Enron: the Rise and Fall of the Organization - Case Study Example

Introduction This essay looks at analyzing the case of Enron by analyzing the different reasons which led towards the rise and fall of the organization. The focus of the paper will be more towards accounting policies, audit procedures, breaches in different ethical requirements and accounting practices and other similar facets. The analysis will help to understand the overall scenario which led towards the fall of Enron and will help to analyze the manner in which different lessons can be learnt for the future so that such activities are avoided and the business is carried on ethical grounds. This will help to understand the importance of corporate governance and will provide a framework within which the organization needs to carry out its different functions. Reason why Enron was an admired company prior to 2000 Enron was one of the most admired company prior to 2000 because of innovativeness and the different strategies which the company was adopting to grow its all round business. The transformation power of innovation was very high in case of Enron which led towards having different projects and other aspects associated with the development of the business. Enron’s commitment towards innovation and ten towards domination in field it has pioneered itself led towards the growth of the organization from a traditional $200 million house to a power pack corporate house of over $40 billion. Enron took advantage of the different growth and opportunities which the market provided and used it to its advantage so that it could grow its business. This led towards multiplying the effect through which business was carried out and led towards multiplying the overall phenomenon through which people admired the company. Enron recognized the opportunity which was provided by the deregulation of natural gas and began to trade in it as a natural commodity. This opened new markets where trading of electric power, pulp and even broadband was possible. This created new opportunities and helped to multiply the pace at which the business was growing. The multiplied opportunities along with different factors led towards a growth rate which was very high (Maria, 2009). People investing in the organization were able to see their money multiply at a rapid pace. This led more and more people invest in the organization and the manner in which the shareholders and others were rewarded led towards being one of the most admired organizations prior to 2000. Reasons that led to the rise and fall of Enron The rise and fall of Enron is a complex story as an organization which was doing well and was one of the most admired company failed and had to file for bankruptcy. In the early days Enron did the right things for the right reasons which led towards an impeccable growth rate and helped them to garner substantial credibility. Enron took advantage of the different growth and opportunities which the market provided and used it to its advantage so that it could grow its business. Enron recognized the opportunity which was provided by the deregulation of natural gas and began to trade in it as a natural commodity. This opened new markets where trading of electric power, pulp and even broadband was possible. This created new opportunities and helped to multiply the pace at which the business was growing. The multiplied opportunities along with different factors led towards a growth rate which was very high. People investing in the organization were able to see their money multiply at a rapid pace. The overall decisions which were taken by Enron were ethical and were based on the grounds where they wanted to increase the shareholders wealth. The policies adopted were clear and highlighted the manner in which different factors which can contribute towards their growth rate were examined. This had an overall impact on the manner organizational decisions were taken and showed effectiveness in managing the different resources which were handled by the organization. The fall of Enron can be largely attributed to the greed which was present within the organization which made them loose a lot of money and this was a process which was continuing for a long period of time. The management took disastrous decisions which led towards losing money as the management was over confident and felt that they could manage anything easily. This led towards investment being made in risky fields where Enron has no experience and those decisions backfired. The management had developed a pattern of covering and disguising the different failures from the shareholders but ultimately it got reflected in the financial statement and the bottom line of the organization. The prime reason which led towards their failure was poor management, violating the different accounting rules and policies and greed which were present among the employees and executives. Enron to ensure that manipulated the books of accounts and showed profits even when they were incurring losses. This made the management being over paid in the form of compensation and salaries especially in situations where the business was incurring losses. Taking advantage of the accounting loopholes and manipulating the financials led towards its failure and everything was later highlighted and the business was in no state to control the proceedings and finally let towards its failure. Reason for Enron Internal & External Check and Balance to prevent its demise Enron was unable to control the disaster because the internal and external check and balance process was not developed and looked at instead using the opportunity to maximize the gains for themselves. Enron had outsourced both its internal and external audit function which had resulted in external parties controlling the different proceedings of the business. The auditors whose responsibility was to audit the financial statement and provide a true and correct picture of the financials statement also didn’t look to carry out their duties and responsibilities. The auditors knew that something was wrong in the financial statement which was provided by the organization but instead of finding out the fault continued to provide the required audit that the financials were true and correct. The role of everyone associated with the business was quite visible and it was clearly evident that the business process was not ethical and was developed based on false grounds. The auditors had the required knowledge and information that the financials which was presented by Enron was manipulated and inflated but the auditors didn’t look to take appropriate steps. This was the role of Arthur Anderson to ensure that the financials highlighted correct picture of the organization and the manner in which bookkeeping was maintained provided the same