Manner in Which Enrons Corporate Culture Led Towards Bankruptcy - Case Study Example

Executive Summary This report concentrates on identifying the different factors which contributed towards the failure of Enron and highlights that the lack of accounting policies, corporate culture and greed led to its failure. This was contributed by different players like attorneys, directors and auditors as despite knowing the actual scenario it was not highlighted among the people. This could have been avoided through the use of whistleblowers as they would have been able to bring forward the wrongdoings and prevented such incidents. In addition to it the report also highlights the present situation of whistleblower protection act in Australia and shows the manner in which it has brought effectiveness in carrying out the different operations so that the business is able to achieve its objectives and is able to use the different resources in the best possible manner. The development of proper corporate governance practices along with ethical principles will help to reduce the risk and ensure that better ethical principles are developed. Table of Contents Introduction 3 Manner in which Enron’s Corporate Culture led towards bankruptcy 3 Role of Enron's bankers, auditors, and attorneys towards Enron's demise 6 Form and extent of current whistleblower protection in Australia 9 Effectiveness of Australian Whistleblower 12 Conclusion 15 References 16 Introduction This paper analyzes the factors which contributed towards the fall of Enron and made it file for bankruptcy. The report concentrates on four major areas which includes the different reasons which led towards the failure of Enron which finally let towards bankruptcy, the role directors, attorneys and auditors had in bankruptcy, the manner in which whistleblower would have prevented such incidents and the role of whistleblowers in Australia and finally looks towards examining the manner in which whistleblowers helped to provide effectiveness in business dealings. This thereby helps to understand the importance of corporate governance and strategies which needs to be adopted to ensure better fulfilment of goals and carrying out the different operations in the most effective manner. Manner in which Enron’s Corporate Culture led towards bankruptcy The failure of Enron can be largely contributed to the manner in which the corporate culture was developed in the organization. The story of Enron looks like a mega illustration of a bad apple among good apples that took advantage of the different loopholes for their own greed and finally were led down and fell into their own trap. The company projected itself as one of the most ethical companies but in reality it turned out the opposite and was one of the most corrupt companies where decisions were taken by the management for their own gains and no consideration was given to the society. In 2001 Enron file for bankruptcy and turned out to be one of the largest bankruptcies in the history of US and was entirely attributed to the unethical policies and corporate culture which prevailed within the organization. This was a shocking incident for the entire world fraternity as the society expected Enron to be one of the most ethical companies who was capable of handling bigger risk without any consequences and looked towards the society as an important member and part of the organization. This corporate culture thereby made employees and executives greedy and they focused on making money for themselves through any way and not looked towards working for the interest of the stakeholders. For example, the compensation package which was designed by Enron focused on increasing the wealth of the company and didn’t focus towards generating profits for the shareholders. The corporate culture thereby looked at encouraging profiteering which made people and executives within the organization to take decisions which were favoured towards them. The collapse of Enron sent waves across the world and raised questions regarding corporate governance and the role that whistleblowers can play in reducing the misappropriations of funds. The failure of Enron can be largely contributed towards the corporate culture which prevailed within the organization as it allowed executives to take decisions which were skewed in their favour and didn’t look at increasing the returns for the shareholders. The corporate culture gave path to the following reasons which led towards the failure of Enron Firstly, was the improper accounting system that was used in the organization. The corporate culture allowed the organization to use accounting system which allowed them to show profits despite not having profits. This looks to present a favourable picture of the organization but in reality it leads towards misguiding the others and the stakeholders which results in the usage of their funds in an incorrect manner. The financial reporting mechanism looked at making changes and highlighting incorrect figures so that the executives and others were not impacted which led towards misappropriation of funds and created one of the biggest reason for the failure of Enron Secondly, the corporate culture looked at hiding the losses and inflating the profits so that they could raise more finance from the market. Enron actually made a loss of $154 million but instead of reporting the losses Enron reported a cash flow of $3 million. This created a false impression about the organization as the management was willing to highlight incorrect and inflated figures to attract more investors so that they could have personal gains. This was further found out after bankruptcy and led towards the failure of Enron. Thirdly, the