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This is a detailed case analysis of Enron scandal which took place in FY-2001 because of bad
and poor accounting practices of senior management of Enron. In which there was a conflict
of interest between the management and shareholders. Enrons CFO Andrew used company
resources illegally and unethically without telling anyone and due to that company almost
everything and filed bankruptcy according to chapter 11. Andrew was auditor of company
who deals with internal as well as external accounts.
Introduction:
Enron was 7th largest company in America in just 15 year time period (Fortune 500).
Company started its operations in 1985 and doing business of more than $0.1 trillion in 2000.
It was most attractive company for investors as well as for employees. The reason was that
company share prices shoot up to $90 in 2000 also 25,000 employees were working in
company before the time of crises. Crises of Enron occurs in 2000 because of senior
management and board. In this draft I did a detailed analysis internally as well as externally,
due to which company went into crises. Reason of crises was that board allows Andrew to do
what he liked most in investing. Also Andrew actions was not according to code of ethics and
thats why billion dollar company failed. I discussed the culture of Enron also which also a
reason of becomes a reason of company failure. At last I discussed the effect of such scam on
society.
2. Reasons for the failure of Enrons internal checks and balances system:
There are several elements included in the multilayered system of Enron. Auditors, Financial
Institutions and Board of Directors are the key players to run a company and lead it to a
success or a failure same members of Enron have led to a fall. The major reason was the poor
boardroom and lack of concentration by external members towards policies and accounting
practices of companies suggested by internal members and executives of Enron. This lead to
further reasons like hiring of employees those were employees of the external auditing firm
of company. These employees made possible the keeping the internal information of
company hides from the external auditors (Dudzinski, 2014, p. 8). Boardroom created an
environment of unethical conduct that was followed by the employees of entire company.
Although, Enron had a code of conduct but that was not followed by any level in the
organization. Chief Financial Officer (CFO) of company was allowed to take all financial
decisions of company and he hedged the pension funding and investment gains of company
that was against the government law. Board was even not focusing on the performance of all
employees in the firm. Board just focused on the profits and policies suggested by CFO.
There was not as such employment motivation system applied to boost the performance and
the upper management was considering the monetary rewards only the way of motivation for
themselves and lower level of employees in organization. CFO of Enron took a great risk of
hedging to avoid loss but it led to more loss. Even after a great loss the CFO didnt stop to
hedge more company investments and there were incentives given to employees so they
would also be agreed to take risk of hiding the internal data of company from external
auditors. These all happenings were resulting in a lack of management and operational
policies designed by internal board members to get few monetary gains.
3. Board of Directors undermine Enrons code of ethics:
Foundational values of Enrons code of ethics were undermined by the board of directors, the
main players in undermining ethics were Jeff Skilling, Ken Lay and most importantly
Andrew, and they practiced illegal activities that raised crucial questions like how much they
are working within the lines of values, respect, excellence, communication and integrity. The
code of ethics was defined on 64-pages according to CEO Ken Lay which describes the code
of ethics in detail. According to the code there is a requirement for each employee to agree
and sign on the document of code of ethics with a promise that they all will follow these
ethics and report any misconduct or if any unethical activity is witnessed. The nature of
Enron was decentralized which led to communication barriers which prevented the people
working for Enron to see the big picture. The communication value was undermined when a
crucial and fraudulent activity was concealed by Andrew that how deeply he was involved in
trading to maintain high market valuation that led Enron to collapse. Moreover Andrew made
unethical investments and was involved in such activities which are not according to the code
of ethics, as any investment which does not follow the guidelines of code of ethics needs to
be approved by the chairman and CEO Ken Lay. The unethical investments made were
presented in a very efficient manner which was accepted by the board and he created an
effective image in front of the board which led him to become the head of investments (HBR,
2016).
