detailed letter to Ken Lay about Enron’s accounting irregularities and illegal activity, including Fastow’s business partnerships. Ultimately, a Wall Street Journal Article written in 2001 questioning Enron’s deals started an SEC investigation. The results of the Enron scandal contributed to the passing of the Sarbanes Oxley Act of 2002. Had the act been around sooner, Enron’s fraud could possibly have been prevented or detected sooner.

Enron’s frauds started in 1987 with the Valhalla scandal and continued until it declared bankruptcy in 2001. At its highest point, Enron was worth $70 billion, and its stock was trading at around $90 per share and then within a year it declared bankruptcy and its stock dropped to $.26 per share. As Enron was making $1-2 million per day taking advantage of California’s deregulated energy market, California ultimately lost $30 billion. Lou Pai left Enron with the most amount of money, but did not face any federal charges.ii Louis Borget was sentenced to one year in jail and Tom Mastroeni was sentenced to two years of probation and 400 community service hours. Tim Belden pleaded guilty to conspiracy to commit wire fraud and was sentenced to two years of court-supervised probation. Andy Fastow pleaded guilty to conspiracy to commit wire fraud. He was sentenced to ten years of jail and had to sacrifice $23 million in assets. Jeffrey Skilling convicted on 19 counts of conspiracy fraud and insider trading and was sentenced to 24 years in prison, which was reduced to 10. $40 million of his assets were distributed to Enron’s victims. Ken Lay pleaded guilty to conspiracy fraud, but he died before being sentenced. Arthur Anderson was found guilty of obstructing justice by destroying Enron’s documents during an SEC investigation. Enron’s employees were affected by Enron’s frauds as thousands of employees lost their jobs, health care, retirement funds, and savings. Employees lost $1.2 billion in retirement funds and retirees lost $2 billion in pension funds.

An entity should have preventive tools and techniques in place to prevent future similar frauds. The Sarbanes Oxley Act of 2002 was passed in response to Enron and various other accounting scandals. The act was created to protect investors by setting new auditing standards and protection for whistleblowers. If Arthur Anderson had to follow the Sarbanes Oxley Act, they would not have signed off on materially misstated financial statements. A public company is now required to have internal controls over financial reporting and the COSO Framework is generally recommended to establish and implement controls. One of the components of the COSO Framework is the control environment, which states that an entity should have a commitment to ethics and integrity by developing a code of ethics. Enron had a cutthroat culture where employees were encouraged to do whatever was needed to succeed. They had a “rank and yank” policy where employees would evaluate each other annually and the bottom 15% would be fired. Therefore, employees took risks needed to succeed and covered up losses using MTM accounting. Had Enron had a code of ethics that was appropriately demonstrated from management, fraudulent acts could have been prevented. The Sarbanes Oxley Act also created protection for whistleblowers, which could have led to employees coming forward about Enron’s fraud sooner without the risk of being fired. In addition, big corporate money should be taken out of politics. Ken Lay had a close relationship with and donated to President George W. Bush’s campaign. The president, in turn, prevented the California energy market from being regulated at the federal level, which benefited Enron’s scheme. Lastly, employees should be allowed to sell stock if executives can do so. This would have prevented Enron employees from losing their life savings due to Enron’s bankruptcy.

ABSTRACT

The administration and top executives at Enron were caught involved in unethical activities such as abusing their power by manipulating data, getting involved in inconsistent treatment with internal and external voters, proving unable to provide proper oversight over responsibilities and putting their own interests before that of their stakeholders. As a result, educators of leadership qualities must exercise:

• Share some of the blame for what happened at Enron,
• Integrate ethics into the rest of the curriculum,
• Highlight the responsibilities of both leaders and followers,
• Address both individual and contextual variables that encourage corruption,
• Recognize the importance of trust and credibility in the leader-follower relationship,
• Hold followers as well as leaders accountable for ethical misdeeds.

INTRODUCTION

Enron’s chapter 11 documenting in November 2001 denoted the start of an exceptional rush of corporate embarrassments. Authorities at Tyco, WorldCom, ImClone, Global Crossing, Adelphia, AOL Time Warner, Quest, and Charter. Correspondences joined Enron officials as focuses of SEC tests, congressional hearings, investor claims, and criminal prosecutions. Enron’s inconveniences, which had been the all-important focal point, were before long pushed to the foundation by consequent disclosures of corporate bad behavior.

Later examples of corporate debasement ought not lessen the significance of Enron as a contextual analysis in good disappointment. Enron crumbled in vast part on account of the exploitative practices of its administrators. Looking at the moral inadequacies of Enron’s pioneers, and in addition the variables that added to their mischievous activities, can give critical bits of knowledge into how to address the theme of morals in a business situation.

The organization’s crumple was at last activated by fizzled interests in abroad endeavors and the unwinding of a progression of questionable constrained associations called Special Purpose Entities (SPEs). These SPEs , supported by Enron stock and wrongfully kept running by organization insiders, were intended to keep obligation off the association’s asset reports and helped prop up its offer cost. In any case, when the association’s stock value started to slide, the organization was not able back its assurances. Notwithstanding charges identified with obscure associations Enron stands blamed for:

• borrowing from auxiliaries with no expectation to reimburse the advances (Wilke, 2002, August 5).
• avoiding government assesses despite the fact that a portion of its auxiliaries, similar to Portland General Electric, gathered expense installments from clients (Manning and Hill, 2002).
• contributing to the California vitality emergency by controlling power costs (Fusaro and Miller, 2002; Manning, 2002).
• paying off outside authorities to anchor contracts in India, Ghana and different nations (Wilke, 2002, August 7).
• promptly guaranteeing benefits for long haul extends that would in the end lose cash (Hill,Chaffin, and Fidler, 2002).
• exchanging account adjusts preceding quarterly reports to help obvious income (Cruver, 2002).
• controlling government vitality strategy (Duffy, 2002; Duffy and Dickerson, 2002).
• plotting with investigators to extend a bogus picture of the association’s monetary wellbeing (Fox, 2003).

A significant part of the fault for what occurred at Enron (nicknamed the ‘Screwy E’ for its tilted Capital E logo) can be laid at the feet of organization author Kenneth Lay, his successor Jeffrey Skilling, CFO Andrew Fastow, and Fastow’s best collaborator Michael Kopper. Each neglected to address critical moral difficulties or situations of administration (Johnson, 2001).

Abuse of Power

Lay and Skilling both exercised their power brutally. So many occupants were taken away from the position when they had problem with Lay or seemed as a threat to his power. Hence the vice-chairman position was called the “ejector seat”. In addition to the above, Skilling removed corporate competitors and tyrannized his subordinate officers. Enron also faced a problem concerning relinquishment of power. Occasionally, managers failed to understand their employees – what the employees were working on or how the business was functioning. Moreover, the board members did not have an effective oversight and seldom questioned the management decisions. According to Cruver, the writer of the book Anatomy of greed: The unshredded truth from an Enron, “Many were selected by CEO Kenneth Lay and did business with the firm or represented non-profits that received large contributions from Enron.”