efficiency. Since, financial statements are used by investors and stakeholders so manipulating the books results in creating additional pressure and thereby have an impact on the overall long term performance. The situation unfolds that the auditors were careless and didn’t look to use appropriate policies which thereby made people associated with the fraud to gain from it (Smith & Brown, 2008). The investors were uncertain and didn’t know the actual ground realities and since the auditors supported the false and misleading statements it resulted in creating panic and also led towards investors losing their money. This was one of the factor which contributed towards the fall of Enron and led towards magnifying the overall situation in such a manner that it impacted the investors decisions to invest in the organization. Would Auditing have prevented Enron? A continuous process of auditing if not prevented would have actually brought the incident to the notice of the management and stakeholders. A continuous process of auditing would have helped to highlight the manner in which the organization was performing and would have brought forward the manner in which different organizational decisions were taken. This would have helped to develop a process of check through which incidents would have been highlighted long before and would have helped to provide an opportunity through which better control could have been exercised. This mechanism would have developed the process through which misuse of funds and management of business process would have improved. In addition to it if whistleblowers would have been used it would have helped to control the entire scene. The whistleblowers when noticing the incident could have brought the same to the notice of the management and then appropriate steps could have been taken which would have aimed towards improving the overall process and brining to light the actual incident as and when they occur. This in addition to continuous auditing would have helped to a large degree. An important point to note here is that the auditors would have to carry out their roles and responsibilities in the most ethical manner. The auditors should have looked towards ensuring that they were true to their duties and looked towards fulfilling their roles in the most ethical manner. In addition to it the auditor should have been someone external to the organization that would have acted in the interest of the shareholders and would have looked towards bringing the incident to the notice of the management (Robert, 2013). Continuous monitoring would have thereby helped to ensure better check and would have improved the entire process by ensuring better control and brining forward the different untoward incident which was taking place within the organization. The overall process would have provided better accountability and would have at least carved out a path through which responsibilities could have been fixed and control could have been exercised in the manner the different business process were carried out. Role of Board of Directors The board of directors of Enron didn’t act in a fair manner as they were looking towards using the situation for their own gains. The directors and other executives looked towards creating their own compensation package where they looked at gaining edge so that they had more money for their compensation. The culture which was developed within the organization was such that it made people greedy and instead of looking for the growth of wealth of the stakeholders the focus was entirely towards increasing their personal gains. This can be seen from the compensation package which was tilted and designed to favour the employees and despite the performance of the organization the employees were able to garner huge incentives and rewards (Dworkin and Brown, 2013). The executives and others were thereby well placed and were able to make huge gains from the entire process. The executives and the directors were looking to take advantage of the situation for their own gains and thereby looked towards having policies which manipulated figures. The management and the board of directors instead of looking at the wellbeing of the shareholders looked at having accounting policies which were faulty and wrong. The strategies which Enron directors adopted were one of double standard and looked at manipulating the books of accounts for their own gains (Brown, 2009). This thereby made it easy for the organization and others to adopt policies which were faulty and thereby increased the likelihood of carrying out activities which resulted in the manipulation of funds. The role of the directors and management instead should have focussed on having clear accounting policies which followed the different legal requirements. The policies should have been developed keeping in mind the manner in which shareholders will be impacted and the correct accounting rules should have been followed. In addition to it the accounting policies should have brought forward the actual financial status of the organization and should have revealed the actual scenario. This would have ensured that the shareholders and other stakeholders would have been clear regarding the performance of the organization and would have taken steps accordingly. Having the use of correct accounting policies would have reduced the opportunity of misappropriating the funds and would have acted as one of the pillars through which correct financial information would have been provided. This would have acted as a method to check the misuse of funds and would have increased the overall relevance of the management and the role of the directors. Breaches in accounting and ethical principles Enron failure was due to the manner in which the organization breached the different accounting and ethical principles resulted in misusing the funds and creating an opportunity where misappropriation of funds became possible. This were as Firstly, the financials statements were altered as despite having losses the business continued to highlight profits. This was done with the intention that more and more funds could be raised from the public in the form of debt and the overall situation would improve which would thereby make the financials appear correct over a period of time Secondly, the executives and the directors determined and developed the compensation that they would take and despite having losses the executives and others were paid high. This was a clear lack of ethical standards as the business was continuing and using the opportunities in a manner which would help them to gain advantage Thirdly, the accounting policies were developed which allowed them to raise large debt from the market and despite the situation being grim the business was able to marginalize large funds and use it in the