Internal Control of Enron - Essay Example

[Supervisor’s Sociology When populace hear the word Enron most assume of corruption on an immense scale—a corporation where a handful of highly paid executives were able to pocket millions of dollars while carelessly eroding the life reserves of thousands of unwitting employees. But earlier, the same people would have heralded Enron as a paragon of corporate responsibility and ethics—successful, driven, focused, philanthropic and environmentally responsible. Enron emerged to symbolize the best a twenty-first-century company had to offer. How did Enron shift from that golden status to being equated with disputed accounting techniques and off balance-sheet financing transactions, misleading statements, unscrupulous executives, dishonest partnerships, and ill-gotten personal gain? The roots of Enrons fall can be found in its failed internal control system and bureaucratic culture. Henry Fayol and Taylor’s approaches of internal control help describing how executives at Enron created an organizational bureaucratic culture that put the bottom line ahead of ethical behavior. (Prentice, pp 3-4) After a brief background on Enron and its rise and fall, like the analysis of the Salomon Brothers fall, the five most important mechanisms available to leaders to create and reinforce aspects are used to analyze systematically the bureaucratic culture and internal control system that led to the companys fall after shocking disclosures about the companys finances. Firms differed not only in the general character of their control systems that changes as the length of the hierarchy, the labor breakdown, and the cost structure. The command hierarchy could be anything from two to twelve distinct levels of control system between the board and the operators. The varying lengths of the command hierarchy made it impossible to make direct comparisons between firms of the size of the span of control at the intermediate levels of management. No single misstep brought Enron to the brink. A series of missteps and just plain bureaucratic control system brought Enrons more nefarious dealings to light, precipitating its ultimate collapse. (Julian, pp 1-2) The dirtiest of Enrons deals involved SPEs of its own construction that sported names straight from Star Wars such as Chewco. While Enrons traders may still have inhabited the fantasy worlds of their youth, their trades had a harsh reality to them that touched the heart and soul of American life. Who got electricity during Californias energy crisis, which farms would have water to irrigate their crops, and other decisions that were critical to the smooth operation of the largest economy in the world were being made in Enrons trading rooms. Aided by their accountants at Arthur Andersen, some of whom then moved on to cushy jobs at Enron, the “Star Wars” SPEs were not the innocent financing vehicles used by Hollywood and the rest of the corporate world, but helped cook Enrons books and funnel vast sums of money to its key financial officers. Darth Vader would certainly have been proud of Enron. Enrons bankruptcy was devastating to those who worked there. Due to bureaucratic internal control system, those at the top of the company were responsible for its collapse; they had sold enough of their stocks to bank away tens and in some cases hundreds of millions of dollars. The boundaries of Enrons bureaucratic internal control system spread well through the company itself. The salaries of Enrons workers had helped make the city of Houston prosperous and vibrant—restaurants, stores, and other merchants would suffer from the loss of their business. Henry Fayol’s description of bureaucratic control system is related to the tremendous power of relationships in the bureaucratic control system of Enron. Taylor long ago documented the existence of the “informal organizational control” of relationships that arises as a natural phenomenon in all organizational settings. The formalization of such a structure at Enron is another nod to the same phenomenon, suspending the scalar chain and legitimizing for work purposes the use of relationships that fall outside the formal vertical hierarchy. (Fayol, pp 19-23) The effectiveness of the cogent bureaucratic formation is appreciated, it is well established that bureaucratic control systems have adverse features that proved in the case of Enron. At Enron, persons become homogeneous, programmed, ineffective victims of a new kind of despotism. Employees under bureaucratic control system at Enron who are subjected to conform firmly to the rules have problem when situations occur which are not covered by the rules, which leads to rigidity and diffidence. Nevertheless, both share the ides that hierarchical control of the individual-organization relation is certainly feasible and useful, and, in that connection, that post-bureaucracy is distinguished from bureaucracy by its involvement of the whole of the individual in organizational practices. This paper finds both bearings tricky. Through an explanation of the fundamental doctrines of bureaucracy I will show that modern demands for flexible organizations give us basis to conceptualize post-bureaucracy not as marking a break with the bureaucratic legacy, but rather as growing basic bureaucratic principles. According to Taylor (1911) scientific management engendered the notorious time and motion studies in which every action needed to carry out a task is carefully scrutinized and broken down into its component parts. All supplementary motions are eliminated. Those remaining are timed using a stopwatch, and the minimum time needed to perform the task is cautiously documented. These time and motion studies formed the foundation of a production process based on piecework and the assembly line. Workers are paid, at least partly, on the basis of how many pieces are produced in a certain period of time. The article of a production process organized this way is to put together the most useful remuneration system with the well-organized division of labor to extract the maximum output physically possible from each worker. Scientific management enticed many