communication process which was used was incorrect as the management lied to the shareholders regarding the losses and instead showed profits. The stock analysis which was also carried out was misleading and didn’t specify the financial and operational cost. This resulted in highlighting incorrect figures and providing incorrect communication. This became possible as the management was willing to highlight the same and didn’t look at providing correct figures to the shareholders. In addition to it the management was involved into activities which were illegal as they entered into unregulated private partnership so that they could have excess debts. These debts were used by the management for their compensation and other purposes thereby using the funds for purposes other than specified. The overall culture thereby resulted in creating an environment where there was greed and people looked to act in a manner through which organization progress was hampered. The process could have been controlled if better accounting policies would have been followed as it would have provided correct information to the shareholders. This could have been possible if the organization has followed a policy of having a whistleblower. This could have ensured that if any incident which was untoward was noticed than the whistleblower could have brought the same to the notice. This would have also acted as a process through which better monitoring would have become possible. This would have thereby helped to exercise better control and would have made the management even attentive due to the fact that they were being monitored and would not have indulged into any such activities. In addition to it having whistle blowers would have brought the incident to the notice when the incident would have occurred and would have provided the required time when changes and steps could have been taken. This would have thereby reduced the overall risk and would have provided an opportunity through which better control would have been exercised in the manner the organization works. This would have helped to transform the manner in which the organization was working and would have highlighted the corporate culture which was prevalent in the organization and would have provided the opportunity through which the management would be better controlled. This would have reduced the overall risk and would have thereby ensured that the overall business prospects improves and the risk for the business would have been controlled as the corporate culture could have been checked at regular intervals. Role of Enron's bankers, auditors, and attorneys towards Enron's demise The failure of Enron can also be contributed towards the role of others like bankers, auditors and attorneys along with the corporate culture which was prevalent within the organization. The different factors when combined together led towards the failure of Enron and is an area highlighting the manner in which unethical principles were adopted. The details are as Auditors: The auditors of Enron knew from mid August about the improprieties which was present in the financial statement and the accounting practices which were used to inflate and manipulate the accounts. Arthur Anderson was responsible for ensuring that the accounting statements highlighted correct figures and the internal bookkeeping process was correct and true. The financial statement which Anderson prepared was used by investors and stakeholders to decide their policies for the organization. It was evident that the auditors didn’t look at using correct policies and instead manipulated the financial accounts for the gain of the executives and employees. The investors were unable to gauge the actual business position as the financial statements were altered and changed by the auditors. This clearly highlights that the auditors played a part in altering the financial statement of the organization and highlighted incorrect figures based on which investors lost the money they had invested. Bankers: The bankers who were involved with Enron knew that there was a certain degree of problem with Enron but till continued to provide the required finance to Enron. The process looked towards underwriting the debt from the bankers as it helped them to raise easy finance from the public and provided an opportunity through which easy finance was gathered. JP Morgan Chase & Citibank knew about the different tax regulations which were present and looked at relying on the audited financial statement which was provided by auditors. The banks based on the audited statement provided large funds to the business in the form of debt. The risk for the banks could be reduced due to process of financial engineering which would help to reduce the overall risk and provide an opportunity through which risk will be reduced. The bankers despite knowing that something was wrong still relied on the financial and audited statement which was provided by the auditors and based on it provided loan and excess capital to the organization. Attorneys: The different attorneys who were involved in the process also looked towards using incorrect ways while leading to the U.S. Securities and Exchange Commission (SEC) enquiry. The attorneys instead of bringing the actual situation to the light of the people looked at adopting strategy where employees shredded important documents were hidden to prevent any indictments. This had thereby resulted in contributing towards the incident which was taking place and was contributed by the attorneys. This process resulted in the alteration of the financial statement and using the different mechanism through which different people contributed towards it. The