Excess Privilege

The top management at Enron had some excessive privilege. Lay is a son of a Baptist preacher and lived a humble life later changed into money-grabber and started to showing off, trying to make a really big impression. As stated by Cruver, once Lay told his friend,” I don’t want to be rich, I want to be world-class rich.” One time he even joked about giving his wife a $2 million to decorate their new home and his wife, Linda exceeded that budget. As per the writings of Eisenberg, the writer of the book Ignorant & Poor – “The couple borrowed $75 million from the firm that they repaid in stock. Linda Lay fanned the flames of resentment among employees when she broke into tears on the Today Show to claim that the family was broke. This was despite the fact that the Lays owned over 20 properties worth over $30 million.” Through Enron’s period of success, workers also received some of the perks that came with the job. Workers availed benefits such as lavish Christmas parties, aerobic classes, free taxi rides, refreshments, and the services of a concierge (Enron excess, 2002; How Enron let down its employees, 2002)

Fraud

Executives of Enron influenced information unscrupulously in order to preserve their interests and to mislead the public. However, the degree of the deceit is yet to be discovered. The executives and board members together claimed that they had no knowledge of the organization’s off-the-books partnerships developed and managed by Fastow and Kopper (Eisenberg, 2002). Lay and Skilling both were given fair warnings that the organizations bookkeeping approaches were under suspicion. Investigation was carried out to figure out the reasons for Enrons collapse. It was carried out by the Senate Permanent Subcommittee on Investigations and they came to a conclusion that the board members were actually aware of the unlawful activities which were taking place at Eron. Moreover, as stated by Cruver, “Board members specifically waived the conflict of interest clause in the company’s code of ethics that would have prevented the formation of the most troublesome special partnerships.” The employees were promptly moving forward in accordance with the organizations top executives. They stated fictitious profits, concealed expenses, misguided energy regulators etc.

Inconsistent Treatment of Internal and External Stakeholders

The relationship of Enron with its employees and external stakeholders were completely inconsistent. Employees were coerced to invest much of their savings in Enron shares through the retirement plan. Moreover, they were not allowed to sell their shares when Enron shares were in free fall. On the other hand top officials were able to sell their stocks as they desired. According to Barreveld, writer of the book The Enron Collapse: Creative Accounting, Wrong Economics or Criminal Acts?, “Five-hundred officials received “retention bonuses” totaling $55 million at the same time laid off workers received only a fraction of the severance pay they had been promised.”

Friends of Enron were treated as royals. To illustrate, Enron made political donations in order to receive favourable treatment from government agencies. Executives made considerable donations to members of the House and Senate of both Democratic and Republican members and the highest contributor for the Bush campaign was Kenneth Lay. Consequently, the company got the opportunity to nominate favourable candidates for the Security Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC). Federal officials along with the foreign government got involved to stimulate Enron projects, and representatives of Enron played a vital role in positioning federal energy policy that facilitated the removal of regulations of additional energy markets. However, if anyone was considered to be against Enrons interests could anticipate reprisal. At one time, to force Merrill Lynch to fire an analyst who sold out Enrons’ stock, Lay pulled out an underwriting deal. As mentioned by Cruver, Skilling called one analyst an “asshole” when he questioned the company’s performance during a conference call.

Loyalties Misplaced

Enron authorities put their faithfulness to themselves over those of every other person with a stake in the organization’s destiny — investors, colleagues, rate payers, nearby networks, outside governments, etc. They likewise double-crossed the trust of the individuals who worked for them. Workers obviously had faith in the organization and in Lay’s hopeful declarations. In August 2001, for instance, he announced ‘I have never rested easy thinking about the prospects for the organization’ (Cruver, 2003, p. 91). In late September, only weeks previously the organization crumbled, he urged workers to ‘talk up the stock’ in light of the fact that ‘the organization is on a very basic level sound’ (Fox, 2003, p. 252). These admonishments came even as he was dumping his very own offers. The feeling of selling out experienced by Enron workers just added to the torment of losing their positions and retirement funds.

Irresponsible Behaviour

Officials and Executives at Enron failed awfully to take the necessary actions and conducted unethical activities by misusing power and not having proper oversight of their organization. Despite the warnings from the CEO of the company, employees at Enron received opportunities to window-frame the company accounts due to lacking of oversight from the management leading to board members being unable to understand company numbers and projects. No one stepped forward to accept the blame after the company collapsed resulting to Lay and Fastow claiming Fifth Amendment privileges. This was done to call this incident as an example of self-incrimination in front of the congressional committees claiming that he had no knowledge of the illegal activities being conducted within Enron. It was visible that the main motives that fueled such unethical activities inside the company’s management were due to greed.

By window-dressing the accounts, employees of Enron created artificially created optimistic reports showing optimistic earnings and hid losses. This tactic was used to keep the stock prices of Enron artificially high which was used as a justification for generous salaries and earnings and allowed the insiders to earn profits from their own stock options. Managers throughout the organization at times received bonuses larger than their salaries by showing artificially met targets. All these benefits compelled the employees of the organization to overlook the shortcomings that the business could face regarding ethics.

Hubris was a major flaw at the Crooked E, that reflected a fact in the company banner that stated: “FROM THE WORLD’S LEADING ENERGY COMPANY — TO THE WORLD’S LEADING COMPANY” (Cruver, 2002, p. 3). Lacking of the social and communication skills of Ken Lay, gives a good example of the haughty spirit of many Enron officials. During the California energy crisis he joked that the only difference between the Titanic and the state of California was that “when the Titanic went down, the lights were on” (Fusaro & Miller, 2002. p. 122).Even the so-called “heroes” of the Enron terribly failed to demonstrate reasons to delay or to prevent Enron’s demise. Complains were received from the company’s treasurer about the financial forgery and window-dressing but retired without going public with these issues.

Vice-president of corporate development Sherry Watkins showed concerns regarding the firm’s questionable financial practices in a letter and in a meeting with Lay (A Hero, 2002). Later Sherry Watkins discussed the same issues with an audit partner at Anderson. Individual greed and pride was magnified by the corporate culture of the company encouraging creativity and risk taking leading to the company’s demise. Employees invented new commodity products earning Enron as a top ranking six straight years on Fortune magazine’s list of most innovative companies (Fusaro & Miller, 2002). The cost of freedom was the pressure to produce that created a climate of terror. Lack of controls, combined with an intense, competitive, results-driven culture made ignoring the company’s code of ethics much easier which was prohibited and conflicted interest such as to seek results at any cost. Anderson’s auditors signed off on its questionable financial transactions fearing of loss of lucrative auditing and consulting contracts with Enron.

Publicly traded firms in the United States are judged by their quarterly earnings reports which greatly victimized Enron. Obsession with short-term results and expectations encouraged Enron executives to commit such unethical activities. Every stock index soared and billions got wasted on Internet start-ups that never had a chance to be profitable.

In 1985, two large gas pipeline companies joined forces and created what we know as the Enron Corporation. The Enron Corporation provided commodities, utilities, and services in natural gas through its vast pipelines. Enron produced, carried and dispersed electricity through the northwestern parts of the U.S, among many other power associated ventures worldwide (Ferrel, Fraedrich, & Ferrel, 2011).

During the 1990s, Ken Lay the Chair, Jeffrey Skilling the CEO and Andrew Fastow the CFO converted Enron into a $150 billion energy company and became a strong Wall Street competitor in the investment market, trading power deals (Ferrel, Fraedrich, & Ferrel, 2011). In two years, from 1998 to 2000, Enron evolved into holding the position of number seven on the list of Fortune 500’s largest companies, with more than $100 billion in profits. Howbeit, that it was discovered by a bankruptcy examiner that Enron’s reported net earnings of $979 million in 2000 were actually $42 million and that Enron’s declared $3 billion cash flow was veritably in the red for $154 million (Ferrel, Fraedrich, & Ferrel, 2011).

