The Rise and Fall of the Company Enron - Case Study Example

ENRON The rise and fall of the company Enron, contained in the case example and in existing coverage, involves accounting, and the abuse of executiveprivilege. Enron stayed in the news long after the initial accounting scandal, as jury selection began for the case of its ex executives Kenneth Lay and Jeffrey Skilling. This report overall examines the specific ethical breach that led to the company’s public downfall, in relation to concepts of business and accounting ethics and compliance. As one source noted at the time of the scandal, “Enron paid out $55 million in bonuses to executives and other employees two days prior to filing for bankruptcy... Still unclear is the legality of the payments and whether they were disclosed by Enron in documents filed with the Securities and Exchange Commission or bankruptcy court. The bankruptcy court will likely allow the payments to stand” (Weinberg and Cooke, 2001). The report also looks at the individuals involved in the ethical breach, including the abovementioned executives. The current status of the case against the now defunct Texas company, which has not yet been resolved, is also explored in the report. The general conclusion drawn from this case involves a highlighted focus on ethical organizational behavior and transparency to shareholders of company financial information. “When Enrons foundation began to crack and weaken, the questions began, but were tempered by confusion over Enrons financial statements and veiled answers by the companys chief. Then the CEOs resignation came out of the blue, after Enron had leveraged itself to the sky” (Value, 2010). The company did not have accountability or transparency to its shareholders; it lied to them. The business issue was unethical and non transparent accounting practices used by the company Enron. Enron was called out on corruption and its leaders have been indicted for fraudulent financial statements and business practices. These caused its stock to plummet in value when the extent of corporate corruption at Enron was revealed. By 2001, it was reported that “The company, whose main business is energy trading, is in crisis following the termination of a multi-billion dollar rescue bid” (Weiss, 2001, p. 2). It folded as a result, but in its prime was considered to be an innovative company and industry leader. Enron at the height of its power contributed as much as $2.1 million in “individual, P A C, and soft money contributions to federal candidates and parties:” this ranked it “among the top 50 organizational donors in the 1999 – 2000 election cycle.” (Weiss, 2001, p. 1). After the very public fall of Enron, new accountability measures became the stuff of extreme media, public, and political scrutiny. The problems involved focused on issues of internal financial controls and transparency as well as standards of accountability. Enron was posting financial results which were designed not to reveal and disclose information, but rather to conceal losses through the assumption of profits though financial document manipulation. Stakeholders expect their documentation to be fairly authentic. The main individuals involved in the Enron scandal are Kenneth Lay and Jeffrey Skilling. Kenneth Lay is more publicly associated with the case although his name is often mentioend beside Skilling’s, because Lay is the individual who founded the company in the first place, while Skilling was its CEO. “Enron founder Ken Lay and former chief executive Jeffrey Skilling have suffered another setback in their efforts to have their trial at the end of the month dismissed. US District Judge Sim Lake, ho will be hearing the fraud and conspiracy case, threw out allegations of misconduct by prosecutors. The pairs lawyers have been arguing for months that prosecutors have hampered their defence efforts by intimidating key witnesses” (Enron, 2006). Also involved by proxy are the other Enron executives who got payoffs before the company went bankrupt, and the lower level employees who didn’t see any of this finance coming their way. At the writing of this report, jury selection for Lay and Skilling has gone on in their trial, in which they are defending against charges of fraud and conspiracy. Jury selection some say may be hindered by the fact that most people are familiar with the Enron organization, not through working for the organization, but through looking at news reports on what led to the downfall of this company in terms of organizaional structure. Currently Enron is a defunct company that is often categorized with other such companies in a discussion of ethical breaches, such as Worldcom. Unlike other companies which have gone through serious ethical breaches and still survived as organizations, such as Tyco, Enron has not survived as an organization to the present and is now dissolved. During its heyday, Enron set about forming a marketing strategies that centered around taking advantage of overseas markets that had been recently deregulated. There are many concepts that can be focused on this issue. First of all there is the concept of training. The question here becomes whether or not it is possible to train an employee to behave in a manner that is ethical. It becomes clear that the working environment of the business must also function in the societal space as a greater microcosm than the individual, but a lesser one than the society. Poor training programs are often the result of a poor reflection of the business as an ethical macrocosm of, and example for, the community, in terms of the impact of training on the employee. Therefore, the rules and codes of the society in terms of generalized drives towards ethical behavior must be followed by the company in its regards to the training of the employee as well, and perceived as such by the individual, in descending order of relative size, to be a reflection of the greater society of which both are a part. This community sets the ethical code, in a sense, since it is at least theoretically there to determine a positive relationship with the individual through models of good behavior that does not bring harm upon others. Besides training, there is also the concept of performance appraisal. Enron was a company that had good performance in some areas with a great deal of strength in integration and market development, but this company had the sort of retrenchment and financial opacity weaknesses that led to its ultimate downfall and scandalized position in the market, perhaps because performance appraisal was based on market development rather than internal auditing and financial transparency. Specifically, the performance appraisal conduct of Enron turned a blind eye to