Bankruptcy of Enron Corp - Essay Example

How did the corporate culture of Enron contribute to its bankruptcy? Enron Corp. filed thebiggest case of bankruptcy in U.S history in December 2001 because of various unethical issues. Enron Corporation had taken pride in and strongly believed that that its personnel would take care of the rising risk without any consequences. The culture encouraged greed and centered on the amount of money that could be made for directors. For instance, Enron's compensation system appeared to be less apprehensive of generating income for its shareholders than with enriching the wealth of the company. The corporate culture at Enron reportedly promoted exploitation. The collapse of the company has shocked the entire financial world and raised many serious questions concerning the subject of corporate governance. The Enron Corporation bankruptcy is becoming the most well-known and extremely publicized bankruptcy case in the history of financing. Several unethical issues have contributed to Enron’s bankruptcy. These include: Bad Communication-: The stock analysts at Enron were frequently vague and failed to specify their finances and operation cost. Enron also lied to the various stakeholders, and their financial statements concealed the various significant losses to their Stockholders and failed in delivering the bad news. Improper Accounting: One of the primary reasons for Enron’s bankruptcy was the company’s reprehensible accounting system. Enron used dishonest accounting measures to generate their incomes. Even though these systems produced more flattering financial image of the company, external observers believed they may represent deceitful financial reporting since they did not precisely portray the true financial condition at the company (Avey et al., 2011). For instance, Enron created the special-purpose entities (SPEs) to change the assets and debt in its balance sheet and raise cash flow by indicating any sale of assets through its books (Ferrell et al., 419). Hiding the losses and inflating profits: Enron Corporation has a cash flow of negative amount $154 millions, but the company claimed of 3 million in its cash flow Misleading the financial reports-: The company filed for bankruptcy after disclosing that it used (SPEs), Special Purpose Entities, which concealed losses. The company used SPEs to take out debts and assets from its balance sheet so as to enable it to amplify its Cash Flow. The improper business and accounting procedures promoted greediness, which caused more than 5000 Enron workers to lose their occupation due to the greed of the company’s executive.Enron's Vice president, Sherron Watkins constantly sent reports out to the then Chairman detailing the poor accounting procedures. The major issue was that the company got its internal audit function from outside. Enron outsourced its internal and external auditing function to Arthur Andersen (Ferrell et al., 419). 2. Did Enron's bankers, auditors, and attorneys contribute to Enron's demise? If so, what was their contribution? Enron's demise was caused by its bankers, auditor and attorneys. Enron's bankers: the bankers recognized that there was a problem with Enron finances but failed to take appropriate action. JPMorgan Chase and Citibank previously knew of the tax regulations and had the opportunity of obtaining sources for audited accounts. These banks still gave huge amounts of money in loans to the Enron (Ferrell et al., 419). Enron's auditor: Enron auditors were aware in mid August of improprieties in the energy company's accounting practices from the concerns of a senior Enron employee. Arthur Andersen was liable for making sure that the financial statements and internal bookkeeping is accurate. Potential investors used Anderson's reports to judge the company’s financial security and future potential before choosing whether on not to invest. This information was also used by current investors to decide whether their funds should remain invested in the company. The company’s former CEO, Jeffrey Skilling, generally viewed as Enron's mastermind was so certain that he had not committed any offense and testified before Congress that he was unaware of any improper financial deal. Jeffrey McMahon informed a congressional subcommittee that he had told Skilling of Enron’s off-the-balance-sheet enterprise in March 2000, while serving as Enron's Treasurer (Ferrell et al., 419). Enron's Lawyers: before the U.S. Securities and Exchange Commission (SEC) enquiry, the company’s workers destroyed crucial documents to avoid any indictments. 3. What role did the chief financial officer play in creating the problems that led to Enron's financial problems? Bill Saporito asserted that Fastow was widely recognized as a money wizard who developed the intricate financial vehicles. Fastow used methods capable of swiftly exploiting deregulating markets for water, energy, broadband capacity and other tradable items. In 1993, Fastow established numerous "special-purpose entities" intended to move Enron's debt to an external company and remove them from the books. To avoid degrading in the company’s credit rating, Fastow increased his staff three times to over 100.He employed several banking experts and gave them the duty of task of buying and selling capital risk (Forbes). This practice in effect made the company’s audited balance sheet to appear free of debt. However, the company really owed in excess of 30 billion dollars at the peak of its debt. He presented these to the public as independent entities but the funds he made were used to tamper with Enron's books. By defrauding the company in this manner, he made tens of millions of dollars and also ignored essential financial practices such as reporting the total liabilities 'cash on hand' (Ferrell et al., 419). 4. The common theme in the case is ethical leadership. Provide your thoughts/opinion about the role of leadership in promoting and reinforcing ethical behavior, starting from Board of Directors to C-Suite to Sr. Management to Mid Level Management to Direct Supervisors. Board of Directors: they should ensure that moral behavior in their personal life mirrors the moral standards that they endorse. They should also execute decisions that are fair and objective and founded on sound ethical principles. C-Suite: they ought to act appropriately and morally and show concern for others. Also they should act as role models in terms of ethical behavior and give others the chance to contribute to decision making. Sr. Management: they should explain decisions in ethical terms and discuss ethics in their communication. Mid Level Management: they should encourage subordinates to air their views concerning ethics-related concerns. Direct Supervisors: they should employ values to guide their decisions and behavior and take responsibility for their actions. They should also treat everyone fairly. 5. Think about/Research 1 or 2 business leaders, who you would consider ethical – describe what makes them ethical and what you can learn form them? One leader I like is William Marriott and Oprah Winfrey. Oprah Winfrey is ethical. She gets a long with diverse people, has great communication skills, and is kindhearted. She knows how to listen to other people, takes charge and delegate. She also has a vision and makes things happen. 6. As a future business leader, describe how you will promote and reinforce ethical behavior in your respective workplace. How will you make a difference in the future of business ethics? I will promote and reinforce ethical behavior my workplace by: i. Posting clear guidelines that define the king of behavior expected of employees. ii. Outlining potential punishments for unethical conduct which can only be used as a last resort. iii. Enacting a rewards system that encourages ethical behavior. iv. Ensuring the privacy of people who file complaints v. Employing an ethical compliance officer to address issues related to ethics. Works cited Ferrell, O C, John Fraedrich, and Linda Ferrell. Business Ethics: Ethical Decision Making and Cases. Mason, OH: South-Western Cengage Learning, 2011. Print. "Enron Files Chap. 11." Forbes. Forbes Magazine, n.d. Web. 1 Dec. 2013. . Avey, J B, Palanski, M E, and Walumbwa, F O. When leadership goes unnoticed: The moderating role of follower self-esteem on the relationship between ethical leadership and follower behavior. Journal of Business Ethics, 98, 573-582. 2011. . 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