As the Enron Company grew into a business powerhouse, its corporate culture grew a huge pretentious ego. Displaying its cultural sentiment in the lobby of corporate headquarters with an enormous banner that declared, “The World’s Leading Company” and how its executives contently affirmed that Enron was so powerful that competition was non-existent for them (Ferrel, Fraedrich, & Ferrel, 2011). There was a mind-boggling sense of pride and the assumption that the people of Enron could deal with growing liability without any uncertainty (Ferrel, Fraedrich, & Ferrel, 2011). Enron’s corporate culture centered on how its executives could monetarily benefit and not on how to build the company, ensure the welfare of its employees or stockholders.

Enron’s corporate culture aided in what is called “Flouting” (Ferrel, Fraedrich, & Ferrel, 2011). Flouting is defined as an open disregard for rules or to treat with contemptuous disregard (Flout, n.d).

Jeffrey Skilling, Enron’s CEO devised a policy whereas the employees were evaluated every six months, forcing those who scored in the low 20 percent out of the company. This created a hostile work environment where everyone within and outside of the company was in full competition with one another (Ferrel, Fraedrich, & Ferrel, 2011). It was stated that Enron’s Chair, Ken Lay said “he felt that one of the great successes at Enron was the creation of a corporate culture in which people could reach their full potential. He wanted it to be highly moral and ethical culture and that he tried to ensure that people did honor the values of respect, integrity, and excellence” (Ferrel, Fraedrich, & Ferrel, 2011). This type of work environment did the exact opposite. It fosters lies and deceit, manifesting a dog eat dog mentality within their employees. Employees that found a way to generate business for Enron were rewarded, whereas those employees that fell short were punished, finding themselves forced to bend the rules to the point where ethical conduct was omitted on the quest to the next big victory (Enron, Ethics And Today’s Corporate Values, 2013).

In 2001 Enron filed bankruptcy after a chain of events revealed that Enron had been utilizing SPE’s (special purpose entities) to conceal their losses. Enron’s chief financial officer, Andrew Fastow, in a meeting told Enron’s lawyers that the SPE’s were initiated so that the equity and liabilities can be reallocated off the balance sheet. Also, to boost the cash flow by displaying that the funds were running in the books when it sold assets. By using SPE’s to reallocate equity and liabilities, painted a different picture as it altered the actual financial status of the company (Ferrel, Fraedrich, & Ferrel, 2011).

Enron used the SPE’s to funnel their funds and stocks while maintaining complete control. When obligations were not met by the partnerships, Enron used their stock to cover the debts. This was viable if Enron stock prices stayed high. Once Enron’s stock prices dropped, cash was needed to meet the deficiency (Ferrel, Fraedrich, & Ferrel, 2011). With continued cover-ups, lack of transparency and disclosures, Enron was on a financial decline directly to bankruptcy.

Appointed to work closely with Enron’s CFO Andrew Fastow in 2001, and now given the job of identifying saleable assets, Vice President of Enron, Sherron Watkins was distressed to find Enron’s obscure, unrecorded book arrangements, only supported by Enron’s shrinking stock (Ferrel, Fraedrich, & Ferrel, 2011). Unable to obtain a clear explanation, she confronted Jeffrey Skilling, Enron CEO. Shortly after, Jeffrey Skilling abruptly resigned. After Jeffrey Skilling’s resignation, Chair Ken Lay returned to the position of CEO. Ken Lay was given a seven-page letter from Sherron Watkins highlighting her concerns and explained that Enron will collapse under apparent scandalous accounting practices if efforts were not made to rectify things (Ferrel, Fraedrich, & Ferrel, 2011). Ken Lay appointed Enron’s law firm, Vinson & Elkins to investigate against the better judgment of Sharron Watkin’s (Ferrel, Fraedrich, & Ferrel, 2011). Shortly thereafter, Ken Lay began to sell his stock options averaging a total of $1.5 million. At the same time, Ken Lay was not honest with Enron’s employees and continued to falsely inform them that the company was doing well. Ken Lay encouraged his employees to continue to invest in the company (Ferrel, Fraedrich, & Ferrel, 2011).

Enron, labeled as the “World’s Leading Company”, employing over 20,000 people fell under the demise of greed filled leadership, unethical corporate culture, unscrupulous business practices, deceit, and lies.

It was stated that, Enron collapsed because their executive pursued “profits, power, greed and influence” at all costs: by engaging in and rewarding lying, cheating, and other forms of rule-breaking; by punishing whistle-blowers and ridiculing under-performers who did not embrace rule-breaking: and by “shifting the blame and pointing fingers’ instead of taking responsibility (Munro & Thanem, 2018).

This scandal saw many members of this organization faced with federal criminal charges associated to accounting and corporate fraud, corruption, insider trading, and conspiracy, just to name a few (Edwards, Hawkins, & Schedlitzki, 2019). Thousands of employees were out of work, many losing their retirement portfolios, and billions of dollars were counted as investor losses (Ferrel, Fraedrich, & Ferrel, 2011). Enron had become a major example of business ethics failure, causing changes in legislation that places heavier restrictions on companies in hope to reduce the chances of such enormous ethical business ills of reoccurring in such a magnitude (Edwards, Hawkins, & Schedlitzki, 2019).

When reviewing the history of Enron, it is clear to see that many factors contributed to the bankruptcy and demise of this progressive company. Enron’s corporate culture was a great contributor to its bankruptcy because it promoted a culture of deceit and fraud on every level. The executives of Enron encouraged their employees to believe that practically anything could be made a financial product with the help of statistical techniques and traded for profit (Ferrel, Fraedrich, & Ferrel, 2011). Leadership incited its employees to produce by any means necessary resulting in decisions being made that may have been unethical, placing their employees in the position to cover up shortcomings and falsify vital information in order to be seen as productive in order to maintain their employment with Enron (Edwards, Hawkins, & Schedlitzki, 2019).

As a result, Enron’s financial information was inflated, and did not represent the company’s true financial status, the company’s stockholders were not taken into consideration and decisions made were based on how Enron’s executives could personally benefit monetary, other than protecting the company, its employees and stockholders (Ferrel, Fraedrich, & Ferrel, 2011).

Corporate culture was not the only culprit in Enron’s demise. Major responsibility lays also on Enron’s bankers, auditors, and attorneys. They all were part of manipulating financial information, making hidden investments and transactions, and overlooked fraudulent activities to have Enron’s financials appeal to investors (Munro & Thanem, 2018).

The role of a CFO is to ensure that financial records of a company are in order, to provide reliable data to the company board, management and stockholders to assist with critical decision making, to oversee and address any compliance issues, prevent fraud and to look out for the financial wellbeing of the company, its employees and stockholders (Biery, 2015). Enron’s CFO, Andrew Fastow failed in all CFO responsibilities, thus playing a huge part in creating dilemmas that led to Enron’s financial issues. As the gatekeeper of Enron’s financial health, Andrew Fastow ensured that he and the Enron executives personally profited by his taking part the fraudulent activities to inflate Enron’s financial standing. Andrew Fastow federally charges with fraud, money laundering, conspiracy and obstruction of justice for his part in Enron’s demise (Ferrel, Fraedrich, & Ferrel, 2011).