issues of off-balance-sheet finances, synthetic leases and special purpose entities, being called into question through misuse by companies and employees. These concepts of performance appraisals and training are relevant because if Enron employees had been trained in ethics and appraised on transparency, problems may have been avoided. One solution offered by ethics training would be training employees in positive behavior, or socially positive behavior. Socially positive behavior may be influenced by moral behavior, which has a more religious semantic connotation, but it should not be confused with moral behavior. “An analysis of the annual reports of the 1998 Fortune 100 revealed 78 companies had included management reports, virtually all of which began with a statement that management took responsibility for the presentation of the reports in this study of the financial statements” (Willis and Lighitie, 2000). This shows an ethical primary breach. A solution offered by better performance appraisals would be that from the perspective that change-positive businesses of the present, in the current atmosphere of shaken investor confidence in the wake of a rash of corporate scandals not just limited o Enron, must heed new accountability standards in performance as a way of regaining a general sense of shareholder wellness. Employee performance should be subject to new scrutiny under various new regulatory measures as a solution that also intersects with the concept of corporate ethics. “The reputation of Arthur Andersen, Enrons auditing firm, was irreparably damaged after company officials admitted that thousands of Enron documents were destroyed Those events led to a flurry of probes, including a criminal indictment of Andersen by the United States Department of Justice. ” (Semple, 2002). The scandal ruined many reputations. If I was hired as a consultant, I would institute training and appraisal procedures that would stress transparency and accountability (also values stressed by most codes of ethics), as a blessing rather than a burden to the corporation. I would tell the company how successful companies in the present are those that are able to integrate ethics, accountability, and transparency into their operations. Enron became a media byword for scandal, rather than the individuals behind the problems. The case focuses on one such individual, and his relationship to the so called objective internal scanning and auditing processes at Enron. “It’s obvious that Andersen helped Enron cook the books. Andersen’s Houston office was pulling in $1 million a week from Enron—their objectivity went out the window” (Case, 2010). Overall, the case shows how Enron was a company with poor ethics that lied to stakeholders. A strong recommendation is to give the FASB more power and control for enforcement. The FASB’s recent implementation of rule FIN 46 has sent some corporations scrambling to re-qualify for non-consolidation in the statements of subsidiaries of a financial interest, which, according to some commentators, puts companies who may have created special purpose entities (SPE) or “ These recommendations ranged from numerous proposals that had been considered seriously in the past, including restricting the types of consulting services accounting firms could provide to their audit clients, to more radical proposals such as creating a federal agency to assume responsibility for the independent audit function” (Case, 2010) The argument is that the cost of capital is increased across the board, and I find that I agree with this basic argument. This issue of transparency is directly counter-indicated by the very presence of off-balance-sheet financing, although some distinctions must be made between ethical and unethical uses of these methods before issues of general business ethics are more directly addressed. Just because some of a company’s items may be hidden from the actual balance sheet if it is using off-balance-sheet financing does not mean that this is in every case an intentional move designed to hoodwink the investor, general public, auditor, Securities and Exchange Commission, or other regulatory body. In many case, off-balance-sheet financing is a legitimately used practice: what becomes the issue, then, is the transparency of the off-balance-sheet financing. A company may, for example, create a subsidiary specifically designed to incorporate finance-only operations, as a way of defraying new costs or setting up an operating system that focuses on these new costs in an exclusive manner. Many off-balance-sheet financing arrangements involve such a subsidiary, which is referred to as an SPE because of the explicitly focused purpose of the company. Ethical issues come to the forefront when a company like Enron or Worldcom uses the SPE purposefully to mask debt from shareholders, but many companies use SPEs without any significant ethical hitch Enron’s behavior is a small example but it also reflects larger issues of ethics. This issue is especially relevant today, when business ethics scandals like Enron and Worldcom are common knowledge to people because of mass media attention. I think that people need to strive to explore ethics in terms of responsibility as it relates to the present, without dwelling too much on the history of industrialization and standards, by looking at what exactly ethics is from a definitional standpoint and from a standpoint of application. Several ethical dilemmas like the one I had with Enron and their accountants’ actions need to be posed in terms of examples, and a clear definition of ethics as it applies to both the microcosm of the company and the macrocosm of society needs to be looked over. “Within nanoseconds, harder questions came laced with nervous suspicion from investors and Wall Street. Word leaked to the media of possible misdeeds and the federal government began asking questions” (Value, 2010). Once this process starts, it is a retroactive struggle for the unethical company. As huge corporate scandals like these show, businesses that treat stakeholders unethically will eventually reap what they sow; off balance sheet financing is not sustainable, but rather resembles a snowball rolling down a hill. REFERENCE Semple, J (2002). Accountants liability after Enron. FDCC Quarterly. Weiss, Steven (2001). The Fall of a Giant: Enron’s Campaign Contributions and Lobbying. Open Secrets, 6(31). Weinberg, N. and L. Cook (2001). Enron Execs Got $55 Million Just Before Bankruptcy. Forbes. Willis, D.M. and S.S. Lightie (2000, October). Management reports on internal controls. Journal of Accountancy. Enron judge says trial must go ahead (2006). Evening Standard. Value in the aftermath of Enron (2010). Risk and Insurance. Read More