lack luster attitude which the employees adopted resulted in the fact that they didn’t have to bring forward any incident and were not questioned. This made the employees carry out the different roles and responsibilities as they felt like. This thereby resulted in the lack of policies which could have a check on the employees and provide a measure through which the employees would be monitored. The lack of proper policies to deal with it made employees to take advantage of the different opportunities which was present for their own gain. In addition to it the stakeholders also never questioned the manner in which the organization was working and agreed to all that was provided. The lack of proper questioning and critical reviews resulted in altering the actual situation and thereby resulted in creating the fraud which led towards failure. The manner in which employees and executives acted and looked at their own gain and greed contributed towards the failure of Enron as the policies which were adopted were aimed towards maximizing their own gains. The employees knew that they would not be questioned and the policies of the organization as such that it would have helped them to carry out the different operations towards their own gain. The process could have been controlled if the employees were accountable for their act would have been followed as it would have provided correct information to the shareholders. This could have been possible if the organization has followed a policy of better corporate governance. This could have ensured that if any incident which was untoward was noticed than the whistleblower could have brought the same to the notice. This would have also acted as a process through which better monitoring would have become possible. This would have thereby helped to exercise better control and would have made the management even attentive due to the fact that they were being monitored and would not have indulged into any such activities. The different people thereby contributed towards the incident which took place as the different person associated with the organization resulted in the taking steps where frauds took place. The different people contributed towards the activities which were taking place at different stages of the business cycle which ultimately led towards the failure of Enron and made the organization to file for bankruptcy. This thereby led towards a situation where the business was unable to carry on ethical grounds and resulted in the overall failure of the organization as appropriate steps were not taken at the correct time which could have prevented the incident for taking place. Form and extent of current whistleblower protection in Australia Australia after the United States has passed the whistle protection act which looks to act as a shield against any misdoing which the business might incur. Since, 1993 all Australian jurisdictions have passed whistle blowing protection act for the public sector and protection of the rights of the stakeholders. Despite continuous changes being made in the law the topic has always remained a vexed issue as the implementation of the law is still doubtful and the benefits which are reaped based on it is incorrect. Several jurisdictions in Australia like New South Wales, Western Australia and Wales have conducted reviews about the effectiveness of the law with regard to the public and have found it to be less effective (Robert G. Vaughn, 2013). This has made different jurisdiction to undergo different reforms and changes in legislation but no jurisdiction has been able to capture all the elements of the legislative design. This requires careful consideration of developing an approach which will be the best and will cover the different elements in the most productive and effective manner. The international thinking reflects a realization where whistleblower protection act have undergone changes and looks to include different dimensions and aspects through which better enforcement becomes possible so that any act which takes place is immediately notified and steps are taken accordingly. The present legislation looks at maximizing the impact and effect on three major objectives which are (1) institutional objectives which aims towards highlighting the wrong doings at the correct time and taking appropriate steps at the same time and limiting the adverse consequences for whistleblowers; (2) anti-retaliate objectives looking towards proper compensation to the whistleblowers who have undergone adverse consequences and; (3) public objective of clearly highlighting the rights and obligations of the whistleblower and the time when the whistleblower needs to make disclosure to the media and other parties (Brown, Latimer, McMillan and Wheeler, 2008). The present institutional model has looked towards determining the different actions which will be termed as wrongdoing but still some work is required in the same field and more comprehensive definition of the different things which will be included in the wrongdoing has to be brought forward. The strategy has to be directed towards making more specific requirements so that the organization is able to respond in the correct manner to the different disclosures and abide with the different legal requirements. The changes also have to be made in the direction of protection of whistleblowers and the different oversight agencies which look at monitoring the incident has to be provided with the required authority and responsibility so that the different specific requirements are met. It is imperative that such an institutional approach is undertaken as the country has a proud history of responsive democracy, fairness and social