- Internal Code :
- Subject Code : HC2121
- University : Holmes Institute
- Subject Name : business ethics
Comparative Business Ethics and Social Responsibility
Executive Summary of Enron Case Study
The report highlighted the reason for the fall of firm Enron by an assessment of factors such as corporate culture, accounting firm role, and company executives. Business ethics as appropriate policies in the organization were not followed. Enron had not pursued collective capability for moral behavior and its decision making was impaired. The company had used questionable practices to maintain its investment-grade by using off-balance-sheet settlement, sale of special purpose entities, and manipulating third party functionaries for carrying uncounted practice. Enron division was kept separate with less authority to question judgment. The top management used deception and short term financial gain to influence functioning. Accounting firm Arthur Anderson and Merrill Lynch were scrutinized for inadequate practice, conflict of interest. Andrew Fastow as CFO was persecuted for inflating client earning and was involved in bribery, money laundering, and deteriorating company wealth and booking personal profit. It was observed that he was behind the alliance to cover company debt around $1 billion which directly contributed to Enron; s bankruptcy. The report addressed the management role to curb corruption and place and influencing transparency and functioning as unidirectional unit. The management unethical conduct on hiring a team of banking experts for buying and selling for divisional illegal practice.
Table of Contents
Introduction..
Fall of Enron..
Key lesson learned.
Conclusion.
Reference.
Introduction to Enron Case Study
Enron, one of the largest energy companies of reshaping the gas and electricity segment, filed for bankruptcy in America (Trung 2016). The resultant condition had sent shockwaves across the corporate functioning. Enron has sustained explosive growth in1990 s with high share trading price. This report highlights the fall of Enron and key analysis of its accounting problem and works culture that led the firm to file bankruptcy and resulted in compliance failure. It addresses the failure of Enron, conflict of interest, and analysis of moral responsibility. The company has used questionable practices to maintain its investment grade by top executives Under Andrews’s leadership and supervision in complexity and capitalizing assets and liabilities for transferring assets to SPE to report loss of off-balance sheet items.
Fall of Enron
Enron had taken 544million to settle off-balance sheet items at its financial strength was questioned (Sims 2003). Enron’s downward spiral continued, the company filed for bankruptcy making it the largest bankruptcy in U.S history on 2nd December 2001 (Washington Post 2001). The impact of the fall of Enron was grave with a fall in share price and thousands of employees faced retirement with no savings and the business reputation and corporate practices were questioned. The company rose with significant heights within years of expanding operations in securities. It is duly observed that managerial behavior contributes to ethical or unethical behavior. Manager’s actin contrary to ethical reasoning impact firms functioning. In the early 1990s, Enron was considered an innovative company with buying and selling gas and electricity it created a market for commodities (Sims 2003). The company was found in the year 1985 and its revenue rose to 100 billion dollars by the year 2000 (Houston Chronicle 2018). The lack of truthfulness by management about the health of operations as a duty of good faith and disclosure was breached. The conflict of interest by Arthur Anderson as a consultant allowed to reorganize finances protecting from creditors. Enron was not all functioning function on the stakeholder confidence. Lack of integrity capacity led to the demise of the firm act as a catalyst for reputation. Integrity capacity is the individual and collective capability for moral behavior, judgment, and promotes moral decision making. The key risk identified as management failure in not acquiring skills for the radical shift as they jeopardized operation health with creative and unconventional products without the ability to manage risk.
The Contribution of Corporate Culture to Enron’s Bankruptcy
Corporate culture refers to prevailing values of the function in the company (Jondle 2017). It reflects the business authority and leadership influence on company operations. The culture at Enron had become arrogant following the rank and yank system (Houston Chronicles 2018). The culture was developed as such that high performance was rewarded, but punished employees who were deemed weak. The working system at the firm was functional in a way that company executives believed in high-risk transactions to turn into profit. The intense pressure led to workers under pressure to perform and was willing to cross ethical foundations by falsifying transactions to maximize revenue. The creditor’s managers in turn booked profits in personal savings. Kenneth Lay instilled fear and workers were afraid to challenge management (Kulik 2005). Its corporate culture did not promote integrity and respect and pushed for innovation. The company created competition within the organization. The culture led to blind following of decision making at tough competition among employees to maintain performance yardstick by instilling practice of money making by moving away from core business practice. The toxic culture shaped organization’s function and structure by lack of shared vision by developing benign followers. This filled the environment with secrecy and inevitably leading to bankruptcy. Enron's corporate culture supported unethical behavior without questioning top management subsided with fear. The business unit and Enron division were kept separate to disallow information from employees (New York Times 2001). The top management used deception and short term financial gain which destroyed its business capabilities. Enron used unfair practice and did not reach its commitment level with power structure between employees and the community was retained by top management. The rank and yank system made employees deceptive and front-run for their actions. Associated graded their peers created a sense of paranoia among employees. Average employees were asked to vest their stock options during a crucial period and were blocked from the share sale.