manner they though it to be perfect. This resulted in misappropriation of funds and using the finances in direction which were not determined by the business. Fourthly, the accounting system which was used was inappropriate as changes were made in the financials to highlight profits. The auditors also provided the audit report that it was correct but it was actually incorrect showing a mix of both lack of accounting policies and ethical conduct within the organization. In addition to it the management was involved into activities which were illegal as they entered into unregulated private partnership so that they could have excess debts. These debts were used by the management for their compensation and other purposes thereby using the funds for purposes other than specified (Brown & Latimer, 2008). The manner in which the business was been developed and directed and controlled thereby created the room and opportunity through which large funds were misused and opportunities which should have been used in the correct manner were not done. This resulted in gaps and using the different opportunities in such a manner that it led towards their own gains and made the shareholders to suffer. Lessons from Enron Case The Enron scandal is one which has provided different lessons for everyone and learning from those will ensure that the business will be carried out on ethical grounds and the different stakeholders will be considered. The different learning’s are as Firstly, it is important that organizations remain ethical and look at carrying out the different functions on ethical ground. The organization need to bring forward the actual scenario in front of the stakeholders and have to ensure that the business is carried out on ethical grounds. Any business undoing which is incorrect needs ti be highlighted and the business needs to be carried on ethical grounds so that the business prospect of being true and correct is followed. Secondly, the business needs to abide with the different accounting policies and principles which have been laid by law. It is important that the financials are prepared on correct grounds and it highlights the actual financial position. Steps should be taken to ensure that no activities which are illegal is followed as incorrect accounting financials would have impact on the stakeholders (Brown, 2013) Thirdly, organizations should look at having a process of continued monitoring. This will help to bring forward any untoward incident and will help to take appropriate steps at the correct time. The process will also help to improve effectiveness and reduce the chance of misusing the funds Fourthly, corporate governance should be given importance in the business arena as it will help to facilitate a process through which better monitoring will become possible. This will help to develop a code of conduct which is abiding on all and will prevent incidents which could lead towards misuse of funds. Effect of Unethical Business Practices The unethical business practice which has been adopted has led towards the society to suffer from many directions. The unethical practices have resulted in people looking for their own gains and don’t consider the society or the stakeholders important. The entire strategy which the business or a person develops is self centred and looks towards maximizing the gains for the individual person (Brown, Latimer, McMillan & Wheeler 2008). The unethical practices have grown to such an extent that people are willing to take any steps so that they gain and don’t bother the long term impact it will have. The decision to remain unethical had impacted the society deeply as it has created a sense where people look to be unethical in all the activities they carry out. This has thereby led towards a society where the different elements are overlooked and the society looks at adopting policies and strategies which are fraudulent (Worth, 2013). The situation as a result has become grim as having faith of people has become difficult. This has create a false impression on the mind of every person and has made them act in a manner where the overall objective is to make fool of other people for their own gain. The process has led towards development of a culture where there is no faith among people and people are induced towards using unethical ways. This has multiplied the overall level of risk and has resulted in widening the gap between the members of the society which would further have a long term impact on the overall growth potential of the society as a whole. Conclusion This essay analyzes the case of Enron by analyzing the different reasons which led towards the rise and fall of the organization. The focus of the paper was more towards accounting policies, audit procedures, breaches in different ethical requirements and accounting practices and other similar facts. The analysis helped to understand the overall scenario which led towards the fall of Enron and helped to analyze the manner in which different lessons can be learnt for the future so that such activities are avoided and the business is carried on ethical grounds. This will help to understand the importance of corporate governance and will provide a framework within which the organization needs to carry out its different functions. References Brown, A. J. 2013. ‘Towards “Ideal” Whistle blowing Legislation? Some Lessons from Recent Australian Experience’, E-Journal of International and Comparative Labour Studies 2(3): 153–182 Brown, A.J., Latimer, P., McMillan, J. and C. Wheeler 2008. ‘Best-Practice Whistleblowing Legislation for the Public Sector: The Key Principles’ in A.J. Brown (ed.), Whistleblowing in the Australian Public Sector: Enhancing the Theory and Practice of Internal Witness Management in Public Sector Organizations. Canberra: ANU E-Press, 261–288 Brown, A. J. & Latimer, P. 2008. ‘Symbols or Substance? Priorities for the Reform of Australian Public Interest Disclosure Legislation’ Griffith Law Review 17(1): 223-251 Brown, A.J. 2009. ‘Returning the Sunshine to the Sunshine State: Priorities for Whistleblowing Law Reform in Queensland’ Griffith Law Review, 18(3): 666–689 Dworkin, T. M. and Brown, A. J. 2013. ‘The Money or the Media? Lessons from Contrasting Developments in US and Australian Whistleblowing Laws’, Seattle Journal of Social Justice 11(2): 653–713 Maria, W. 2009. Deadly Disclosures: Whistle blowing and the Ethical Meltdown of Australia, Adelaide: Wakefield Press. Robert G. Vaughn 2013. The Successes and Failures of Whistleblower Laws, Edward Elgar Smith, R. & Brown, A.J. 2008. 'The Good, The Bad and The Ugly: Whistleblowing Outcomes' in Brown, A. J. (ed), Whistleblowing in the Australian Public Sector Worth, M. 2013. ‘Whistle blowing in Europe: Legal Protections for Whistleblower in the EU’, Transparency International, Berlin Read More