Enrons Culture and How It Contributed to Its Bankruptcy - Case Study Example

Enron Scandal Name Course Name and Code Institution Name Date Table of Contents Table of Contents 2 Executive Summary 3 Introduction 4 Enron’s Culture and how it Contributed to its Bankruptcy 5 Lack of Critical Questioning of Accounting Practices 5 Relevance of Whistle-blower’s Actions 6 Contribution of other Organizations to Demise of Enron 8 Lack of Critical Questioning of Accounting Practices 8 Reasons to why they Adopted the Unquestioning Attitude 9 Conclusion 10 References 11 Executive Summary Corporate governance is a framework of rules, relationships, systems together with processes through which authority is exercised and controlled in an organization. Good and effective corporate governance structures demand that corporate organizations create value for the company through innovation, entrepreneurialism, exploration and development as well as provide control and accountability systems with regard to the risk involved. Poor corporate governance within any organization on the other hand is a recipe for unethical corporate practices which eventually result into the demise of the company. This paper using the case of Enron, discusses poor corporate governance that led to the complete failure of the company. Introduction According to OECD (2004) corporate governance is a set of relationships between the firm’s management, its board, shareholders together with other stakeholders. In essence, corporate governance provides a structure within which company’s objectives are set together with strategies of achieving the set objectives as well as monitoring of the overall performance of the company. Similarly, corporate governance is also regarded as the framework of rules, relationships, systems together with processes through which authority is exercised and controlled in an organization. It is a mechanism within the company whereby the company and those in control are held responsible (Culpepper 2010). Excellent and effective corporate governance structures compel corporate organizations to create value for the company through innovation, entrepreneurialism, exploration and development as well as provide control and accountability systems with regard to the risk involved. Contrastingly, having poor corporate governance structures within the organization leads the company and those in control tom indulge in unethical corporate activities that always culminate into its demise. This paper discusses Enron’s corporate governance which resulted into the company being declared bankrupt and its final collapse. Enron’s culture and how it contributed to its bankruptcy will discussed; similarly, how other organizations including the company’s auditors, Attorneys, and bankers participated in the whole saga will be discussed. Enron’s Culture and how it Contributed to its Bankruptcy Lack of Critical Questioning of Accounting Practices In its early years, Enron was positioned as a sound and prosperous company; the company’s leadership then was focused on key objectives and transformed the company to become one of Wall Street’s favourites. In fact, the company was once seventh largest company in the Fortune 500. However, turning into the 21st century, it was established that the company’s moral objectives had been abandoned by the top leadership and they were now engaged in deceitful corporate practices that allowed them to siphon Enron’s monetary resources for their personal gain. For instance, the Enron’s corporate culture encouraged the executives as well as employees to override rules in pursuit of profit (Sterling 2002). This section expansively discusses how lack of critical questioning of accounting practices lead to the company’s bankruptcy. The culture of not questioning critical accounting practices was massively practiced by the company’s top leadership (Markham 2006). The Special Purpose Entities (SPEs) was a program cleverly designed to hide company losses while positioning the company as one of the most profitable companies. SPEs in essence were singularly designed assets and debts off Enron’s balance sheet as well as increase cash flow and claiming that the funds were flowing through its books particularly when assets were sold (Fox 2004). This was an accounting conspiracy that posed Enron to be having a favourable financial condition. It never represented the company’s true financial picture. The SPEs were only name entities that were funded by the company’s own stock while maintaining control over them. Accordingly, when these SPEs made losses, the company used its own stock to cover the debts. Various executives were found liable for not critically questioning the company’s financial accounting. The federal prosecution of Enron’s top executives found out that the company was in accounting practices that were not in line with ethical corporate practices (Fusaro & Miller 2002). Fastow; the chief financial officer pleaded for conspiring to conceal fraudulent accounting practices at the company including inflating profits, hiding company debts in order to enrich himself. The company managing director also admitted and pleaded guilty to money laundering and wire fraud. Accordingly, Fastows wife; Lea, also admitted hiding gains gotten illegally, she also pleaded guilty to a tax felony. The chief executive officer; Jeffrey Skilling claimed that he did not understand why the company went bankrupt. He even said that he was not aware of any inappropriate financial arrangements within the company despite of him being the most influential person in the company (Zoan 2014). Regardless of this, Skilling was found guilty of seriously avoiding knowing about wrong doing at Enron (Russell 2013). He did not take critical look at the company’s financial accounting thus allowing it to become bankrupt. Ken Lay after ascending to the CEO position, he decided to cover up the shoddy and fraudulent deals that were happening at the company (Salter 2008). For instance after Watkins informed of the accounting scandals and warning of party investigation, he went a head to have Vinson & Elkins the company’s law firm to investigate the issues (Franzese 2009). Eventually, Watkins’s computer was confiscated and was also pushed out of plush executive office suite and denied executive privileges. Given the above malpractices, it is evident that lack of