The Enron Scandal represents one of the largest business debacles in the United States, riddled with acts of greed, deceit and a host of fraudulent activities, which has changed the course of business today, proving that leadership that does not foster an ethical corporate culture, transparency and integrity can led an organization down the road of ruin.

The managing partner at Target Rock Advisors, Richard Rudden stated, “Ethics and integrity are at the core of viable, continued success”. The basis building a just and ethical corporate culture is to create fair and lasting business principles. Companies will be measured by the traditions they build and how they manage their relationships with shareholders, communities, and employees (Silverstein, 2013).

Dan Amos is the CEO, chairman and leader of the Fortune 500 Company, the America Family Life Assurance Company (AFLAC) and is known to have set a guideline for corporate culture and ethical business practices (Grillo, 2010). Through his character, integrity and strong moral principles, Dan Amos has lead AFLAC to being recognized as Fortune’s Most Admired Companies, 100 Best Companies to Work For List and the World’s Most Ethical Companies (Bowman, 2017). Dan Amos’s philosophy is, “Treat others the way they would like to be treated, not the way you want to be treated, it’s all about them. Dan Amos goes on to say, “Failure is a stepping stone to success, if you are not failing you are not taking enough risk therefore, don’t limit the failures”, “Leading with character and integrity encourages company loyalty that breeds dedication, ensuring reputation and success. “Walk the talk and don’t be afraid to stand alone when it’s right. Take the right moral ground” (Bowman, 2017). Dan Amos believes that if you give your employees all that is needed to be successful, they will in return give their all to help the success for the business (Grillo, 2010). Dan Amos encouraged his employees to take risks, without the fear of making mistakes. If mistakes are not being made, you are not taking enough chances. Decisions should be made to push the envelope a bit. If everything you do is right, then maybe you are too comfortable (Bowman, 2017).

According to Dan Amos, “Many times people are afraid to make mistakes and afraid they will be penalized. Here at AFLEC, we do not have that attitude. Job security is what an employee need to succeed”. (Grillo, 2010). In the 20 years that Dan Amos has been CEO of AFLAC, there has never been job cuts (Grillo, 2010).

Dan Amos has demonstrated many characteristics of an ethical leader by maintaining his high moral standards and integrity, by creating an ethical corporate culture whereas his employees can strive in a work environment that promotes fairness, honesty, encourages resourcefulness, and values his employees. Above all, Dan Amos leads by example.

Enron was the seventh largest corporation of America. The company gave a vision of a steady company having very good revenue, but in real that was not the situation the large part of the company’s profit was just on the paper. All of this could be possible just because of planned accounting and traders reforms. Their debts and there hiding nature put the company in big trouble which in turn lead Enron in bankruptcy by late 2001.

There were many factors which resulted in the downfall and eventually the collapse of the Enron few of them are stated below:- Mark to Market Accounting – this type of accounting had an adverse effect for the company. The forceful accounting figures of the company had corrupted the Enron in this limit that it didn’t had an ability to assume about the future profits. Cash is an important asset to run a company and for Enron who were having the revenues just on paper was aware that they have been struck by cash crises.

Enron culture

The Company had a policy that says if you are a good money maker then you will be awarded by bundles of cash as a bonus. This policy got competition among the employees they just wanted to finish the deals somehow and wanted the bonus. The performance review committee was the main reason for the employee’s aggressive nature.

Enron was surrounded by the people who thought they are intelligent than one another having this attitude they thought they will always be escaped by the CRIME.

• JEFFREY SKILLING was responsible for the mark to market accounting principle in Enron. They launched an internet based service namely EnronOnline which helps the energy contractors to trade directly with Enron. At the end they were not able to cover their capital cost which was one of the reasons of their bankruptcy.
• ANDEW FASTOW, the Chief Financial Officer of Enron was mastermind of some special entities like LJM1, LJM2. He was the one who helped them in hiding their debts and losses.
• REBECCA MARK, Head of the failed business of Enron International and Azurix. It was mentioned by the one of the executive that whenever she travelled for business purpose it always cost $60000.
• KENETTH LAY, is the CEO and Chairman of Enron he and his family members misused the company’s asset. It is said that they used the company’s jet for their personal use.

AUDIT ISSUES

Commercialisation and independence – an effective auditor will be independent from the management and financial representations of all users of financial statements. Anderson earned less than 30% of his salary from auditing and the rest he covered by charging his consulting fees. Anderson was playing the role of external auditor in spite of being internal auditor. It was seen that whenever the audit team saw issues relating to accounting they choose to ignore it and applied some accounting schemes to give a cover to their client.

Internal control weaknesses- auditors do have an access to the internal controls of the company to depend on the clients accounting system. The CFO was free from the dispute of interest policy and internal controls above SPE’s were fraud which was there as an existence but not as in substance. The foreign assets of the Enron were not secure in their hands. The daily handling of the cash was done in a careless way, the matured debt was not planned, the debt which was not in the balance sheet was always ignored but they did existed there. Overall it can be said that the internal control were insufficient, the contingent liability was also not shown and all these facts were ignored by Anderson.

Evaluation of Accounting – under this section the auditors give a note about material misrepresentation. There were many errors that came into light about Enron but it was all rejected by the Anderson. There were many other errors that were there and could have rectified by the further investigations.

Related party transactions- the CFO of Enron in substance behaved as a buyer and seller in the same transaction which gave challenging task to the auditors.

Internal controls at Anderson – we need to gain the confidence of the investors by the financial reporting which is only followed when the internal controls of the company and the audit firm is strong. But Anderson had very poor internal controlling skills. Enron was Andersons second biggest client still the accounting advice passed by Anderson was not followed by the audit team, no effort was shown for the assurance of advice was followed.

AFTER EFFECTS OF ENRON

The bankruptcy of Enron was most affected by the 21000 employees of the company. Many people lost their steady income, there were many who were looking forward to their pension and also lost their hopes of secured future.

Sarbanes Oxley Act was introduced after the Enron scandal; it stated that the set of standards were regulated by the public company boards, managements and the accounting firms. Most important introduced reforms were that the company should have independent directors and the audit committee should have financially educated member and an expert.

On 14th January 2004 ANDY FASTOW and wife lea was guilty and was sentenced for 10 years. Lay was guilty by the six charges on him and was prison for maximum of 45 years. Exactly after 41 days Lay died due to heart attack. On October 23, 2006 Skilling was sentenced by 24 years and 4 months prison.

CONCLUSION

The bankruptcy of Enron was due to various factors, some of them are mark to market method, the competitive working environment, audit risks etc. The main players behind everything were Lay, Skilling, Fastow and Mark. Enron scandal was about the people who made it possible. It is about the people whose decision not only affected them but also did effect the present and future of 22000 other employees and whole of the America.

Enron Corporation, founded in 1985, was an American energy company based in Houston, Texas. Enron was the result of the merger between Houston Natural Gas Co. and InterNorth Inc. Enron was commended for its innovative business model and was awarded by Fortune magazine as “America’s Most Innovative Company” for 6 consecutive years. Enron was amongst the world’s leading natural gas, electricity, communications, pulp and paper companies before it bankrupted in December 2, 2001. Its annual revenues rose from $9 billion in 1995 to over $100 billion in 2000. The scandal led to the bankruptcy of Enron Corporations as well as the dissolution of one of the largest accounting and audit firm in the world, Arthur Andersen. Enron was the largest corporate bankruptcy in American history at the time with losses totalling around USD 66 billion.

