Analysis of the of Enron Scandal - Case Study Example

Top of Form Bottom of Form Running head: The Case of Enron Scandal Discovery of the scandal The Enron Scandal has been known as the symbol of corporate excess and fraud for most Americans. The Enron Company was founded in 1985 by Kenneth Lay through merger of Houston natural gas and the Inter north natural gas companies. At the time of merger owned 37000 miles of intra and inter estate pipelines for the transport of natural gas (Hitt). This company experienced revenues amounting up to 100 billion dollars (Bruce). It went on to invest in other business ventures like internet broadband and electricity supply among others. The company appeared to be harvesting a lot until problems started knocking. What may have gone wrong? The stability of the company was put was questioned in the year 2001. The company had made an agreement with the blockbuster incorporation to run the World Wide Web movies. In March of the same year the company cancelled the deal followed by admission of insolvency of the California energy firms. This led to the resignation of the chief executive officer Jeffrey Skilling in august strengthening the validity of the disclosure of insolvency. Come October the same year the company declared a $618 million loss for its third-quarter and the following day revealed the scandalous truth. The outcome and the circumstances It appeared that the companys noteworthy had been overstated by more than $1 billion dollars. The shocking revelation leads to the drop of the Enrons stock market. It emerged that the company was suffering huge losses beforehand but it managed to cover up its accounting data regarding its finances. The company managed to hide the fraudulent acts so well that they even deceived the most keen debt and capital investors. This was achieved through creative accounting (Henry). This involves appraising the values of the deepwater drilling operations. They also recorded higher values for the mineral deposits than the actual value as well declaring higher values for the future contracts. There was for example the Enron camouflage of the deficits through partnerships also legally termed as "Special purpose entities" (SPE) (Hitt). Generally the firms used SPEs to minimize risk by transferring assets under distinct partnerships which maybe brought by investors. The company sold its assets that are not earning anymore to the partnerships hence recording proceeds in income. These SPEs were dependant on Enrons leadership and skill capacity and capital. The company managed to pass through the auditing team in that the team had very little information given to them to work upon (Zellner). Creative enough, the management gave those sufficient benefits so that they are not encouraged to ask for more. The players The fall of the Enron Company and its financial problems are mainly attributed to the neglect of managerial integrity capacity. Integrity capacity calls for individual and collective capability for repeated processes of conformity to moral awareness, deliberations of character and conduct that shows balanced judgment (Zellner). It enhances ongoing moral development and promotes supportive system for upright decision making. The top of Enrons executives pleaded guilty in the congressional hearings about a managerial immorality and illegal conduct. It was a recommendable example of consequences of the organizational integrity capacity. The issue of integrity capacity can always be exhibited through alogical unity odf action and purpose in the face of accountability pressures instead of resorting to moral evasions or extra forms of careless managerial decision making (Robert). Generally managers or organizations that have low integrity capacity erode their reputational capital and engage management distrust and stakeholders. Those who bared the consequences The adverse impact of the Enrons scandal is evident in many ways. The top managers and stakeholder chose deception and a short term financial achievement for themselves. This destroyed their personal and business reputations and their social understanding. Individuals and investors lost the money they had invested in the company since they were consistently missing information about the true financial performance reality through questionable accounting practices. The companys employees were deceived about the actual financial condition and deprived for the freedom to diversify their retirement portfolios. The employees simply had to stand helplessly as their retirement savings evaporated. Meanwhile the top managers cashed in on the employees lucrative stock options (Robert). Others affected by the scandal included the government, secondary and tertiary stakeholders. For example, Enron top manager pressured Arthur Anderson to certify maximum risk. Arthur Anderson then won huge contracts in the short run but eventually lost their professional integrity and client base. The morality of this act is that greed dishonesty, arrogance, hypocrisy, disrespect and injustice corrupt work culture. As for the Enron, overemphasis on personal financial gain at the expense of others destroys all the trust of the employee. Furthermore, visionless accumulation of rapid wealth can expose the absence of leadership wisdom and the deliberate obfuscation of financial structures to rule out a fair picture of the financial health of the firm. Furthermore, it is evident from the scandal that lack of political virtue of citizenship is particularly damaging to internal and external development. Implications of the scandal The scandal was a clear indication of failure of various sectors from accounting to management to the auditing team. The audit team should therefore rethink their entire business model. The auditors should realize why they exist. They need to change their strategy from minimizing the costs and legal risks of performances to increasing profits in various areas. What this means is that audits that go past a boilerplate certification of narrow conformity with accounting standards while allowing a more complete reflection of the insights of the auditors client performance and risks (Henry). In this way the audit firms will craft a distinctive value suggestion, targeting a group of clients rather than attempting to be a one stop for all types of clients. Furthermore the executives seemed to have failed to perceive the relevant moral issues and were as well not sensitive to them. They seemed to have mistakenly taken overconfident of their initial distorted perceptions morally acceptable business conduct, and when challenge came in, they retaliated against accusers and looked for information in ways that agreed to what they believed. Another moral lesson coming out of this scandal is that capacity to engage in critical and comprehensive appraisal of causal factors is to recognize moral options to arrive at balanced and inclusive reasonable decision. This should be able to provide standard for future determinations. What is learnt from the decision making style of Skilling is a demonstration of a tendency to suppress all but one aspect of moral decision. The Enron managers including the board members poorly analyzed and resolved moral conflict of interest through policies that are self centered (Robert). As a result of this diminished capacity for balanced moral deliberation, they are held morally accountable for the downfall of the company Furthermore the executives only greedily pursued short term returns of economy while manipulating their industry’s rules. They ignored the negative morale impact of their bad example. They showed how poor they were in terms of moral judgment being callous indifferent and ruthlessly hostile to contextual constraints. The legislation and punishment The trial of those involved in the scandal was carried out and most of the accused pleaded guilty. For example Fastow and the wife Lea both pleaded guilty to the charges against them .Fastow had 98 charge on accounts of fraud, laundering, insider trading and conspiracy. He pleaded guilty of two that saw him being sentenced to ten years imprisonment. The wife got a one year jail term. Others executives like Lay and Skilling were also tried on the same scandal. Their accounts were 52 covering a wide span of financial crimes. These included bank fraud, making false statements to banks as well as auditors, securities fraud, wire fraud money laundering and insider trading (Paul M). Lay pleaded guilty of six accounts and not guilty to eleven. He made the claim that he was misled by those surrounding him at work. He faced a sentence of forty-five years in prison. Other big players like Arthur Anderson was as well charged with obstruction of justice for shredding thousands of documents and deleting e-mails of the company file that ere for the audit of the firm. Though the Supreme Court let him free, the damage the scandal caused to the name of his company was detrimental. Though those directly involved in the scandal all paid their prices in none way or the other, some victims of the scandal were unfairly treated. These include the companys shareholders who lost more than $ 74 billion of money before the bankruptcy. Employees also lost part of their savings in the retirement schemes. References Bruce. Can You Trust anybody anymore. Newn York: McGraw-Hill, 2002. Henry, David. Who else is hiding debt. Web. New York: McGraw- Hill, 2007. Hitt. Sstrategic Mnagement. New York: Longhorn Publishers, 2006. Paul M. ThE Fall of Enron. Chicago, 2003. Robert. "The Enron Scandal and the Neglect of Mnagement Intergity." Cleveland: Cleveland State University, 2002. 24. Zellner. The Perfect Sales Pitch. New York: McgRaw- Hill Copmanies, 2007. Read More