supporters during the first stages, and like other theories, it has been flayed for flawed data and on the grounds of callousness. It continues to exercise its influence today in various forms. Its benefits to employers and administrators are evident, although some workers can be persuaded that this type of incentive system is worth the costs it exacts in terms of repetitiveness and tedium on their part. Unlike pre-modern organizations, Enron drew in employees in non-inclusive terms. It did not have individuals in the empirical entirety generally associated with their personality and social position. To put it differently, bureaucratic organizations were not composed up of aggregates of individuals, as were pre-modern organizations (Fayol, 1949), but of functions and the models brought about by the interdependence of roles. This fundamental principle of bureaucracy – non-inclusiveness – had sweeping repercussions for the spatial and chronological structuring of society. In medieval societies work, home and social position were mainly undifferentiated and closely related to hereditary social status. In the up-and-coming contemporary society bureaucracy played a basic role in separating work from home and from public life, thereby structuring society in separate spheres. This was necessary for social parity. With work separated from individuals with especial innate social positions, work performance could be standardized (as role requirements), which then made it possible to explain labor contracts that gave people lawfully enforceable rights and duties. Apart from its ethical implications bureaucracy within Enron engendered main “functional” implications. By separating itself from the multiple entireties of peoples lives, bureaucracy opened up greater opportunities than pre-modern organizations to rearrange. Therefore, bureaucracy both created a demand for individuals who were keen and capable for role taking and satisfied that demand by advancing the maturation of individuals adhering to these requirements. Organizations with bureaucratic control like Enron operated as “normalizing machines”, not only because they recognized professional norms disengaged from private and public life, but also, and more essentially, in that they made it “natural” for individuals to play and to change among various roles. in a few words, the Enron due to its bureaucratic culture “made up” a new type of individual with a motivation and capability of treating herself as a thing of obedience and control – a self-disciplining individual competent and eager to learn from and to become accustomed to unforeseen events; so the employees at key positions can make use of them for their illegal purposes. The Collapse The reputation of Enron was shattered as a result of bribery, using political pressure to gain the favor as it did in India Power Project and pressurized Bolivia to build the controversial gas pipeline in the world’s only dry forest. Moreover it also opted illegal practices for their contracts in Central and South America, Philippines and Africa. After the revelation of the fraud and illegal auditing practices by Andersen the company was at the verge of undergoing the worlds biggest bankruptcy. The Enrons plunge occurred when it was revealed that it’s much of the profits were results of the deals with the SPE’s (special purpose entities which were controlled by it) and the losses which Enron got were not reported in its Financial Statements. Enron’s shares that were speculated touch $120 from $90 stood to $0.30 by the end of 2001. (Hake, pp 3-6) Thousands of Enron Employees who have lost their life savings serving the biggest company has filed case against the administration and officials that includes 29 executives including chief accounting officer. Mr. Brexter the former Enron Executive was fund dead in his abandoned car in a suburb. (Fusaro, pp 54-55) The Enron Bankruptcy has lead the way for the strong check over the companies so they may not involve in such illegal practices in this regard congress has drafted Sarbanes – Oxley Act to make sure that such wrongdoings are not followed in future and transparency is maintained. Internal Control of Enron If Enron would have dealt with the proper implementation of effective internal control, accounting practices, maintaining of the record, deals with proper auditing standards, such standards that are not biased and proper financial disclosure, it would not be collapsed. After Enron’s collapse, it has made compulsory for the companies for the first time to have their attestation on the internal control assessment. This Sarbane’s Oxley Act emphasize on the implementation of IT based systems for keeping the record, as it’s more reliable. (Thomas, pp 23-29) The world is moving toward IT based solutions and corporations should anticipate this new technology; the use of ERP’s could be more effective for the track and record keeping which provides the complete record of the events, accounts, sales etc. Works Cited Fayol, H. (1937), "The administrative theory in the state", in Gulick, L., Urwick. L. (Eds), Papers on the Science of Administration, Institute of Public Administration, New York, NY, pp.99-114. Fayol, H. (1949), General and Industrial Management, Sir Isaac Pitman & Sons, London. Hake R. Eric; Financial Illusion: Accounting for Profits in an Enron World, Journal of Economic Issues, Vol. 39, 2005, pp 03-06. Julian D. Scott, Elton Scifres; An Interpretive Perspective on the Role of Strategic Control in Triggering Strategic Change, Journal of Business Strategies, Vol. 19, 2002, pp 1-2. Prentice Robert; Enron: A Brief Behavioral Autopsy, American Business Law Journal, Vol. 40, 2003, pp 3-4. Rose, N. (1999), Powers of Freedom, Re-framing Political Thought, Cambridge University Press, Cambridge. Taylor, F.W. (1911), Scientific Management, Harper, New York, NY. Thomas C. William; The Rise and Fall of Enron; When a Company Looks Too Good to Be True, It Usually Is, Journal of Accountancy, Vol. 193, 2002, pp 23-29. Fusaro C. Peter, Ross M. Miller; What Went Wrong at Enron: Everyones Guide to the Largest Bankruptcy in U.S. History, Wiley, 2002. Read More