inclusions which includes tolerance of diversity. This will help to provide more specific and intelligible guidance regarding the different institutional approach and will bring forward the different indictments which will be applicable in case of wrongdoings (Dworkin and Brown, 2013). The overall process of making the whistle protection act has strengthened the role of whistleblowers and has provided with them additional powers and also prevents from unauthorized actions which could have an impact on the manner whistle blowers act. The process further requires a more comprehensive approach which focuses on both the public and private sector organization and highlights the different obligations which needs to be followed and abided with so that the risk reduces. The anti-retaliation objective is one of the most important objective that has to be reviewed as strengthening and updating the remedial right of the whistleblower who has suffered adverse consequences needs to be properly analyzed and monitored. The present practice is mainly to criminalise intentional reprisals but an alternative which looks at dealing with the whistleblowers in a different way has to be analyzed (Brown, 2009). Since, whistleblowers work with the organization and have an understanding of the organizational culture so effective policies need to be developed which will be aimed towards strengthening and simplifying the overall process through which effective business decisions are taken. The process has to be matched with ancillary reforms in the workplace relation system. This will help to strengthen the role and effectiveness of whistleblowers and will provide them with additional impetus through which corrective decisions will be taken and wrongdoing will be highlighted. This will serve as a process through which whistleblowers will be provided with additional authority and responsibility and will be able to act in a manner through which better and corrective decisions will be taken. The overall role of whistleblowers will thereby increase and will provide an opportunity through which better control will be exercised over the different issues and matters so that business prospects for the long term improves. Australia has looked toward making a lot of institutional changes in the manner whistleblower protection act has been developed but will need to make major ramifications and include different legislative and directives so that it is strengthened. The process has to look at protecting the interest of the whistleblowers as well and protect them from any adverse consequences which they might have to face because of others (Smith & Brown, 2008). The overall process has to be developed and directed in such a manner that it increased productivity for the whistleblowers and provide them additional role and responsibilities along with power. Australia has already strengthened and is moving in the correct direction but continuous institutional changes and improvement in the whistleblower protection act will help to improve the mechanism through which different process are controlled and will help to multiply the effectiveness through which different decisions are taken. This will help to reduce the chances of any wrongdoings and will bring forward the different incidents as and when they occur thereby limiting the risk and multiplying the gains. Effectiveness of Australian Whistleblower The whistleblower protection act has looked towards ensuring that any wrongdoing is immediately notified to the management through the blowing of whistle and should thereby help to reduce such incidents in the future. It has been identified through a survey that 80 percent of the employees feel obliged to blow the whistle when they notice any wrongdoing within the organization but only 49 percent feel that the whistleblowers will be protected from their managers and won’t have to face the issue of adverse consequences. This has thereby undermined the effectiveness of the Australian whistleblower protection act as it has diluted the overall impact it can have on different business undertakings. The present Australian whistleblower protection law has several loopholes as it lacks consistency and provides avenue where the different loopholes and exemptions are used in a manner which provides them more and more benefits. The Public Interest Disclosure Act of 2013 is one of the most comprehensive protection regimes which have been developed to protect the whistleblowers in Australia and it covers different disclosures which have been made in public sector enterprise. This has helped to deal with rigorous internal procedures and have fostered changes across agencies through which overall business gain and effectiveness have increased (Brown & Latimer, 2008). The growth in the number of legislation and process which looks at protecting the interest of the whistleblowers and at the same time transforming the manner in which wrongdoings are highlighted have reduced the extent to which such incidents takes place. This has helped to reduce the number of wrongdoings which were taking place and has helped to multiply the relevance of whistleblowers in organization. Australia through the policy of having whistleblowers have been benefitted greatly as the entire process of reporting have undergone changes. Any wrongdoings are brought to the notice by the whistleblowers. This has reduced the impact and has resulted in fostering a culture where people look towards the shareholders and look to increase the profits for the shareholders but not through unethical ways. The process has to look at protecting the interest of the whistleblowers as well and protect them from any adverse consequences