White Collar Crime: Collapse of Enron - Research Paper Example

?White Collar Crime: Collapse of Enron In organizations in any sector, leader is the one who can lead the employees under him/her on the successful path or on the detrimental path. The management team and their employees for their part also maximally follow their leaders. The risk factor in this practice of just following the leader is that, if the leader functions ineptly, unethically, inefficiently, etc, then there is a possibility that the whole organization could collapse. This is what happened in Enron. When the leadership role of former Enron CEO and Chairman, Kenneth Lay is analyzed, it is clear that he has lead workers including in the management team, as well as customers and investors who depended on him to on the detrimental path, thus leading to the in-famous Enron scandal. Enron, American Energy Company, has become the “ultimate symbol of corporate wrong-doing” due to certain inept leadership actions of Kenneth Lay and the resultant unethical practices. Firstly, when his staff and management team in collusion with the accounting firm, Arthur Andersen indulged in a systematically planned accounting fraud, he remained a mute spectator taking no initiatives to stop it. Because of this fraud, Enron was able to conceal its losses in the financial statements, and were able to earn profits as a result of deals with special purpose entities. “A big factor in Enron's eventual collapse was the use of so-called special purpose entities, which were separate companies set up to hid Enron losses on their own financial statements” (Welytok, 2006). Also, since Enron’s executives and top management team were compensated based on the stock price, they had an incentive to keep the stock price artificially high by not declaring their losses. Enron is a stark example of how companies rewarded corrupt practices of employees at the company. They paid hefty bonuses to competent managers who were willing to do whatever it takes to improve the company’s stock process. They did so by using accounting malpractices to hide these losses and to even declare profits. Enron consistently published falsified financial statements that obscured aspects of its operations. These statements tried to disguise debt levels and used external partnerships to convert stock into profit. In addition, an overly complex organizational structure facilitated the fraud. These actions reflect a bad decision-making process where accurate information (losses and proper accounting principles) were used to support the negative values and preferences (they wanted to earn more than what they deserved) of the management team. “Enron's executive compensation philosophy and executive incentives were misaligned as management was paid based on revenue and earnings growth when they should have been compensated for economic profit creation and profitability” (“Enron Destroyed Long-Term Shareholder Value”, 2002). From this unethical and fraudulent actions of Enron, its top management and particularly its CEO, it is clear that decision making processes has to be carried out, taking into considerations the repercussions of the decision that will be taken. The decision-maker has to make sure that the consequent risks could be managed, including whatever indirect advantages the decisions may have. However, Enron and its management did not think about the risks, and tried to deceive various stakeholders. When the whole fraud was revealed to the public, the stocks of Enron plunged to very low levels leading it to bankruptcy and leaving the 20,000 odd employees in dire straits. To make matters worse, when CEO, Lay knew that the company is on the verge of collapsing, he sold majority of his stocks and did not take any positive steps, leading to the decimation of many of the employees’ retirement accounts, which were largely based on Enron stock. That is, even after knowing that his company is on the verge of collapse with its stock price collapsing, he encouraged the workers to put their retirement fund in the company’s stock. “Lay took steps to falsely inflate Enron’s stock price so that he could profit from stock transactions and lied about Enron’s financial condition to the public, stock analysts and Enron employees” (“Enron's Ken Lay”, 2004). The employees both in the management team and cutting across all organizational structures trusted what their CEO told them, did so and ended up losing everything when the stock eventually collapsed and the company closed down. The investors for their part also suffered with the Enron shares dropping from over US$90.00 to US$0.30 (“Compass: Enron- The lessons Learnt”, 2007). This clearly shows that when the leader or the management team takes a decision, they have to take into account what effect those decision will have on its various stakeholders. However, in the case of Enron, they did not think about how their fraudulent actions could have negative impacts on whole lot of stakeholders. Even though Kenneth Lay had an inbuilt ethical compliance system inside Enron, he did not follow it and instead supported the anti-ethical steps. The grand jury at the Houston Court indicted him on 11 counts of securities fraud and related charges. Leader should only play a proactive role to take his/her organization with the aid of management team and