Enron's leadership disregarded its role and became annihilator. The employees were asked to mindlessly follow management and ethics was pushed on the backburner. This resulted in the fear spread and lack of competent practice by staff under pressure. The company cultured turned ignorant, aggressive and management tuned into unethical conduct. Sheron walking is an example of how internal whistleblowing failed. Her actions to reach out was subdued by job loss and hostility in interaction with chief staff (Petrick 2003). Employees felt extreme pressure not to reflect against the negative wrongdoings of their top management. The company developed a compensation plan offering compensation to employees for the short term earning, this allowed top executives to build an income. Rising stock prices and opaque system of communication diluted employee power. Greed was the primary motivator observed in the company. The company turned innovation through structuring in molding the statistical model (Dobson 2006).
The Contribution of Eron’s Bankers, Auditors, and Attorney’s to Its Demise
The bankers, auditors from the company played a major role in the firm's demise. The inflating of balance sheet due to cash value projection of deals presented favorable picture of firm’s financial health. Major Banks were accused of disbarring financial statements. The details of three banks emerged in connection with wire-fraud at Enron. The transactions were placed to appear helpful in deal structure. The creditor believed that financial statements presented correct information due to bookkeeping but the auditors aided Enron (Dobson 2006). Arthur Andresen was the auditor and resistible for internal bookkeeping. Besides the stance taken by the company would not have been possible without lawyers. CFO at Enron said he admitted that accountants helped the company in developing structure and gave approval for transactions. Enron falsified its practice with other banks and services Merrill Lynch faced scrutiny for deal around 28 million with a promise by Enron to payback (Petrick 2003). Merrill Lynch was accused of misleading by issuing recommendations on Enron showed failure on research and banking practice. This showed power influence of the participatory authorities in fall of Enron with banks supportive stance on management deals.
Arthur Anderson was compromised by the financial interest thus it failed in providing unbiased opinion at Enron accounting practice. Arthur Anderson was ignorant of its structure deals that were mere vehicles used to manage earnings by the company CFO. The accounting records evaluation came in light with Enron reporting until previously shows deception by the firm on fair assessment. SEC regarded Arthur Andresen has a serial offender. Merrill Lynch created a record for selling 12 million in earning in the year 199 for meeting the earning goals (The Wall Street Journal 2003). The role of Auditor as Arthur Andresen who was one of the leading accounting firms was involved in deception and was accused of conflict of interest as both auditors and consultants at Andersen. On US government investigation Andresen chief Auditor had shredded that might be compromising (Smith 2004). Andresen was a major partner at the company and was found guilty in the year 2002 for obstructing justice for destroying related documents (Smith 2004). Enron was one of the top clients of Vinson and Elkin and was responsible for the omission of details and misconduct. The legal practice and evaluation was not competent throughout the years.
The Role of Eron’s CFO in the Company’s Financial Problems
Andrew Fastow was Enron CFO he was persecuted for inflating client earning. The charges were placed on him included bribery, money laundering. It was observed that he was behind the alliance to cover company debt around $1 billion which directly contributed to Enron; s bankruptcy (Accounting today 2001). To make Enron look competitive Andrew defrauded Enron by off-balance-sheet deals. It was alleged that he received kickbacks presented as donations from family friends. Fastow played a major role in engaging structured finance transactions created for false appearance for Enron. Andrew directly ran the partnership using Special purpose entities to purchase underperforming assets (Forbes 2002). A large amount of money was raised through SPE was used for personal profits. Under Andrews’s leadership and supervision Enron used SPE for complexity and capitalizing assets and liabilities He used SPE to park troubled assets and transferring assets to SPE to report loss of off-balance sheet. Enron's financial deal calculation was calculated for the long term and sold an interest to third party transactions at a specific rate of return. This structure allowed Enron to record over $110 million that got busted post broadband unit failure (Trung 2016). Fastow used these SPE and hired staff from a team of banking experts for buying and selling risk. He documented the deals in balance sheet listing on future transaction basis. Fastow bent rules for personal gains profited around $30 million from the associated companies (The wall street journal 2003).
Key Lesson Learned
- The structured finance method on classification should be restricted to prevent ant fraud in the future. Regulatory reexamination of structured transactions.
- Use of collective capability for moral behavior and its decision making in financial decision yardstick. Developing positive and participative work culture among units at workplace.