Firstly Choo’s (2008) framework and Bazerman & Tenbrunsel ethical blind spots would be applied at the preconditions stage, followed by Padilla et al – Toxic Triangle at the crisis stage. The following theories were chosen as it explains the causes that led to Enron’s collapse as well as to grasp a better understanding as to why this crisis has occurred in the first place and whether it can be prevented.

Preconditions

Enron’s crisis contained a lot of early warning signs that were ignored. The 3 causes that stop the signals from being processed are: Epistemic Blind spots, Risk Denial, and Structural Impediment. Organizations that overlook and ignore warning signals are potentially allowing problems to build up and escalate which could eventually lead to a full-blown crisis. This report will only focus on ethical and epistemic blind spots in particular.

There were more than a dozen red flags that should have been investigated by Enron’s Board but those warning signs went unheeded due to blind spots (US Senate, 2002b, p.59). Epistemic blind spots are when warning signals are ignored as the “information does not fit on the organization’s current frame of reference” and information is selectively interpreted to fit our acceptance of the truth (Choo, 2008). Enron’s Board evaded the warnings that were appearing about the means by which the company was accounting for its assets and holdings on its financial statement as the board perceived that the disclosure was just a “normal part of conducting business”.

Epistemic blind spots are when people come across information that contradicts their beliefs, they would rather ignore the information and question its reliability rather than contemplating change to their beliefs (Choo, 2006). The investigation found that the Board authorized numerous improper transactions even though they were aware and were given substantial information regarding Enron’s activities. When failures and existing losses started appearing in their company performance, instead of taking action to correct it, the company hid their losses to protect their reputations. Enron’s board of directors should have questioned on whether the performance of the company was “too-good-to-be-true” and paid greater attention to warning signals.

Enron began to sell its assets to “unconsolidated affiliates” when it struggled to find willing investors. Unconsolidated affiliates were entities whose assets did not appear on Enron’s financial statements. Warning signals emerged about these methods but were dismissed by Enron’s board members as it was their shared belief that these methods were an essential part of conducting business at Enron. The Board were aware that Enron was planning to move underperforming assets and potential investment losses off its balance sheet (Choo, 2008). Red flags on Enron’s shortage of cash and profits should have alerted board members and yet, violations of accounting principles and rules went undetected.

Ethical Blind Spots

Ethical blind spot is the failure to notice others’ unethical behaviour (Bazerman & Tenbrunsel, 2011). Enron’s board failed to notice top management’s corrupt behaviour as increasing share prices gave them little incentive to question the executives. The Board were less likely to condemn executives’ unethical behaviour when it was them who pressurized the executives to make stellar profits. Enron’s unethical misconduct and ethical shift happened gradually which makes it less noticeable by its board of directors. The board did not prevent the firm’s management from engaging in risky behaviour, and they failed to ensure the executives were doing business ethically and legally. The board claimed that they had been deceived and blinded by management as they were presented false numbers. The Board cannot be blamed for not acting on withheld information but they can be blamed for the lack of scrutiny on Enron’s transactions.

Motivated Blindness

Motivated blindness is when people overlooked others’ unethical actions when it is against their own best interests to notice. Enron’s board of directors, Arthur Andersen, and credit rating agencies had access to relevant data and should have detected and acted on Enron’s unethical behaviour. Andersen’s motivational blindness led them to not noticing Enron’s flawed accounting practices as Andersen was motivated to retain Enron as a profitable client. The conflict of interest Andersen faced prevented them from making impartial verdicts about Enron as they possessed a psychological tendency to turn a blind eye on the bad data. Analysts saw the warning signs in the public fillings but they had no incentive to expose Enron as it was in their best interest to protect their relationship with profitable clients such as Enron.Sherron Watkins is the former Vice President of Enron Corporation and was famously known as the whistleblower who warned then-CEO Kenneth Lay of accounting irregularities within the company and the impending financial doom in the fall of 2001. The financial world changed when Watkins blew the whistle. Watkins was brave enough to step forward as she feared that Enron would “implode in a wave of accounting scandals”. By mid-2001, Watkins came across evidence of massive fraud which prompted her to investigate in which she noticed “off-balance-sheet financial structure” (Raptors) and losses worth hundreds of millions of dollars. Watkins initially wrote to Ken Lay questioning accounting methods and Raptor transactions. Watkins advised Lay to come clean to investors, restate its financials, and to admit to its problems as she believed that it was their only chance to survive. She told Lay to hire outside law and accounting firms apart from those working with Enron to investigate her concerns but Enron failed to use independent investigators which led to her claims being dismissed. The accounting irregularities that Watkins had discovered were “the tip of the iceberg” and her warnings came too late to save Enron which eventually led to its bankruptcy a few months after her warnings. The point when Enron’s crisis produces the greatest damage is its bankruptcy on December 2, 2001. The crisis escalated from August 2001 to December 2001 and causes for the crisis was due to the destructive culture brought upon by the unethical conduct of their senior officials within the company.

Toxic Triangle

Enron’s collapse was a result of unethical leadership such as the distortion of information, engagement in unlawful act, and the abuse of power. Followers are equally responsible for Enron’s moral misdemeanour (Johnson, 2003). The concept of the toxic triangle explains why companies end up with scandal. If all three factors (destructive leadership, susceptible followers, and environmental factors) are present, it will lead to a scandal.

Destructive Leadership

Enron’s demise was due to the escalation of moral decline in Enron. Kenneth Lay and Jeff Skilling were seen as remarkable leaders with charismatic leadership style as proven by Enron’s label as a “blue chip” stock investment. However, Enron’s leaders became self-centred, greedy and arrogant after numerous successes. They were not content with their successes and their thirst for power grew which eventually led to Enron’s unsustainable expansion and diversification projects. Lay and Skilling were continuously pushing the boundaries and had high expectations for their employees to add value even if it violated the rules. Lay’s Enron was an outcome of destructive leadership due to its close association of leaders with “acute personalized needs for power” (Padilla et al, 2007).

Unethical leaders like Andrew Fastow and Jeffrey Skilling use their power for personal gain and self-promotion (Conger, 1990; Howell & Avolio, 1992). The destructive leadership practice permitted leaders to manipulate accounts and deceive government regulatory bodies (Pugliano, 2001). Enron’s reward scheme established a “win-at-all” costs focus (Sims & Brinkmann, 2003). Enron’s top management was heavily rewarded with stock options which incentive executives to maintain high stock price at any cost (Lardner, 2002). Lay and Skilling supported disloyal leadership behaviour through “extravagant bonus” and encouraged blatant financial metrics misrepresentation to heighten short-term profits (Einarsen et al., 2007; McLean & Elkind, 2013). Enron’s senior executives held the belief that the company had to be the “best at everything” and are willing to do anything to protect their reputations. Watkins described Fastow as “vindictive” and Skilling as “intimidating”. Fastow requested Watkins to lie to an Enron’s partner regarding an investment.

Susceptible followers

Susceptible followers are recognized as providing opportunities for leaders to commit sinful activities (Art, 2007). Leaders alone are not able to bring destructive repercussions. Lay and Skilling cultivated a competitive, elitist environment by only hiring top aggressive and ambitious graduates who were willing to maximize short-term profits by circumventing the rules (McLean & Elkind, 2013). Watkins felt like Enron’s employees were somewhat like “cult followers”. Enron’s followers were divided into two groups: Colluders and Conformers.

