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Enron Report
Business ethics (National University of Modern Languages)
Studocu is not sponsored or endorsed by any college or university
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Acknowledgement
We are very thankful to Allah, who gave us strength for the completion of this project. Without
his mercy we were not able to complete this project. We would take this opportunity to thank
Miss Mehvish Batool, for her valuable support and encouragement which she has offered. Her
words of wisdom will always be remembered, and I am convinced that the knowledge of
Business Ethics that she has imparted would go a long way in making good managers and
helping us all through our professional career. Besides, this report program makes me realized
the value of working together as a team and as a new experience in working environment,
which challenges us every minute.
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Executive Summery
This case analysis will talk about the local, state, national, and global effects of Enron's
corporate decisions that led to the company's bankruptcy in 2001. The case will give an in depth
discussion about Enron and their business practices. This scandal eventually led to the
bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas,
and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy
partnerships in the world. In addition to being the largest bankruptcy reorganization in
American history at that time, Enron undoubtedly is the biggest audit failure. It is ever the most
famous company in the world, but it also is one of companies which fell down too fast. In this
report, we analysis the reason for this event in detail including the management, conflict of
interest, stakeholders issues and accounting fraud. Meanwhile, it makes analysis the moral
responsibility from Individuals’ Angle and Corporation’s Angle.
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Review of Enron’s Rise and Fall
This case is about the Collapse of Enron and how it affected several Americans. Enron Corporation was
formed in 1985 through a merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. The
Union created a midsized firm whose main asset was a large network of natural gas pipelines. The
company’s core business was distributing natural gas to utilities. The key stakeholders involved in, or
affected by, the collapse of Enron where the employees, stakeholder and mutual fund investors. The pain
caused by Enron’s abrupt failure was widely felt. The company immediately lay off 4,000 employees,
with more to follow. Thousands of Enron employees and retirees saw the value of their 401(k)
retirement plans, many heavily invested in the company’s stock, become worthless overnight.
The challenges faced were those of a changing workforce, competitiveness, and globalization, as well as
ethics and social responsibility. While many companies were downsizing in the mid-1980s, Enron
continued to grow and expand despite their lofty goals. They ventured out into foreign markets to be
more competitive. The workforce also became more diverse and the characteristics changed.
Employees during Enron's tenor were less devoted to long-term career prospects; instead they were
more interested in financial gain at any cost. Ethics seemed to be a secondary thought for most people
during Enron's time. To meet these challenges Enron executives had to make working for their company
more attractive and lucrative.
The contributing factors to their downfall were poor planning and leadership. The company grew too
quickly. In their desire to grow and expand, the company's senior management did not establish and
follow ethical practices that would sustain the company. Controls were not established in key places,
such as, accounting practices and principles. Enron’s non transparent financial statements did not clearly
depict its operations and finances with shareholders and analysts. The company started manipulating
the revenue figures. Enron used many methods to make the companies condition look better by starting
different accounting practices. They also broke the legal and ethical integrity of the company by
overseeing the company’s financial reports. Even supporting the political parties didn’t help them. They
had a complex business.
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HISTORY OF ENRON:
Enron was created by a merger between Houston Natural Gas and Internorth. Houston's Natural Gas's
CEO Kenneth Lay headed the merger of the two companies. Kenneth Lay became the CEO of Enron.
Enron was originally solely involved with the distribution and transmission of electricity and gas in the
United States. In the merger, Enron incurred a large amount of debt, and as a result of deregulation, no
longer had exclusive rights to its pipelines. The company had to find a way to generate profits and cash
flow. Kenneth Lay hired Jeffrey Skilling to work for Enron as an accountant. Skilling suggested the practice
of buying gas from a network of suppliers and selling it to consumers at a fixed price with a contract.
Enron was interested in the expansion, building, and operation of pipelines, power plants, and other
infrastructure worldwide. After just a year of operation Enron merged with a company called Spectrum
Seven, a company whose chairman and CEO is the former president of the United States, George W.
Bush. In 1999, Enron tried to expand their company by creating the Azurix Corporation, a water utility
company. Overall the Azurix Corporation proved unsuccessful financially. The Azurix Corporation, due to
their failure to make an entrance into the market, went under. By 2001, Enron announced plans to
dissemble Azurix and liquidize the assets of the corporation.
Enron allegedly became successful, trading over eight hundred different products worldwide. Enron was
named "America's Most Innovative Company" by Fortune magazine from 1996 to 2001. Enron was on
Fortune's "100 Best Companies to work for In America" in 2000. The company's future appeared to be
bright and promising continued success.
