Case Study: The Fall of Enron

Case Study Sample: The Fall of Enron

Feb 2, 2021 at Access Our Numerous Free Essay Examples Online

Enron Company

This paper analyses the factors that contributed to Enron's fall through research of academic materials. It also explores different aspects of the financial processes and status of the company that caused such massive losses. The essay examines the factors that conduced to Enron's mismanagement by the top officers. The factors considered included the codes of ethics ignored by Enron's leadership as well as the system and culture that influenced the wrong decisions, which further promoted the harmful actions that led the company to financial turmoil.

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Furthermore, the paper looks into the findings of other researchers to have a deeper understanding of the elements that prompted Enron's financial crisis. I undertook a qualitative research to obtain more information from different sources and get an in-depth understanding of the fall of the Enron Company. Thus, I used both web resources and printed materials for achieving that goal. The articles written by various researchers have different viewpoints and recommendations. Their opinions have helped in providing clear answers to the case study issues. For responding to the given questions, I used a managerial approach because Enron collapsed due to poor control by the companys leadership, and efficient managerial concepts were necessary for answering the questions.

Through the case study, I have acquired the new knowledge and skills required for embracing teamwork. In all likelihood, Enron collapsed because senior managers excluded junior officers from contributing their ideas towards the running of the firm. If the junior officers got the chance to participate in the affairs of the organization actively, they would have saved the giant corporation from shattering. Finally, the paper addresses the role of accounting professionals in the company. The company failed because the accountants were unable to prevent financial malpractices that led the firm to bankruptcy.

Overall Summary

Enron was a natural gas company incepted in the late 1980's. It rapidly grew to be the leading natural gas pipeline company in the energy industry. It initiated businesses that led the local energy market trade and global construction. Enron was worth $1 billion and received recognition as the best creative and innovative company for six years straight (Healy & Palepu 2008, p. 3). They overtook the old industries that had bothersome hard assets and instead chose to venture into the free world of e-commerce. The problems in the company commenced when the senior officers trusted in managing the property of the company colluded to benefit themselves at the expense of the shareholders (Nanda 2002). They involved themselves in corrupt deals and directed the companys income into their bank accounts. In the end, they received large sums of money, but the company collapsed. The scandal surrounding Enron is paramount as it educates on the importance of strong moral values among employees in any corporation.

The major players in the case study include the senior officials who did not want the junior officers to know the dirty deals in the organization. The junior officers who showed interest in investigating the matter got fired on flimsy excuses such as lack of creativity (Nanda 2002). Furthermore, the company's auditing and accounting practices facilitated theft instead of protecting the interests of shareholders. The accounting officers presented false information in the books of accounts to prevent the public from knowing the truth. The corporate governance and culture of the organization relied purely on falsehood where the annual reports displayed high revenues to attract more investors to the company (Bierman 2008, p. 5). The firm ignored the ethical foundations of integrity and accountability and instead allowed corruption to dominate the regular operations. There were no moral values to guide the behaviour of employees, and that discouraged workers from performing their duties with efficiency. Thus, the working environment could not allow new and constructive ideas to thrive, which contributed to dismal performance at Enron.

Issues That Arose Within the Organization

Quite some issues emerged in the company and led to its collapse. The first problem was unprofessionalism whereby the company traded its assets in the oil market without assessing the risk factors involved in the industry. As a result, Enron incurred massive losses amounting to $90 million in less than a week (Nanda 2002, p. 1). The company reserves disappeared, and Enron had nothing tangible left (see Appendix). Another issue was poor accounting practices. The firm failed to keep records of the transactions undertaken, and no one appeared responsible for financial losses. Scanty information made it impossible to track the assets and liabilities of the corporation and thus encouraged theft. The third concern that emerged in the organization was unreliability (Nanda 2002). The auditors and boards of managers were entrusted to ensure that the resources of the organization were properly used. However, they betrayed the firm and collaborated to rob Enron, which caused its fall.

Factors that Led to Collapse of Enron in 2000

As the natural gas industry is competitive, the market prices are always fluctuating making it uncertain. It creates problems for gas pipelines and suppliers like Enron. Therefore, the vendors are concerned about investing into a new gas source only not to come to the market and find that the prices have gone low, resulting in massive losses (The rise and fall of Enron n.d.). Due to this fact, the natural gas demand in the 1980s went to an all-time low, and most gas companies found themselves with large amounts of gas and no customers requiring the product.