Ambitious colluders are easily recruited when there are opportunities to profit (Kellerman, 2004; McLean & Elkind, 2005). Opportunistic ambitious individuals thrived at Enron due to their “individualistic and aggressive efforts” to achieve profits. Colluders sees an opportunity to promote themselves and attain their personal gains by following destructive leaders. Colluders share similar world-view ideas and bad values as toxic leaders which makes them willing to participate and support the leader’s plan. Enron’s employees are ambitious and seek personal gain through their association with the leader. Employees “Machiavellian tendencies” and hunger for status led to their willingness to engage in fraudulent actions. It became apparent that many Enron employees had aided senior executives in implementing corrupt and unlawful business schemes. Deceitful tendencies were encouraged by management and it was the norm for employees to overlook imprudent dealings and unethical conduct. Unhealthy competition between co-workers existed and they would rather “stab each other in the back than help one another”.

Conformers accepted destructive leaders as a way to save themselves. They are primarily driven by fear due to extreme pressure to produce fast results else they would be terminated if they fail to do so. Enron’s aggressive environment inherently provided employees with an incentive to commit fraud to ensure their survival in the company. Questions about the business dealings of the company or the raising of concerns were punishable and very few dared to raise objections.

Conducive Environment

Culture set by its destructive leadership played a major part in Enron’s downfall. Annual performance review committee, known as the “harshest employee-ranking system” in the US, fires the bottom 15% of employees. Associates are required to grade their peers which generated a great deal of hostility and distrust among employees. The bottom 5% got “publicly shamed” during annual reviews (Sims & Brinkmann, 2003). Arthur Andersen applied lax standards to Enron’s audits due to a “vested interest “over significant consulting fees paid by Enron. Anderson’s attitude evidently led to management taking advantage of the absence of checks and balances. Enron’s top management was provided a conducive environment to commit fraud (Journal, 2002). A few former executives were charged with offences and sentenced to jail post-Enron. The aftermath of the Enron’s scandal led the public to question the sufficiency of U.S. disclosure practices and the integrity of the independent audit process. Increased oversight and regulation have been legislated to help prevent corporate scandals of Enron’s level. The lessons learnt from Enron scandal was that the decisions made by executives can influence a company’s profitability and reputation. There was a need for ethical disciplines within organizations, and substantial reforms in the US accounting and corporate governance.

The scandal resulted in the creation of new regulations and legislation that were designed to increase the accuracy of financial reporting for publicly held companies. U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley passed the Sarbanes-Oxley Act in 2002 with the intention of protecting investors by imposing harsh consequences for “destroying, altering, or fabricating financial records”. The corporate accountability law requires organisation to put measures in place to prevent fraud and ensures management is held personally responsible to certify truthful financial report else, they would “face up to 20 years in jail”. Sarbanes Oxley process was costly but it resulted in the rise of corporate governance standard (Wippell, 2011). Sarbanes-Oxley stringent rules has led to a decline in accounting frauds. The Financial Accounting Standards Board implemented new compliance measures to significantly raise the levels of its ethical conduct. These new methods are vital to detect and close loopholes that were commonly used by companies to evade accountability.

Enron’s fraud changed the perceptions of and attitude towards whistleblowers. Watkins futile efforts to stop the fraud resulted in the creation of the 2010 Dodd-Frank Reform Act. The aim is to protect whistleblowers and reward them with a share of any penalties recovered due to their information. After a decade, law enforcement decided to incentivise and protect whistleblowers as a way to fight financial fraud. Major changes are implemented regulatory as a direct result of Enron’s downfall. The 3 major effective governance changes are: “1) Strengthening of internal control systems, 2) increased board independence, and 3) Provision of non-audit services by external auditors are restricted.” Enron’s downfall was a result of the internal and external corporate governance system that failed to control Enron’s management. External monitors were “slow to react” to the firm’s warning signs and Enron’s board internal oversight was lacking.

A new disciplinary board is formed to provide greater transparency and to administer “annual quality monitoring process” for large firms. Instance of non-compliance would be referred to the disciplinary board and the new organisation would have increased authority to “monitor compliance with SEC practice standards”. The AICPA will not restrict limits on offering certain non-audit services to audit clients of public companies. Audit standards have been amended to detect fraud, and new measures have been implemented for discouraging fraud such as increased “internal control procedures” for boards, management, and audit committees. It has also declared its support for greater extensive changes in its self-regulatory structure. Additional reforms such as an enhanced financial reporting model would need to be enacted to prevent and avoid another accounting Enron scandal from occurring in the future. Summary

In sum, Enron’s collapse was an accumulation of a breakdown in Enron’s internal controls and board governance, inattentive regulatory agencies, investment banks misrepresentation of Enron’s true financial condition, lack of ethical discipline, and the failure of credit rating agencies to whistle blow (Salter, 2008). The main cause of the collapse was the organization culture. Choo’s (2008) epistemic blind spot framework combined with Bazerman and Tenbrunsel (2011) ethical blind spots theory explained that blind spots were the reason why Enron ignored warning signs. Watkins as a whistleblower was the trigger as Enron went into a crisis shortly after her warning. The crisis stage incorporated Padilla et al (2007) toxic triangle theory to help explain how destructive leadership is made possible through a combination of leaders, followers, and conducive environment. Lastly, the Post-crisis section highlighted regulatory changes and the implementation of new laws such as Sarbanes-Oxley following Enron’s scandal. All in all, Enron’s crisis was preventable had the management be more truthful about the health of the company, the board paid greater attention to management activities, and a change in leadership and corporate culture.

Enron was one of the biggest companies in the United States, but it fell apart almost immediately due to one of the most notorious business failures in history. The former CEO of Enron, Jeffrey Skilling, described Enron as pursuing an “asset-light” business strategy according to “Making Sense of the Enron Nonsense.” Within this strategy, Enron’s main focus was to make profits off their employees’ ability to comprehend and anticipate what organizations that produced and used electricity and natural gases may do. In other words, Enron frequently benefitted from successfully leveraging and taking advantage of arbitrage, meaning they bought and sold contracts across the energy markets faster than the rest of the market could and made profits off price differences. According to the article, “there were three reasons” for anyone to believe that Enron’s business model was profitable. First off, Enron was the leader in restructuring the US energy industry. Secondly, Enron had more experience as a multinational firm than its competitors. Lastly, arbitrage opportunities were profitable during this stage of the evolving energy markets. Early on, Enron wasn’t so “asset-light” in their strategy or business model, as can be seen above in exhibit 1, which outlines Enron’s plans regarding pipelines throughout the US. Enron initially strived to provide many end-users with natural gas and electricity through their power plants, pipelines and other energy products. Over time, though, their “asset-light” business model took shape, and Enron began to focus on the trading of commodities, such as energy, in order to make a profit off basically acting as a broker in their markets.