Enron faced many accusations of building links to political power. The company's connection to George
W. Bush and Houston's local politics has received much attention in the recent past. In 1986, Enron was
involved with Bush's company in joint drilling for oil. There are reports that Kenneth Lay and George W.
Bush even shared friendship. The Enron Corporation was the largest financial supporter of Bush's
presidential campaign. Kenneth Lay has employed politicians who have worked under George W. Bush.
Bush also signed off on a law that deregulated Texas's electrical markets, which coincidentally resulted in
large profits for Enron.
The company also had political links that reached outside of the United States. Enron created a massive
and highly expensive power plant in India, even though many Indian citizens and the World Bank
strenuously objected. Allegedly protesters in India were beaten and arrested. The United States
ambassador to India, who opposed the plant eventually, joined the board of Enron Oil and Gas.
The screws came loose in August 2001, when Jeffrey Skilling, the CEO resigned from office for unknown
reasons. By October 2001, Enron experienced its first quarter where they did not report a profit. On
November 8th, 2001 Enron told the SEC it was restating its earnings since 1997, reducing income by
$586 million dollars.
In December 2001, Enron filed for chapter 11 bankruptcy. This was the biggest bankruptcy protection
case in United States history. It appears that Enron's problems were not in its energy operations, but
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from "dot com" investments and in some foreign subsidiaries. The accounting system practices in placed
failed to provide a clear picture of the corporation's financial status. Enron used accounting techniques
involving hiding debts to give the illusion of high profits. When the accounting practices were revealed
virtually all profit since 2000 had disappeared and the company plummeted.
Like many other companies Enron offered a retirement plan to its employees, in which they could
substitute earnings for stocks in Enron. The benefits to this were that the employees were able to buy
the stock on a tax-deferred portion of their pay. When the company closed in December 2001, sixty-two
percent of the company's 401 k plan was held in Enron stock. The stock, which once traded at eighty
dollars a share, went for less than seventy cents a share when Enron folded.
Cultural Overview
Our findings affirm that the culture of Enron’s San Francisco office is strong and well defined.
Specifically, the culture is entrepreneurial and innovative, values merit over hierarchy, emphasizes both
team and individual behavior, focuses on profits (especially in the short-term), emphasizes
responsiveness, and fosters internal competition. A ‘sink-or-swim’ mentality also pervades the culture;
the firm gives employees significant responsibility and opportunity to succeed, but little training and
guidance. Communication with other groups is infrequent and can lead to a feeling of isolation for the
San Francisco office.
Enron hires people who are “young, self-confident, and self-starters” without industry experience and
exposes them to the front line with minimal training and high expectations. This “sink-or-swim” notion,
which throws new employees into their jobs with minimal training and guidance and expects them to
produce, is one of the unique traits that fosters and sustains Enron’s innovative culture. The young
employees that Enron tends to hire are free from pre-existing industry conceptions that may anchor
their decisions and hamper their ability to think outside the box. Additionally, these employees may be
more tolerant of risk than experienced employees because of their younger age. Placed into a
competitive work environment with high demands to produce, these employees respond with innovative
solutions that do not conform to traditional industry thought processes.
Entrepreneurship and innovation are critical strengths of the culture and main competitive advantages
for the firm. Similarly, the Enron culture provides a sustainable advantage difficult for other firms to
mimic. [A mid-level manager] points out that Enron’s cultural distinctiveness, specifically its
entrepreneurial culture, gives it a significant advantage over other firms in the industry. As demonstrated
by its winning of Fortune’s “Most Innovative Company Award” for a record five consecutive years,
outsiders (including the stock market) recognize the firm for its legacy of innovation. Indeed, the legacy
continues with the firm’s recent launching of broadband services and trading, services clearly out of the
range of traditional energy companies.
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The Enron culture exudes meritocratic ideals that reinforce the atmosphere of innovation. Staff
consistently ranks intelligence and initiative as top qualities valued at work. Over 70% of surveyed
employees assert that Enron is “extremely merit-based” in terms of promotion. [An employee in the
management development program] indicates, “Bonuses are reflective of people’s performances.” [A
high-level manager] observes, “Our culture is one where everybody can come up with ideas.”
The strong entrepreneurial, competitive culture that distinguishes Enron as an innovative organization
also leads to negative implications.
The lack of emphasis on formal communication hinders effective knowledge management practices.
