Assessing Brilliance of the Enron Corporation - Case Study Example

Assessing Brilliance in Innovation: Analyzing the Rise and Fall of the Enron Corporation Innovation is increasingly being considered as a core competency that organisations must develop. Companies that consistently innovate don't rely on chance; they address innovation in a systematic way. The Enron Corporation was a brilliant innovative company. It was so brilliant, in fact, that even the most adept economists could not foresee the paralyzing future of this company, and Fortune Magazine awarded Enron as "Most Innovative Company in America" from 1995 to 2000. As of March 2000, Enron was the sixth largest energy company world-wide, according to the Energy Financial Group. It would be within the next year that Enron would begin to go through some major financial difficulties. It will be argued here that the basic tenets of a successful company require three key aspects: profit; sustainability of innovation; and good leadership. First, one should begin with a short history of Enron. In the case of the Houston-based Enron Corporation, a multi-billion dollar institution encountered a crisis situation. The denial of top corporate executives Kenneth Lay and Jeffrey Skilling led to Enron making excuses such as blaming Arthur Andersen, its accounting firm, for its failure. An integral part of understanding Enron's demise comes from learning a little bit about the company and how it grew over the years to its existing status. Houston Natural Gas merged with InterNorth, in July 1985, to form the Enron Corporation. Over the next fifteen years, Enron expanded rapidly, establishing many new businesses worldwide. The first sign of an innovative corporation is that it shows a profit. In about fifteen years, Enron grew from nothing to being America's seventh largest company. Enron employed over 21,000 individuals in more than forty countries. Enron's executives transformed this company, without actually building a company that made significant business profits. By doing this, Enron executives could exaggerate the company's cash flow. To create these profits, Enron's executives also used many accounting procedures that seemed to confuse watchdogs-and, to make themselves look better, they blindsided everyone who thought that Enron was on top of the world, by creating hundreds of fake companies. To prevent anyone from seeing any loss from Enron, they would transfer their debt to the fake companies. By doing this, Enron's debt would seem a lot smaller than they actually were. Like many large companies, Enron had its good and its bad side. In 2002 Enron's bad side was exposed to the nation. So the question is raised, what did Enron make' Enron didn't really make anything. Enron acted as the "middleman" in large natural gas and electricity deals. Enron always admitted it was hard to define their "business" in one sentence, but they finally came up with an explanation that they make commodity markets so that they could deliver physical commodities to their customers at a predictable price. Enron seemed to have trapped employees that worked with the company. The employees were forced to put their pension money into the Enron stock, which was overvalued. The employees at Enron were just doing their jobs, and in fact should not be held to blame. "Such high turnover [at the top of corporations such as Enron] suggests that the real problem isn't a lack of innovation-it's sustained innovation."1 Although many of the future business people attend curriculums that require business law classes, the Enron scandal has proven that corporate corruption is alive and well. Also, the company proved that it could not sustain its innovation over time, because its biggest innovation, mark-to-marketing accounting, was a fraudulent innovation. It was brilliant, in the sense that profits could be estimated and then banked upon, but it was also an illegal practice to put profits on the books that were not truly there. In addition, Enron made off as though it had some great technology before it actually acquired it, but made a deal anyway in its absence and ended up jacking up its company stock price by predicting a future deal that never ended up happening in reality. Enron and its management should have been held socially responsible. Enron should have made a greater effort to avoid the business practices by its employees from culminating in the total collapse of the company. It should have also kept the shareholders informed as to the ethics behind the proposed plans of action. Corporations and businesses conduct business abroad in places where ethical codes are not the same as ours. The executives of Enron are just as much to blame as the accountants or auditors who failed to ethically comply with the rules and regulations set forth in governing big corporations. Jeffrey Skilling was the mastermind behind much of Enron's quote-unquote "success," changing the company to be innovative in various ways. When asked in college if he was smart, Skilling said, "I'm f---ing smart."2 Skilling was indeed talented, and he made the Enron company culture unique. He used to have glasses, and then he decided to get laser surgery so he wouldn't have to wear glasses. This became a trend within the company; everyone who was an employee who wore glasses started getting laser eye surgery to have corrected vision. Skilling also remade his image by losing a lot of weight. Skilling had other innovative talents as a leader as well. He was the person who developed the illegal (but new and exciting) concept of mark-to-marketing accounting. Skilling was the person who initiated company trips to daredevil-type mountain bike and motorcycle rides in exotic locales, making stories about the company employees' adventures outside the office something of legendary status among company associates. This became part of the Enron culture, and it cannot be separated from its downfall, which was based in pride, greed, and excessiveness. In the case of the Anderson group, the financial auditing firm which dealt with Enron's books, was just as guilty as the executives of Enron. A practice known as cooking the books was one of the loopholes Enron used to deceive investors. The financial records of Enron were "cooked" using investors' 401K plans and shareholders' stocks in order to falsely project profits. The banks which handled Enron's financial business alleged