which they might have to face because of others. The overall process has to be developed and directed in such a manner that it increased productivity for the whistleblowers and provide them additional role and responsibilities along with power. Australia has already strengthened and is moving in the correct direction but continuous institutional changes and improvement in the whistleblower protection act will help to improve the mechanism through which different process are controlled and will help to multiply the effectiveness through which different decisions are taken (Maria, 2009). This will help to exercise better control and have policies which are directed towards strengthening the manner in which different business decisions are taken at different levels. The process of strengthening the role of whistleblowers has helped to consolidate and strengthen the mechanism through which business decisions are taken. The mechanism has acted as an arm through which wrongdoings are brought forward and has helped to transform the manner in which the organization works (Brown, 2013). The benefits due to the strengthening have outweighed the cost associate with it. It has raised fears regarding the manner in which people will be caught and punished for the different activities they carry out. The fear and improved monitoring has ensured better reporting and has thereby impacted the overall mechanism through which different business decisions were taken. The present practice is mainly to criminalise intentional reprisals which has raised fear and prevented people from carrying out any wrongdoing as the fear of being caught and bring punished is continuously increasing. This will help to strengthen the role and effectiveness of whistleblowers and will provide them with additional impetus through which corrective decisions will be taken and wrongdoing will be highlighted (Worth, 2013). This will serve as a process through which whistleblowers will be provided with additional authority and responsibility and will be able to act in a manner through which better and corrective decisions will be taken. The overall role of whistleblowers will thereby increase and will provide an opportunity through which better control will be exercised over the different issues and matters so that business prospects for the long term improves. This has helped to reduce such incidents and provide a cover through which better effectiveness is ensured. The overall mechanism of strengthening the whistleblower protection act has provided different benefits and gains. This has helped to completely transform the manner in which different business dealings are carried out and has helped to bring a check in the business wrongdoing. Strengthening and including the different legislation and directives will further strengthen the manner in which whistleblowers work and will provide them with a cover so that their actions are not penalized. This will help to bring the required change and ramification through which better monitoring will be ensured and the overall process will look at strengthening the manner in which business works. This had created positive impact and with similar other decisions and strengthening of the law more positive results will be witnessed and the overall mechanism through which business decisions are taken will improve. Conclusion This paper analyzes the factors which contributed towards the fall of Enron and made it file for bankruptcy. The report concentrates on four major areas which includes the different reasons which led towards the failure of Enron which finally let towards bankruptcy, the role directors, attorneys and auditors had in bankruptcy, the manner in which whistleblower would have prevented such incidents and the role of whistleblowers in Australia and finally looks towards examining the manner in which whistleblowers helped to provide effectiveness in business dealings. This thereby helps to understand the importance of corporate governance and strategies which needs to be adopted to ensure better fulfilment of goals and carrying out the different operations in the most effective manner. References Brown, A. J. (2013), ‘Towards “Ideal” Whistle blowing Legislation? Some Lessons from Recent Australian Experience’, E-Journal of International and Comparative Labour Studies 2(3): 153–182 Brown, A.J., Latimer, P., McMillan, J. and C. Wheeler (2008), ‘Best-Practice Whistleblowing Legislation for the Public Sector: The Key Principles’ in A.J. Brown (ed.), Whistleblowing in the Australian Public Sector: Enhancing the Theory and Practice of Internal Witness Management in Public Sector Organizations. Canberra: ANU E-Press, 261–288 Brown, A. J. & Latimer, P. (2008) ‘Symbols or Substance? Priorities for the Reform of Australian Public Interest Disclosure Legislation’ Griffith Law Review 17(1): 223-251 Brown, A.J. (2009). ‘Returning the Sunshine to the Sunshine State: Priorities for Whistleblowing Law Reform in Queensland’ Griffith Law Review, 18(3): 666–689 Dworkin, T. M. and Brown, A. J. (2013), ‘The Money or the Media? Lessons from Contrasting Developments in US and Australian Whistleblowing Laws’, Seattle Journal of Social Justice 11(2): 653–713 Maria, W. (2009), Deadly Disclosures: Whistle blowing and the Ethical Meltdown of Australia, Adelaide: Wakefield Press. Robert G. Vaughn (2013), The Successes and Failures of Whistleblower Laws, Edward Elgar Smith, R. & Brown, A.J. (2008). 'The Good, The Bad and The Ugly: Whistleblowing Outcomes' in Brown, A. J. (ed), Whistleblowing in the Australian Public Sector Worth, M. (2013), ‘Whistle blowing in Europe: Legal Protections for Whistleblower in the EU’, Transparency International, Berlin Read More