Even before it declared bankruptcy, Enron was known for its “opaque accounting practices,” according to “Making Sense of the Enron Nonsense.” According to this article, the 1990s were a time in which a lot of growth was taking place related to energy trading. Enron frequently exploited profitable trading strategies, such as those arbitrage opportunities mentioned above, and showed solid and consistent revenue growth on financial statements. With the help of Arthur Anderson, they portrayed the image of a healthy and strong company, even though their balance sheets and other financial statements were considered by many to be “indecipherable,” according to the article mentioned earlier in this paragraph. In the end, Skilling and other Enron executives wanted to transform Enron into a money-making machine, and Enron became what most people thought was just that and an industry leader for several years. Enron’s business practices throughout the 1990’s led them to the inevitable declaration of their bankruptcy. What really started this was when Enron was allowed to use mark-to-market accounting. This allowed Enron to record potential future revenues on the day a deal was agreed on. This, combined with a lacking ethical structure from the top down, allowed Enron to falsely inflate their revenues. Many people at Enron including Jeff Skilling were brilliant, but many of them clearly let their desire for money get in the way of Enron’s long-term financial well-being. For example, while stock prices across the market were going up, Enron was losing money and not showing that fact on financial statements. At the same time, many executives at Enron and other organizations were selling their shares. When Portland General Electric (PGE) and Enron merged, this madness rose to another degree. With access to the west coast energy markets through PGE, Enron now had access to California’s deregulated market. Around the same time, Skilling was proposing ideas like trading unused bandwidth or even weather in attempts to make Enron more money. For example, when Enron released news about its project with Blockbuster, aimed at delivering movies on demand, Enron’s stock soared even though the idea never even worked out. Furthermore, Enron was able to use mark-to-market accounting to record millions in profit from the venture despite it losing money. By the end of 2000, internet stocks were falling, yet Enron’s stock remained on the rise and it was still unclear to many skeptical stakeholders as to how Enron made money.

We now know that Andy Fastow, Enron’s CFO, lead various companies that conducted business with Enron. These companies took on Enron’s debt, which made it look like Enron was seeing cash come in. That wasn’t the case at all, as the debt was simply hidden within Fastow’s companies. Many major banks invested in these companies, and accountants and lawyers went along with all of it. An example of this fraudulent activity occurred during California’s national emergency regarding their lack of power due to Enron’s dirty business practices. Enron was exporting power out of California during the power shortage they created by having power plants shut down. When the prices went up from this shortage, they would sell the energy off at the inflated prices. At the same time, traders at Enron were betting on the price of energy to go up, which was clearly mostly under their control at the time. Enron wasn’t the only company doing these things, but the extent to which they committed fraud vastly outweighs other examples. Under Skilling, Enron employees either didn’t care or didn’t know about the extent of their wrongdoing.

On August 4th, 2001, Skilling resigned as CEO of Enron. A day after this happened, Sharon Watkins sent a letter to Ken Lay regarding the information she had uncovered related to assets which were hedged with one of Fastow’s companies. She effectively “blew the whistle” because she knew that the financial statements didn’t make any sense the use of creative accounting had gone much too far. She referenced this strange accounting in a letter to Lay, which he didn’t seem to pay much attention to. Through the downfall of Enron, Arthur Anderson and other parties involved were also punished. It’s only right that Arthur Anderson was demoted from its “Big 5” status because employees of the firm shredded over 2,000 pounds or one ton of paper evidence related to the Enron scandal. As stated in the overview, Enron served in the energy trading industry, capitalizing on the fluctuation of the cost of energy in order to make their revenue. It’s important to realize how well Enron was doing before things went bad. At their peak, Enron’s common shares were trading for $90.75. By the day Enron declared bankruptcy on December 2, 2001, the shares were trading for $0.26. In the end, a combination of poor internal control processes as well as their auditors turning a blind eye to poor accounting practices led Enron to become the center of “one of America’s greatest business debacles,” according to NPR.org. Auditing standards were lacking & Enron actively lobbied to amend acts such as The Public Utilities Holding Company Act, which eventually eased up on various kinds of restrictions on investments Enron was interested in. Similarly, relationships with both the Bush family and Arnold Schwarzenager are suspected to be part of Enron’s business practices.

US GDP growth rate in 2000: 4.2%. 2001: 1.1%.

US unemployment in 2000: 4%. 2001: 4.2%. 2002: 5.7%.

US real interest rate in 2000: 6.8%. 2001: 4.54%. 2002: 3.09%.

US inflation rate in 2000: 3.39%. 2001: 1.55%. 2002: 2.38%.

Enron portrayed the image of being an innovative and financially healthy company. This paired with rising stock prices made the 1990s, retrospectively, a mess in terms of investing. Also, financial statement users were not as knowledgeable before the Enron scandal & lacking oversight in accounting helped lead to Enron’s downfall, which lead to the development of the 2002 Sarbanes-Oxley Act. Under this act, financial statement users are more protected and informed than ever before.

Computerized accounting procedures are much more common than before, which, among other tremendous aspects, makes the true destruction of evidence more difficult.

Enron was an energy company that also generated revenue through energy market arbitrage. Enron’s management did not particularly stress sustainability with the energy is produced, and actually lobbied against renewable energy sources, showing their support for natural gas, oil and coal energy sources.

Enron frequently lobbied for their chosen causes, and the downfall of Enron, as mentioned above, under “sociocultural” aspects, helped bring about The Sarbanes-Oxley Act, which primarily protects financial statement users. According to the New York Times’ article, “Enron’s Many Strands: The Strategies; How Enron Got California to Buy Power it Didn’t Need,” Enron’s tactics that helped bring about its’ demise were “condemned” as “‘seemingly gaming the system’ and ‘very offensive’” by Enron’s former interim chairman, Norman P. Blake Jr. in front of the Senate. According to this same article, Enron was “get[ting] paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion” in the state of California. In other words, Enron was essentially portraying the false image of energy congestion while taking advantage of arbitrage opportunities, resulting in Enron charging more than necessary for services they weren’t truly or completely providing. In the end, regulators were forced to fix this issue in 2001 through the implementation of price restraints throughout the West coast of the US. Before these price restraints, Enron took part in purchasing power in California at “capped prices” and subsequently offloading it at a profit. Furthermore, California laws required Enron, among all other sellers of power, to disclose the unique source(s) of the power that they would sell. This implies that, “in order to short the ancillary services it [was] necessary [for Enron] to submit false information that purport[ed] to identify the source[s] of the ancillary services.” This issue, unfortunately, was not unique to Enron. Luckily, changes like the Sarbanes-Oxley Act have been put into place since this era of financial statement messes.