that Enron officials artificially inflated the company. In the investigation into the role of Enron's independent auditors, the Anderson firm may have Enron in committing illegal acts in its financial accounting practices. Andersen stated that it had disposed of a significant but undetermined number of electronic and paper documents and correspondence relating to Enron. "It [was inappropriate to get rid of documents'Clearly, there was [going to be] an informal SEC inquiry on Enron."3 Spencer Barasch of the SEC testified that, "In my 15 years experience at the SEC, it's pretty well-understood' that when a Fortune 500 company gets an inquiry from the SEC's Enforcement Division, they're almost always going to contact their auditors and let them know the SEC is sniffing around."4 Arthur Andersen partner David Duncan testified that he instructed his colleagues to destroy Enron-related documents knowing full well that he was breaking the law. "I obstructed justice' to follow the document retention policy, which I knew would result in destruction of documents."5 In prosecution, FBI agent Paula Schanzle personally examined "more than half" of [one] document'earmarked for destruction and the "vast majority, had something to do with Enron."6 A senior official with Enron told of two meetings she had with her boss,Tom Bauer, a partner in Andersen's Houston office, to discuss getting rid of paperwork. In one meeting, Baurer "told me that if he ever talked to us about getting rid of documents, it would be along the lines of being in compliance with the firm's document-retention policy," she said.7 Enron's related-party transactions were considered "smoking guns [one] can't extinguish."8 One of Enron's many methods of illegal business ethics included offering huge bonuses for deals, encouraging traders to inflate the earnings from their deals to earn bigger bonuses. Enron also used a mark-to-market accounting system, allowing them to report the value of a deal over its lifetime as current revenue, which is also illegal. Many of Enron assumed that the over-inflated large bonuses and abuse of business expense accounts were isolated incidents, not realizing they were widespread problems, company-wide. As a result, the Enron debacle had major implications for the labor-capital movement as well. Not only did Enron's collapse undermine the retirement security of all workers whose pension funds held Enron stock, but the company's meltdown revealed serious flaws in our nation's financial system which threaten the security of the nation's retirement system. Enron declined suddenly because of the following mistakes. The biggest mistake Enron made was lying to the banks in order to get loans. Misleading the banks pushed Enron into losing everything and losing the banks' trust. The banks believed that Enron was one of the largest companies in the world, when its stock was actually losing value and the company was running out of money. If Enron was a "great" company as they claimed themselves to be, they should have started off by not lying to the banks that they were working with, showing them that they were financially stable when they were not. This shows that Enron was a cheating company and stole its way to the top as the banks found out when they could not pay back the bank loans. Another problem Enron was facing was firing many of its employees. Enron should have started small and should have let itself grow one by one like any other business. The firm that did the accounting for Enron, Arthur Andersen, failed in that they lied to the people and other companies by lying for Enron and showing people that Enron was one of the biggest companies in existence. White-collar crimes such as those committed by Enron are done out of greed. The people who usually commit these crimes are financially secure. Statistics have shown that the majority of white-collar crimes are committed by certain groups of people. Women over the age of eighteen are less likely to commit these types of crimes. People in authority positions are more likely to commit white-collar crime such as what happened at Enron, mainly because they have more opportunities. What happened at Enron that affected people the most was the scam. The most effective weapon against such crimes is to whistleblow and to inform the public. If the general population knew more about a scam such as Enron was running, the shareholders and employees within the company could have protected themselves much better by getting out of the game early, until their stocks were reduced to zero and they lost their jobs, respectively. On the whole, when most white-collar crimes go to the courts, the penalty is light compared to most other crimes. But out prison systems are getting more overcrowded each year. Taking those two factors into consideration, harsher sentences on white-collar crimes do not seem to be the answer. Possibly the answer to slowing down the growth of white-collar crimes is to make them harder to commit, and if the public became more informed of white-collar crime they could keep an eye out for anything suspicious, which would help deter potential thieves. In fact, it was the observation of a simple reporter, Bethany McLean, who first wrote an article suggesting that the stock of Enron might be overvalued, which caused a small firestorm within the company.9 McLean raised the question about how Enron made its profit, and, the simple fact was that the top executive of Enron, Jeffrey Skilling, couldn't answer. Skilling referred Ms. McLean to the company accountants, and was debriefed by Andy Fastow in a windowless board room of the accounting practices of the company. McLean found it interesting that the way that Enron operated was sort of a black box. Upon doing some research, McLean eventually found out that Enron's stock was overvalued, and that was the cause of people losing their jobs. She later wrote the book based on her findings called The Smartest Guys in the Room.10 Meanwhile, Jeffrey Skilling, Kenneth Lay, and other top executives cashed out their Enron stock to the tune of hundreds of millions and tens of millions of dollars. Another issue that could have been improved was that crimes should have been reported by the people who were being affected by the crimes, because they would be the most likely to stop the abuse or report it. The employees should not have let themselves should not have been taken