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Enrons internal problems started when traders began to experience some financial failures, and Enron was unable to make profits. The situation was also related to the way Enron declared their revenue both internally and externally. Enron used its sales instead of profits as its sole primary purpose, performance motivator, and measure of success (CBC News 2006). Enrons use of superficial numbers, which helped make a good impression to the public, was more important to it than dealing with the rising amount of debt in the company. All this was Skillings idea of governance. He used the companys revenue as the primary measure of the companys performance to achieve his mission of boosting Enron to be the worlds leading energy company. He took uncalculated risks, but they all backfired. Enron's use of income implied that the day to day activities either came to a halt or they borrowed money, and this put them in recurring debts. As for taking risks, Enron chose to venture into commodity trading with new products in the market (Bierman 2008). It is important to take risks, but it is always advisable to assess the dangers and have a strategy to reduce them to a minimum or have a plan to combat them when they occur.

Why Enrons Internal System Failed to Prevent Its Demise

As indicated above, Enron was more concerned about its image than the dire situation that was happening within its system. Skilling had stipulated a condition of his work for Enron, which was that the company had to adopt a new form of accounting called mark-to-market (The rise and fall of Enron n.d.). This system created and developed by traders in the 1980's introduced a new accounting method that allowed for the fair value of an asset or liability to be dependent on the current market prices (Russel 2012). However, the application of other processes could still help in obtaining this figure.

It means accountants could value assets and liabilities using any desirable approach. Since the system of accounting seemed like an attractive idea, it could work well with the natural gas exchange in the form of a commodity. Arthur Andersen, Enron's accounting advisor and auditor, had the Securities and Exchange Commission both sign off an indication of approval for Enron to adopt mark-to-market accounting. It meant that in spite of how much revenue Enron was earning, it could speculate and predict natural gas futures and record them on their books as earned revenues. With that began Enron's journey to destruction. From the abovementioned facts, it is evident that the internal systems failed to prevent the collapse of Enron because they were manipulated to create an impressive image for the public.

How Top Leadership Undermined the Foundation of Enrons Code of Ethics

Enron code of ethics required all employees to execute their duties avoiding the conflict of interest (Russel 2012). However, the senior management acted against the virtue and assumed the fault for promoting company shares publicly and using own stakes in the organization (Nanda 2002). Other senior executives like Andrew Fastow bought shares in the company acting as outside parties yet owning the companys shares. They took the partnership side of contract relationships between them and Enron, hence taking advantage from Enrons losses (Nanda 2002). The Chief Financial Officer also undermined the code of ethics prohibiting conflict of interest by mediating both sides of the transactions to implement ghost partnership that his allies and posed as outside investors.

Furthermore, the code of ethics expected all workers to uphold professionalism in their duties. It outlined the steps managers were to follow in making sound decisions that could not harm the company. The code of ethics advocated for the thorough research and consultations in the organization as the basis for making policies and investment decisions. Instead of considering that in their operations, senior management acted unprofessionally by entering into numerous partnerships that were not in line with the companys code of ethics, conditions, and financial status. They claimed such careless collaborations like a partnership with Blockbuster were catalysts of taking the company to higher levels (Nanda 2003). Instead, they were the tools that recorded the company's earnings and financial status even though the organization ignored the standard accounting rules.

Honesty and fairness were part of the code of ethics that guided operations at Enron. Each staff member was to act in an honest manner that did not imply fraud in any way. However, the Board of Trustees and directors undermined this term of the code of ethics by allowing fraud to happen without taking any action against it. They collaborated and united efforts of all the professionals that were associated with Enrons fall ranging from the bankers, lawyers, financial analysts, advisors to the creditors.

How Enrons Corporate Culture Promoted Unethical Decisions and Actions

The Enron Code of Ethics and its foundation of the values of respect, integrity, communication, and excellence did not help create an ethical environment in the company. That is why when anyone hears the name Enron, they see the most corrupt scandal ever to exist in the history of business. They view it as an organization where the highest paid executives stole millions of dollars at the expense of thousands of their employees (Nanda 2003). Enrons corporate culture could have contributed to its fall in many ways. It supported any unethical behavior without question, as long as it brought back monetary rewards for the company. There was a high level of arrogance in the company, which led the Enron team to believe that it was possible to involve in high-risk situations and extricate without getting affected. The culture did little to promote respect and integrity both internally and externally. It instead praised "innovation" even when it was risky and punished those who seemed unwilling to be creative.

Each of Enrons departments worked in isolation, and as a result, very few people in the organization had any idea regarding the perspective of the company's operations (Biegelman & Bartow 2006). The employee appraisal conducted within the organization was unfair since those who supported evil practices received promotions while the performers were fired because they posed a threat to incompetent managers. It created a cut-throat environment both within the organization and between its employees and its competitors. Besides, it led to enmity between its employees (Biegelman & Bartow 2006). The internal tension and rivalry only reduced through communication between operating departments out of fear of being dismissed. This environment reached a point where illegal operations and transactions were necessary to stay afloat.