Advice

After Enron filed for bankruptcy, they never reopened and this business is looked at as the prime example of why sound accounting principles are important and why they needed to be changed following this debacle. As mentioned before, Enron was shifting debt to its subsidiaries in order to keep their stock price rising, which was seemingly beneficial for all of their shareholders. Also, Enron pursued various other “creative accounting” techniques, as well as arbitrage opportunities to deceive financial statement users and turn a profit. If I were an auditor hired by Enron before their downfall, I would’ve advised Enron’s management not to hide debt for a multitude of reasons. First, it is illegal and immoral. In addition, you can only keep up appearances for so long, so this was a short-term solution/scheme at best. Deceiving shareholders into thinking your company is far better off than it is will never end well, so I would’ve advised Enron’s management to portray a more honest, if not conservative, view of the financials. When conservatism works, financial statement users get excited about outperforming target objectives. When conservatism goes too far, financials can get depressed by a high degree of misstatement. On the other end of the spectrum, though, Enron was being way too generous, which only brought down the stock price. In the end, I would’ve advised Enron’s management to portray the financial statements in more of a conservative light. The main issue regarding Enron’s fraudulent activities is the issue regarding Arthur Anderson’s lack of independence. Since The Sarbanes-Oxley Act, accounting has seen a more serious attitude towards ensuring the independence of auditors. Individuals at Arthur Anderson and management at Enron should’ve placed more emphasis on auditor objectivity and independence, and I would’ve advised them to do so. For example, it was not responsible for Enron or Arthur Anderson to undertake both consulting and auditing activities and duties. In the end, the off-the-books entities that Enron claimed to conduct business with went unnoticed by both representatives at Arthur Anderson and the board of directors of Enron. This, coupled with the lack of transparency that resulted, ended up bringing down both Enron and Arthur Anderson. Enron’s failure was undoubtedly warranted due to their poor business practices in combination with their accountant’s poor auditing practices. These poor auditing practices were a direct result of Arthur Anderson not maintaining independence throughout its business relationships as mentioned in the previous paragraph. Arthur Anderson was supplying business consulting advice as well as auditing Enron’s financial statements. That being said, there was incentive for Arthur Anderson representatives to help the business to perform well (at least on paper) and to pass their yearly audits. This failure had somewhat of a silver lining in that the accounting industry was heavily refined to ensure a squander of this magnitude could not be replicated. Now, independence from your accountant is a top priority since their main objective is to provide credibility to the financial statements, ensuring that they are fairly prepared and presented.

A key point from this same article is that “accounting is not an exact science.” This is the major counterpoint to the common argument that Arthur Anderson should’ve been held solely responsible, without question, for the Enron scandal. Most people may not realize that the job of an auditor is not to ensure the exactly correct portrayal of financial statements and reports. On the contrary, a company’s management is responsible for the preparation and fair presentation of financial statements with respect to the applicable reporting framework (such as US GAAP). Around the year 1990, Enron started reporting its energy sales revenue as gross revenue instead of net revenue. This helped boost the appearance of their financial well-being, and this practice trickled down through the industry to other similar companies. The most harmful aspect of this is that the users of financial statements were unaware of this unethical practice, and the share prices of companies like Enron went unchanged relative to this behavior for a long time because of a lack of communication of accurate information. Close to its demise, Enron once employed, according to their 2001 financial statements, 20,600 employees. According to the same statement, Enron also had 58,920 stockholders. By the time Enron had crumbled, some of these stakeholders had lost everything.

The last interesting point “Making Sense of the Enron Nonsense” brought up is, essentially, that the shareholders of Enron could be seen as being at fault for what transpired in relation to Enron’s eventual bankruptcy. As the article states, “Shareholders must exercise their responsibilities as owners of the firm to demand complete disclosure of all relevant information.” This is another way of saying “buyer beware,” which rings true in most circumstances without this being an exception.

Even though Enron executives were able to essentially steal hundreds of millions of dollars, this ended very ugly for most of them, with Skilling initially being sentenced to 24 years in prison, Lay reportedly dying of a heart attack while awaiting sentencing, and Fastow being sentenced to 10 years in prison. Another Enron higher-up, Cliff Baxter, also reportedly committed suicide after the incident. In addition to Enron executives, over $7 billion was paid by a group of banks to shareholders and investors because of the banks’ alleged participation in Enron’s fraud through funding activities. On the other hand, the best outcome of all of this was the Sarbanes-Oxley Act of 2002, as mentioned before. In the end, the whole Enron scandal is just a valuable lesson we can all hope to learn from.

The Enron Corporation of Houston Texas was the result of two Houston companies merging together in 1985. Up until that point, Enron had been struggling financially and continued to struggle after the merge until ‘the deregulation of the electrical power markets took effect, and the company redefined its business from “energy delivery” to “energy broker”’ (Ronald, 2). In doing this Enron was able to begin making trades and contracts while profiting off of them. Workers were held by high expectations Chief Executive Officer Jeffry Skilling, which in turn gave the company a great work output. These employees worked so hard that they began to push the limits of ethical conduct so much so that it went unnoticed as they were chasing their success. This overlooked ethical conduct is what helped Enron succeed in becoming the biggest and fastest growing corporation America had ever seen to later filing for bankruptcy in just a single month. This bankruptcy, however, would not happen for many years. With the company’s growing success Enron was able to conceal any red flags investors might have. They created partnerships as an easy way to raise money, kept their debt hidden from analysts to ensure that the company was still thriving, and encouraged workers to invest in the company’s stocks. One of Enron’s biggest crimes was committing accounting fraud with the help of Arthur Andersen. He did this by having his ‘employees destroy important documentation regarding the Enron audit’ (Nelson). With the crimes of the Enron Company and Arthur Andersen exposed, the Sarbanes-Oxley Act of 2002 was put into place. This act was meant to monitor and regulate corporation audits so that theft and fraud could be avoided. To understand more about this act, it is first important to understand more about the Enron scandal and the ethics behind it.

As previously mentioned one of the ways Enron deceived the public was by forming partnerships. These partnerships resulted in writing down the profits that were anticipated to be made before a deal was made- if even made at all. The mental mindset that Skilling’s enforced on his workers began blurring the line of what needed to be done to make the company be the best and what was ethical. The other way Enron kept its reputation was by concealing the debt that they were in by keeping it off its balance sheet. This could also be seen as an ethical issue, however the company fought it by saying that this was merely a timing issue. ‘Moving debt was as easy as pre-dating a check, and would harm no one, and therefore was not an ethical issue’ (Ronald, 3). The most elusive move made by Enron, however, was keeping partnerships at a distance. They did this by making sure their partnerships were not viewed as Enron subsidiaries. Essentially these smaller companies were not ‘owned’ by Enron, and thus the accounting methods did not have to be as strict. In order to do this though, Enron needed help. This is where an outside accountant by the name Arthur Andersen came in.

Arthur Andersen played a crucial role in the Enron audit failure. His role as an auditor was to review Enron’s finances and in doing so he had to ensure that the company was maintaining its social responsibility. Social responsibility in this case is defined as ‘the continuing commitment by business to behave ethically and contribute to economic development…’ (Linthicum). However it has already been brought up that Enron had been deceiving investors through partnerships and debt avoidance. It was Andersen’s job to make sure these red flags stayed concealed through the financial papers of Enron. The corporation valued its reputation above anything else, and this is seen when Skilling pressured his workers into performing despite unethical values being present. Skilling, however, decided to leave the corporation in August of 2001 and sold all of the stocks he had bought for a large sum of money. It is when Skilling left that the company began to crack. ‘Only two months later, Enron restated earnings, stock prices dropped, and the company froze shares in an attempt to help stabilize the company’ (Ronald, 4). With workers slowly becoming aware of the fraud going on within the company and word spreading about this the public starting to question Enron and its ethics. While addressing the possible scandals and trying to calm the situation, Andersen was behind the scenes shredding any papers revolved around Enron’s finances. It is later on that Andersen admits he and his firm shredded the papers, which in turn ruined both his and Enron’s reputation. ‘Following AA’s admission of document shredding and the release of the Powers Report suggest that the market questioned AA’s independence, and thus questioned the credibility of AA’s clients financial statements’ (Linthicum).

Following this series of events on the second of December, 2001, the Enron Corporation ‘filed the biggest bankruptcy petition in the history of the United States” (Gledhill). Arthur Anderson was criminally charged ‘of obstruction of justice for “knowingly, intentionally, and corruptly” inducing employees to shred documents relating to Enron’ (Gledhill).