Board of Enron strictly followed the rule of no tolerance for failure and set guidelines that in
the case of failure the employee would be replaced by the next best employee who have
better performance. Top leadership was somehow inactive in decision making, and the
company followed biannual feedback system. The performance appraisal was conducted on
upon six month performance targets. Code of ethics was entirely used for the private gains as
the activities supported the open environment. The communication barrier problem broke the
element of code of ethics to communicate effectively, where every individual had to share
and co-ordinate information with each other, but in the real case scenario was that all the
business units within Enron were acting independently which hid the actual fraudulent
activities for a long period as due to no link within department no one working could see the
bigger picture.
Moreover commitment to excellence practiced by Enron was the most ineffective
performance appraisal systems and reward/compensation systems that was beneficial to
executives, encouraged and fraudulent activities like inflating value of contracts, and
encouraged use and practice of non-standard accounting practices. These appraisal systems
and compensation methods were made and regulated by the top leadership of Enron. Overall,
the decisions and actions carried by the top leadership didnt support the values, respect and
integrity of the company. In addition, Andrew exemption from board and top management
indulging in unethical activities undermined the values of respect and integrity (Sanctuary,
2012).
Basic financial standards such like IFRS (International financial standards) and ISA
(International standards on accounting) were being followed by Enron. But still company
faced such horrible crises. But if I were the accountant in Enron then critical analysis along
with evaluation which will cover the gaps in the area of finance and accounting at firm level.
This detailed analysis helped me in decision making as well as actions against Andrew CFO
and other senior management on such poor ethical practices. So this analysis also might help
to prevent Enron form such a big scam. As the loss of shareholders, investors, stakeholder
trust and confidence on Enron, this effected the organization as well as the society. But as an
accountant at Enron, actions taken by me against such poor unethical business activities
would have be accordance to required financial framework. The reason of such behavior is
solely my responsibility both professionally and ethically.
6. Implications of unethical practices on society:
Enron was doing a one trillion business that failed due to poor corporate governance, lack of
management decision and unethical business practices. Due to all these issues company lost
everything and shares becomes worthless just in a year. Share prices fell 99% just in few days
and prices became 0$.20 per share. Such unethical business practices have a bad impact on
society.
Followings are key outcomes due to bad practices of Enron (Mack, 2003);
Conclusion:
Enron collapsed mainly because the top leadership of the company was indulged in unethical
and fraudulent activities the main key player was the CFO Andrew which was made head of
investments and carried of activities which led to high market valuation and inflating
contracts, The top leadership designed appraisal and compensation systems and
managed/controlled the company in the most unethical manner in terms of respect and
integrity and finally led to collapse.
References
Dudzinski, J., 2014. Research conducted for Dr. Robert Hurleys Leadership Trust
class at the Fordham Graduate School of Business Administration. [Online]
Available at: http://www.trustinorganizations.com/Resources/Documents/Enron
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[Accessed 17 October 2016].
GERTH, R. W. S. a. J., 2002. ENRON'S COLLAPSE: THE SYSTEM. ENRON'S
COLLAPSE: THE SYSTEM; Web of Safeguards Failed as Enron Fell, 20 Jan, p. 1.
Healy, P. & Palepu, K., 2003. The fall of Enron. The Journal of Economic
Perspectives, 17(2), pp. 3-26.
Kulik, B., 2005. Agency theory, reasoning and culture at Enron: In search of a
solution. Journal of Business Ethics, 59(4), pp. 347-360.
Mack, S., 2003. Yorubusiness.azcentral.com. Effects of a Lack of Ethics on a
Business Environment, 12 May, p. 1.
NEW YORK TIMES, 2002. Failure of Enron. Multilayered system of checks largely
failed in Enron's case, 20 Jan, p. 1.
Sanctuary, 2012. wenku.baidu. [Online]
Available at: http://wenku.baidu.com/view/4954d41bc281e53a5802ff09.html
[Accessed 16 Oct 2016].
Silverstein, K., 2013. Enron, Ethics And Today's Corporate Values. [Online]
Available at: http://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-
and-todays-corporate-values/#6c23db317688
[Accessed 15 October 2016].
Wong, P. T. P., 2010. Lessons from the Enron Debacle: Corporate Culture
Matters!. [Online]
Available at: http://www.meaning.ca/archives/archive/art_lessons-from-
enron_P_Wong.htm
[Accessed 16 October 2016].