Enron: The Smartest Guys in the Room

Enron movie is based on the company, Enron Corporation, which went

bankrupt in the year 2001 resulting in many of its employees losing their
jobs and many of its investors robbed of. Enron Corporation was an energy
company with its headquarters in Houston Texas. It was supposedly one of
the leading energy companies in the United States at that time and was
repeatedly awarded the Americas most innovative Company. What
actually happened in the backend was not known to many. Enron
Corporation is known for using various fraudulent accounting practices
which in turn misrepresented its financials.
After the fraud was discovered, the company went bankrupt within a span
of just few days. The company was described as one filled with individuals
with greed, arrogance and intolerance. The top executives of the company
made millions by altering the accounting books and hiding the actual
information from the customers. The key players in the scandal were
Chairman Kenneth Lay, CEO Jeff Skilling and CFO Andrew Fastow. The
government too contributed a great deal in helping Enron executives
achieve their goals. Since Enron was a major corporate contributor
towards George Bushs election campaign; the government too adhered to
their demand of deregulating the oil prices. In the initial phases, Enron
was on a winning streak, with its traders involved in speculating the prices
of oil. Despite of such speculations being risky and few employees
warning Lay about the illicit trading by the traders; Lay encouraged the
traders as they were making money for the executives, who in turn were
transferring huge amounts of money to their offshore personal accounts.
As the risk kept increasing, finally Enron met its doom. One of the two
traders was arrested which led Lay to look for alternates for making
money again. Then came Jeff Skilling, a Harvard Business School Alumni,
who was appointed the CEO of the company. Jeff came up with a magical
idea where Enron would serve as a market to trade natural gas just like
stocks and Bonds. In addition to this, he arranged for the SECs approval
to use Mark to Market accounting. According to market to market
accounting, Enron would record all the revenues from long-term contracts
in the current year even though the cash would flow over the number of
years. Lou Pai and Clifford Baxter were the closest to Jeff Skilling and
helped trade the energy services. Lou Pai, like other Enron executives
only cared about money. Employees described him as a mysterious figure
who hardly asked for details. In just few months, Lou left Enron with $250
million.
All these series of activities led to the rise in stock prices of Enron by 30%.
Stock prices reflected the earnings of the company and these earnings
rose every quarter. The companys executives pushed the stock prices and
thereby encashed their stock options. They made billions of dollars during
this period while the truth was that the fortunes of Enron were actually
fading. Due to this, Enron then bought Portland General (PGE) and became
the largest electricity and natural gas producer of the industry. As a result
of this, stock prices further rose.
Enron then entered the deregulated electricity market of California and
created artificial demands for power. Very soon, the suspicions raised

regarding the growing profits of the company. Securities Exchange Board

announced an informal investigation into the books of Enron. As soon as
this happened, Enrons accounting firm, Arthur Andersen destroyed tons
of paper related to Enron and then began the endless blame game.
So the question is: Were these guys really so smart as to fool their
customers as well as the government? Was this an ethical way of making
money?
The major accounting scandal, Enron is famous for suggests that neither
the employees nor the investors questioned before trusting Enron. Neither
the top executives questioned themselves on morality nor the investors or
employees were morally aware. Had the public questioned the profits of
the company even at times of difficulties, it would not have been possible
for the companys top executives to successfully carry out the scandal.
Greed, a human characteristic, played a major role in materializing the
fraud. Top executives were only concerned about increasing their bank
balances.
Analysing the issue in systemic approach helps us identify the
stakeholders of the company who were directly or indirectly affected by
this scandal.
After bankruptcy, the investors got very less or nothing from the
liquidation. They lost most of their savings and are still battling to receive
as much returns as possible.
Approximately 22000 employees lost their jobs with their families
devastated.
Government of United States suffered a huge protest and outrage from
public. They were blamed of being careless and negligent. The
government seemed to have been aware of the companies taking
advantage of the deregulations in most of the states but never went
against these major players in the industry. The politics of United States
also provided favourable grounds for such activities.
Securities Exchange Board was constantly criticized for inadequate
supervisory measures. This gradually led to the formation of Sarbanes
Oxley Act in 2002, which incorporated strict administrative measures and
held CEO and CFO accountable for all the activities of the company.
Trust of the general public was challenged after the scandal. Public lost
their trust and confidence on the government. Their moral awareness
increased and they learnt to see more than just the financials of the
company.
Above all this, this scandal taught us a very important lesson; ones greed
can martyrize several others. All the executives of Enron acted in their
own best interest. Many of them were heavily influenced by the CEO and
Chairman of the company that they failed to move ahead of the
conventional stage. Ethics did not play any role in decision making. We
can understand that the culture of the company was ethically weak.
Traders were not disciplined and for most of them, money was the only
motivational factor. The leadership team was extremely weak in terms of
morality and did not convey any message to act ethically. Rather, the
company was led by a bunch of bad apples who not only were dishonest

but also corrupted the whole system. The companys performance review
had no weightage to ethics. Employees were only rated based solely on
their ability to make money for the company. Whistle blowers were not
encouraged by the top leaders.
The corporations are responsible to the investors. Here the investors are
not only the shareholders but all the stakeholders of the corporations. The
stakeholders here are customers, employees and shareholders.
So, we need to ask ourselves that this smartness comes at the cost of
what? Are we ready to accept all the consequences while doing business
smartly or should we focus on ethical ways and be content with whatever
we have?