organizational structure to success, but Lay instead was inactive when the company was committing mistakes and was going through a crisis, causing a major failure. When the scandal was viewed from the overall perspective, another reason seems to have emerged regarding what factors contributed to this scandal, and that involves outside agencies like credit rating agencies. That is, although, the CEO, the management team as well as the accounting team inside Enron is primarily responsible for the scandal, it being said that the failure of the credit agencies to give a bad rating to Enron also contributed to the scandal and its downfall. The main objective of a credit rating agency is to assign a credit rating to issuers of debt, and its is used by investors, issuers, investment banks, broker-dealers, and governments. This rating is used to measure the credit worthiness of the issuing company; it is used to measure the probability that the money invested will be returned. Apart from being statistically and numerically accurate, these ratings have to be ethically viable and unbiased. Enron is the perfect example of ethical misses as it was given good investment rating by many credit agencies, only to see it going bankrupt immediately after. “Credit rating agencies have faced criticism for failing to identify impending crises at corporations such as Enron and many in the telecommunications industry.” (Teather, 2003). This Enron scandal has damaged the credibility of these agencies, and effective steps are regularly taken to avert such a scenario. “The credit rating industry is facing sweeping regulatory changes in the wake of the scandals that have beset Wall Street during the past year.” (Teather, 2003). The key response to this scandal emerged from the side of the US government, as it formulated and passed the Sarbanes-Oxley Act of 2002. This congressional legislation which passed the House 334-90 (GovTrack, GovTrack: House Vote On Passage: H.R. 3763 [107th]: Sarbanes-Oxley Act of 2002, 2002), and the Senate 99-0 (GovTrack, GovTrack: Senate Vote on Conference Report: H.R. 3763 [107th]: Sarbanes-Oxley Act of 2002, 2002) (“Bill Information”, n. d.). In the wake of the fraudulent steps carried out not only by Enron but also WorldComm and other entities, investors’ confidence in the ethical practice of publicly traded companies began to wavier. The government responded in 2002 with one of the most sweeping and radical pieces of corporate legislation ever written. The Sarbanes-Oxley Act, or SOX as it is known, was intended to reign in corporate deception by making the financial practices of publicly traded companies more transparent to the public. In order to achieve this control, SOX put into place strict penalties, and even imprisonment for violations of its code. The main reform of SOX is the creation of the Public Company Accounting Oversight Board (PCAOB). This board has been tasked with ensuring publicly traded companies and their accounting firms are in compliance with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act, 2002). Beyond the creation of the PCAOB, the next greatest act of SOX is the promulgation of antidiscrimination laws which protect employees who report alleged violations of SEC and other accounting and financial codes. This section is modeled after other Federal Whistleblower protections, but in many cases expanded either the protection or the penalty for noncompliance. Thus, one of the most important aspects of SOX is its protection of whistleblowers. SOX attempts to protect from retaliation, discrimination, and harassment any employee of a publicly traded company who reports alleged violations. This provision of SOX is more far reaching than any other such attempted whistleblower antidiscrimination law. From the above analysis of the Enron Scandal, it is clear that the scandal happened because of the inefficient and unethical practices of the Enron’s top management particularly its accounting department in liaison with the consultant accounting firm, under the ‘mute’ supervision of its CEO. This mistake led to the entire company collapsing and unfortunately affecting the employees and other stakeholders. In addition, it brought into the purview the inefficiencies of the credit rating agencies. More importantly, on the positive side, this scandal led to the formulation and implementation of the SOX, to prevent further scandals like this and also to protect the employees. References: “Bill Information.” (n. d). GovTrack. Retrieved from: http://www.govtrack.us/congress/bills/107/hr3763 “Compass: Enron- The lessons Learnt.” (2007). Ace Connect. Retrieved from: http://www.aceconnect.co.in/pdf/newsletter03.pdf. “Enron Destroyed Long-Term Shareholder Value Study Finds; Charas-Hoffman ``Economic Profit'' Analysis Reveals Deterioration Since 1996” (2002, February 13). Find Articles. Retrieved from: http://findarticles.com/p/articles/mi_m0EIN/is_2002_Feb_13/ai_82796381/ “Enron's Ken Lay: Captain of a Modern-day Titanic?” (2004, July 28). Wharton School of the University of Pennsylvania. Retrieved from: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1015 Teather, D. (2003). SEC seeks rating sector clean-up. Retrieved from: http://www.guardian.co.uk/business/2003/jan/28/usnews.internationalnews Welytok, J. G. (2006). Sarbanes-Oxley for Dummies. Dummies. Read More