Poor knowledge management practices do not align with Enron’s innovative culture, where learning and
experimentation are essential to stay ahead. To efficiently complete projects that require creative
thinking, individuals must not only understand the goals and objectives, they must also have access to
resources that pool relevant information.
Enron’s profit-driven environment gives minimal incentives for employees to improve their management
skills or to proactively contribute to the professional development of younger employees. Employees
are rewarded based on concrete earnings results rather than “soft” skills such as leadership and
mentoring. By excluding recognition and other incentives, Enron fails to motivate employee actions that
are beneficial to Enron but do not directly result in earnings.
Characteristic of an entrepreneurial culture, groups at Enron are driven by their own profits and
sometimes operate as separate entities. This inherently creates conflicts and an emphasis on individual
or group achievement. When making decisions, groups or managers can make better, more informed
decisions if they incorporate the experiences and intellectual knowledge of employees throughout the
organization into the process. When individuals or groups act as separate entities, such as in meetings
between the wholesale and retail groups where each group sits on opposite ends of the table to conduct
negotiations, they fail to pool each other’s resources and experiences such as in joint decision-making. In
addition, the competitive environment adversely affects the San Francisco office’s ability to complete
long-term deals involving the sale or purchase of natural gas or electricity.
Although it is highly effective in promoting innovation, Enron’s “sink or swim” mentality does have some
negative impact on morale. Increasing demands and responsibilities that are associated with highly
autonomous and self-directed environments create negative stress for some employees. Several
respondents describe Enron’s environment as chaotic, and characterized by little coordination.
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Effects on Stakeholders:
The key stakeholders involved in, or affected by the collapse of Enron are: employees and retirees,
thousands of them lost their jobs and the investment; the executives: Kenneth Lay, Jeffrey Skilling and
Andrew Fastow they sold significant blocs of company stock, have conflicts of interests; government
figures, Lay had close personal tie with the Bush family, Enron’s efforts influence policy making;
regulatory authorities: Commodities Futures Trading Commission (CFTC) and Securities and Exchange
Commission (SEC); their business partners: Arthur Anderson and Vison & Elkins; the competitor Dynergy;
the two banks: Citi Bank and J.P. Morgan Chase and the last two are the customers and investors.
Stakeholders and mutual funds investors lost $ 70billion market value.
The stakeholders let the collapse of Enron through their carelessness and lack of oversight. The reward
system let employees to make the accounting numbers look good. The deregulation causes the market
become more volatile and risk, customers and producers are complaint. Employees were afraid to
question the company and their directors and business partners suffered from the same financial
conflicts of interest. Not only the stakeholder and bondholder lose out, the confidence in the company
also fell. This was the major setback for the company.
The actions of Enron management left a deep scare for its 4000 employees which lost out their jobs and
also impacted others around them. Some blamed Arthur Andersen; Enron’s accounting firm and some
blame the board of directors for insufficient oversights. The damage was so big that it was likely to take
years for the court to sort the wreckage. The company did not think of its future and took many bad
steps just to earn money. The CEO should have looked into the company matters long time ago and took
action so that hundreds of jobs could have been saved. The companies who were associated with the big
firm were affected on a very large scale. This was the biggest bankruptcy of a firm with $63.4 billion in
assets.
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Conclusion
On July 13, 2001, Skilling resigned as CEO. He claimed it was for personal reasons. The real reason was
that Enron was heading for trouble, and he didn’t want to face the music. The company was in a cash
crunch and was trying to sell assets to raise cash. Skilling could see the writing on the wall, but so could
most of Enron’s senior management. Many had been liquidating their holdings in Enron stock for
months.
Many people suffered from Enron’s failure, but employees were hit especially hard. Thousands were laid
off with just $4,500 in severance pay. Enron had encouraged employees to invest their pension assets in
the company’s stock. Employees who had foolishly done so lost pension savings as well as their jobs. In
June 2002, Arthur Andersen was convicted of obstruction of justice for its destruction of Enron
documents. Andersen, which was once the largest accounting firm in the U.S., was barred from auditing
clients. The energy industry went through a crisis, since other companies in the industry were Enron
copycats and had very similar deals and trading positions in place when Enron went down. And investors
took a big hit.
Finally, even with its downfall, some good has come. Sarbanes-Oxley (SOX) legislation came into being on
July 30th of 2002 and brought about major changes to corporate governance and financial practice in
the United States. The Act was developed in response to a rash of corporate scandals involving
companies like Enron, Tyco, and WorldCom to ensure that another Enron does not emerge.
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