- It was observed that Enron's illegal activities and agency culture led to unsustainable and fraudulent corporate practices.
- Safeguard business innovation and serious application of code and conduct among management and third party aggregator.
- Conflict of interest to be monitored between auditing and consulting to separate their line of operations.
- Government rules need to be reinforced with transparency in reporting and valuation. It is important to customize the organizational design to reflect their business strategies raised by the change in the business environment (Ferrell 2018).
Conclusion on Enron Case Study
A more complete system is needed for owners to provide the operating situation of the company. They violate the interest of loyalty and discoed information with financial statement disclosure. Its corporate culture played a major role that led to defining internal transparency and action by the firm. Enron's leadership disregarded its role and ignorant towards ethical practice by manipulating records. The employees were asked to mindlessly follow management and ethics by the top management CFO’ s personal profit booking for revenue in deals showed conflict of interest and using power structure to influence decision making. The company cultured turned ignorant, aggressive and management tuned into unethical conduct. Enron's financial deal calculation was calculated for the long term basis. The moral responsibility of the board as professional ethics was violated by the management. The leadership at Enron cared about enriching themselves and leadership did not develop a shared vision with employees, centered only on making a profit. Financial firms have a major responsibility towards stakeholders and the community. The Enron scandal acted as government and ethics as central to the functioning of the firm. The role of corporate governance is critical to align the interest of executives and shareholders to prevent reporting failure and misconduct. The responsibilities of both management and staff in engaging practice to curb corruption and place importance on trust and credibility.
References for Enron Case Study
Accounting today. 2001. Former Enron CFO confronts fraud examiners. [Online]. Available at http://www.accountingtoday.com/news/Former-Enron- CFO-Andrew-Fastow-Meets-Fraud-Examiners-67263-1. [Accessed on September 3, 2020].
Dobson J. 2006. Enron: The collapse of corporate culture. in: Dembinski P.H., Lager C., Cornford A., Bonvin JM. 2006. (eds) Enron and World Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9780230518865_12
Ferrell, O., Fraedrich, J. and Ferrell, L. 2018, Business Ethics: Ethical Decision Making and Cases, 12th ed. Southwestern, Cengage Learning
Forbes. 2002. Andrew fastow the fall guy. [Online]. Available at https://www.forbes.com/2002/10/03/1003topnews#52c085756fa1. [Accessed on September 4th, 2020].
Houston Chronicle. 2018. [Online]. Looking back at the rise and fall of Enron. Available at https://www.houstonchronicle.com/local/history/economy-business/article/The-rise-and-fall-of-Enron-9712210.php. [Accessed on September 7th, 2020].
Johnson. C., 2003. Enron's ethical collapse: Lessons on leadership educators. Journal of leadership education. 2(1), pp. 1-12
Jondle, D., and Ardichvili, A. 2017. Ethical business cultures in the emerging market. Cambridge university press.
Kulik, B.W. 2005. Agency theory reasoning and culture at Enron: In search of a solution. Journal of business ethics, 59(1) pp. 347-360. DOI: https://doi.org/10.1007/s10551-004-7308-2
Oppel, R. and Sorkin, A. 2001. Enron collapse an overview. [Online].Available at https://www.nytimes.com/2001/11/29/business/enron-s-collapse-the-overview-enron-collapses-as-suitor-cancels-plans-for-merger. [Accessed on September 3, 2020].
Petrick, J.A. and Scherer, R.F. 2003, "The Enron Scandal and the Neglect of Management Integrity Capacity". American Journal of Business, 18(1), pp. 37-50. https://doi.org/10.1108/19355181200300003
Sims, R.B., and Brinkmann, J. 2003. Enron's ethics (or culture matters more than code). Journal of business ethics, 45(3),pp. 243-256. 10.2307/25075069
Smith, C., and Quirk, M. 2004. From grace to disgrace: the rise & fall of Arthur Anderson. Journal of business ethics education, 1(1). pp 91-130.
Emshwiller, J. and Davis, A. 2003. Merrill Lynch takes Enron's responsibility. [Online]. Available at https://www.wsj.com/articles/SB106381175380460400. [Accessed on September 4th, 2020].
Trung. 2016. Enron- flaws in organizational architecture and its failure. International Journal of Scientific & Technology Research , 5(5). pp. 143-157.
Washington Post. 2002. [Online]. Enron's culture fed its demise. Available at https://www.washingtonpost.com/archive/politics/2002/01/27/enrons-culture-fed-its-demise/d73cf80c-0d00-4281-848d-968683828ef9/. [Accessed on September 4th, 2020].
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