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How I Would Have Responded to the Situation If I Was An Accountant at Enron

Streamlining an already corrupt system that is still functioning is a hard endeavour. Being tasked with the responsibility of handling the company's finances, I would gain courage and become a focused individual. Bearing in mind that the mark-to-marketing accounting system was already in place, I would work towards replacing it with a system that reports real figures and values as opposed to predictions of futures (Nanda 2003).

There were no discussions and agreements concerning the correct approach to evaluating an asset, and therefore anyone produced a figure with the mentality that the company would be able to handle it." I would also implement a system where every single coin spent would count both electronically and on paper. It would create accountability awareness as everyone would be required to append their signature to any financial transaction, making them legally bound and responsible for it (Russel 2012). There was also lack of communication between departments. As an accountant, I would adopt a financial information system to facilitate retrieval of expenditures at every departmental level in the organization. It would help monitor and detect any cases of fraud.

Implications of Unethical Businesses in the Society

Companies that lack moral values have a large impact on the entire society. First, they lead to economic stagnation (John 2013). It results from the fact that such enterprises release false financial reports evading payment of taxes. Thus, the federal government collects little or no tax from such organizations, which leads to slow development that in the end stalls economic growth. For instance, Enron controlled an important sector of the economy, and its wrong ways of conducting business robbed the country of large sums of taxes that could have helped in initiating major development projects.

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Another implication of unethical business practices is that it causes unemployment. When Enron collapsed, people lost their jobs because the company could no longer afford to pay their salaries (Silverstein 2014). Thus, families lost their sources of income, which caused the lowering of living standards of the affected people. Furthermore, unethical practices in businesses discourage investors from buying company shares. Many capital owners fear that senior managers will use their resources in a reckless manner and choose to keep their money in banks, affecting the performance of the stock market.

Finally, unethical practices in business hinder professional growth in the organization. Employees compromise their codes guiding their profession to suit the companys needs and thus kill their careers (Silverstein 2014). For instance, when auditors and accountants collaborate to prepare false books of accounts to please their corrupt bosses, they undermine their jobs and fail to develop into respectable professionals in the society. It is crucial to understand that corporate code of ethics, morals, and principles are not for the chosen few but for everyone who wants to keep climbing the economic ladder. Punishment may serve as an impediment or obstruction on the way to unlawful actions, but codes of ethics are even more important.

Furthermore, it is the people who make or break these institutions (Johnson 2013). Therefore, establishing structures that help in guiding people becomes the driving force of performance for everyone in the organization. That is why Enron may not be the last corporation to leave such a negative impact. However, it did change the way of conducting business and helped initiate new codes of ethics for running a business in the modern age. It is, therefore, important to adopt healthy practices to avoid such implications. It is clear that profits emerge after paying all the internal and external costs, and what remains is what determines the value of a company. They also help identify areas of improvement to facilitate the growth of profit margins. These profits are then used to venture into other portfolios, for instance, expanding the company by opening new power plants like in the case of Enron.

Conclusion

The case played a significant role in explaining the impacts of unethical behaviours in the organization. Corruption enriches a few individuals in the society but causes harm to the society. Through corruption, big corporations like Enron close rendering many persons jobless. As a result, the living standards of the unemployed population decline and subject them to poverty. Furthermore, fraud affects the confidence of investors in the stock market. When a companys value of shares suddenly depreciates due to poor management, it instils fear among the capital owners who opt for the withdrawal of their money from the stock to avoid incurring losses. When investors withdraw their financial assets, the rate of economic growth declines and leads to a low level of development. However, to some extent, unethical practices may impact positively and save the organization. When the accounting officers prepare false financial statements depicting higher revenues for the business, it may attract potential investors who may rescue the firm from financial problems.

Through the course of this case study, it was learned that a simple wrong tolerated behaviour could spread like a virus and affect an organization and a society both internally and externally. Also, the task revealed that short-term fulfilment could be detrimental to the future. It is important to follow the right processes no matter how long they may seem to take, as opposed shortcuts that eventually turn out to be fatal. Firms should adopt effective policies that will enhance professionalism, integrity, and accountability to avoid facing a similar situation like what befell Enron. There is a need to always uphold professionalism in the organization to prevent losses like in the case where Enron traded its shares without analysing the risks involved and incurred massive losses. Furthermore, the board of managers, accountants, and auditors both internal and external should desist from fraudulent activities and put the interest of the shareholders. It is also of paramount importance to promote the spirit of teamwork to find solutions. Finally, there is a need to keep proper books of accounts that could help in tracking expenditure to operate businesses profitably.

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