advantage of as they were. Nor should the shareholders, who should have demanded regular reports on the company's financial progress, showing the numbers in plain daylight which supported the fact that Enron's stock was still viable. Keeping an eye out for one's self, and watching out for others, are factors that will make (and would have made) a difference. People with whistleblower attitudes would have been less likely targets. Thus, transparency in their dealings would have brought Enron down even more quickly than they did. So, what brought about Enron's collapse' It was not just one area or one department; it was many different divisions together, and a lack of good leadership. Enron fell because of massive failures by its management, board and outside advisors as well as self-enrichment by some employees. This was exactly what was discovered to be true. It really began when Jeffrey Skilling took over as Chief Executive Officer (CEO) back in February of 2001. Mr. Skilling waived all ethic rules of business when he allowed Andrew Fastow to head up particular persons or groups that bought and sold assets with the company, all while still working for Enron. Fastow was the primary creator of Enron's deceptive finances. But, it really wasn't just his ability to manipulate that led to the fall. Kenneth Lay, chairman of the board, and Mr. Skilling were often called inattentive. These top two executives, along with other board members, neglected to monitor Fastow's activities. All the while he earned a reported 30 million, often bumping up his sales so his commission would be larger. Fastow wasn't the only one misrepresenting the figures; many sales personnel reportedly earned a 3% bonus on all transactions. They cleared the bonus when the sale was commissioned, not when the profits began to show. Naturally, this was a temptation by many to "bump up the numbers." Falling again on the top executives and board members for being unobservant and not stressing a more critical voice. The accounting department played a large role in the collapse of the company as well. In many cases, my research showed that a handful of managers in this department covered up nearly $1 billion in losses within a 12-month period. Not only were they obligated for, but aided in the manipulation of financial records. They were often quoted as "exotic accounting personnel", often inflating profits and hiding losses. Enron's outside auditor, Arthur Anderson, did not execute his professional duty either. He reportedly earned $5.7 million specifically for reviewing and approving the setup of the partnerships that led to Enron's downfall. The companies outside law firm, Vinson & Elkins, were reported to be at fault too. They were aware of Fastow's business and often completed the paperwork side of the deals. This law firm did not speak up or object to his manipulating. It was mentioned in the video lecture that essentially there are five functional areas of business. The accounting, the finance, the information technology, management, and marketing. It was clear that all areas were a direct result in the collapse of Enron-but bad leadership signaled the beginning of the end for Enron. The accounting department manipulated financial records, while hiding losses and inflating profits. This information was passed on to the finance department, where they made the decision to move forward with the invented statements. The information technology department should have raised some red flags. This is the area where the hardware and software manage all the data, data that certainly could be caught when being altered. But the management team did nothing to stop this. They pressed forward, as long as it was making a profit for them. The management team encouraged the marketing department to close deals at an excessive rate. The commission rates of three percent that were issued when the sale was complete, not once it made a profit. In an era that encourages pushing people to the limits--even though several departments played key roles in the collapse of Enron--ultimately, it was a massive failure on the top executives, the upper management. The management department is responsible for making sure people are doing what they are supposed to be doing. They are considered to inspect the accounting department, the finance department, the IT department, and the marketing department. But, when Enron had several corrupt players within the management level position, then the company itself will became corrupted. The good sides and the bad sides of Enron have been discussed. Although Enron was an innovative company, some of their innovations turned out to be illegal, including mark-to-marketing accounting. In analyzing a company, an innovative company must: turn a profit; sustain its innovation; and have good leadership. In Enron's case, it failed the first test. Although it did sustain its innovation for awhile, ultimately many of Enron's practices failed to save the company. Finally, the leadership of Enron was corrupt, and so it led to company-wide failure due to lack of oversight, mainly on the part of the executives. However, it is all of the people that went through this process-shareholders, employees, and executives-and no one blew the whistle until it was too late, and people had lost their jobs, their stock, and in many cases, their pensions. The downfall of Enron should be a lesson to those planning to go awry : one must never fake profits, lose its innovation by dealing falsely, or lead people astray from the top down. REFERENCES Farrel, Greg. The Andersen Trial. Money Online. April 7, 2002. Gesalman, Anne Belli. Shredding The Case' Newsweek Online. May 27, 2002. Gibney, Alex. Enron: The Smartest Guys in the Room. USA: DVD Video, 2006. McLean, Bethany. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. USA: Portfolio Trade, 2004. Murphy, Kate. Down Home at the Andersen Trial. Business Week Online. May 9, 2002. Muller, Amy et al. Metrics for Innovation: Guidelines for Developing a Customized Suite of Innovation Metrics. www.strategos.com/articles/InnovationMetrics/InnovationMetrics.pdf. Retrieved 19 February 2009. McNamee, Mike, et al. Out of Control at Andersen. Business Week Online. April 8, 2002. Salkever, Alex. Hot on the E-Trail of Evidence at Enron. Business Week Online. January 29, 2002. Thomas, Cathy B., et al. Will Enron's Auditor Sing' Time South Pacific. May 20, 2002. Read More