the top management at Enron to critically analyse the company’s financial accounting records hence giving room for corrupt practices to escalate. Relevance of Whistle-blower’s Actions Whistleblowing is the internal reporting of the activities to management or external reporting to outside agencies. Whistleblowers in a company are always ostracised as well as punished for their actions (Russell & Cohn 2013). Sherron Watkins Enron’s vice president was tasked with finding assets to sell off. Given the events that were taking place at the company, Watkins found out unclear, off-the-books arrangements that were supported only by deflating company’s stock. With regard to this, she started planning on how to inform the CEO Jeffrey Skilling; however, Skilling quit his job to attend to family matter (Culpepper 2010). When Ken Lay stepped up as the new CEO, Watkins prepared an anonymous memo and placed it into his inbox. Contrastingly, Lay never mentioned anything regarding the memo during the company-wide meeting. This prompted Watkins to arrange a personal meeting where she handed Lay a letter describing her concerns about the Enron’s accounting practices. The following are the reasons as to why Watkins actions were necessary: i. The above actions as taken by Watkins were relevant and appropriate; for instance through her reporting; the executives’ fraudulent corporate activities were exposed (Fusaro & Miller 2002). It was ethical for Watkins to bring to light and before the eyes of the corporate world how poor corporate culture can detrimentally impact the company and eventually lead to its failure (Milhaupt & Pistor 2008). ii. Exposure of the illegal corporate activities helps to hold culprits liable for their actions. For instance, after reporting the accounting malpractices it leads to congressional investigations where the top Enron executives were found guilty and imprisoned for their actions. iii. It also lead to the company’s investors including creditors and shareholders to discover what was really happening at the company. iv. In the same line of discussion, through her reporting it was discovered that Enron had the biggest business scandal of its time in the Corporate history thus leading to the formation of the Sarbanes-Oxley legislation. This legislation is strict and thus has placed companies under stiff scrutiny to ensure that they work within ethically acceptable corporate culture. v. The whistleblowing also exposed how company top executives can cleverly design corporate partnerships colluding with company’s subsidiary organizations with a singular objective of fleecing company’s monetary resources for their personal gains. Contribution of other Organizations to Demise of Enron Lack of Critical Questioning of Accounting Practices As identified from the above section, Enron’s top leadership worked fraudulently together with the company’s attorneys, bankers, and auditors to help them fulfil their personal gains rather than accomplishing company objectives. For instance, SPEs were a grand scheme to conceal company losses while positioning as a profitable company in order to constantly increase the prices of company shares (Raja 2008). The following is a description of how various organizations were complacent in the Enron’s scandal with regard to the lack of critical questioning of the company’s accounting practices: Vinson & Elkins law firm was Enron’s official legal adviser accounting for approximately 7% of its revenues. This company; Vinson & Elkins even after Watkins found that Enron’s top executives were involved in fraudulent corporate activities, the company covered it up and dismissed her claims which were valid (Raja 2008). Accordingly, Vinson & Elkins helped in structuring the SPEs partnerships for Enron. Similarly, some of the deals were legally confirmed by the company despite of their illegal nature. Vinson & Elkins did not critically evaluate the company’s financial accounting practices and advice Enron accordingly. Merrill Lynch a brokerage and investment firm helped Enron to incorrectly record $12 million in the sell of Nigerian barges. For instance the company bought the barges for $28 million and $21 million were financed by Enron (Zoan 2014). Regardless of Merrill Lynch having knowledge that Enron’s internal record showed that the deal was singularly meant for aiding and abetting Enron’s fraudulent manipulation of its income statement, the company went a head and bought the barges. Arthur Andersen LLP was Enron’s official auditor and thus was tasked with ensuring accuracy of Enron’s financial accounting statements together with internal book keeping. Reports developed by Andersen’s were largely used to judge Enron’s financial soundness together with prospective future potential (Culpepper 2010). In this regard, certifications of accuracy of Enron’s records together with proper application of accounting procedures was required to be independent and without any conflict of interest (Collins 2006). However, this was not the case; the company was found guilty of fraud due to obstruction of justice through destruction of relevant auditing documents in SEC investigation of Enron. Andersen was unduly paid by Enron in order to certify its financial records without critically looking and evaluating them. Reasons to why they Adopted the Unquestioning Attitude Enron’s corporate culture was aggressive whereby higher performers were rewarded while under-performers were gotten rid off (Culpepper 2010). This culture also encouraged higher performance while loyalty and ethics were not taken into consideration. Similarly, Ken Lay’s ignorance and Skilling’s arrogance encouraged employs to be extremely cunning and falsifying information in order to inflate earnings (Bauer 2009). The following are reasons as to why Enron employees adopted the unquestioning attitude: a. The company’s culture encouraged employees not to work according to the company’s set rules but inclined to work in pursuit of profits. b. The compensation plans for Enron’s executives were not directed towards generating profits for shareholders but were meant their own personal gains. c. The creation of employee evaluation system by Skilling to rate employees every six months whereby the bottom 20% were forcefully laid off encouraged unethical competition among employees. For instance, they not only competed with their counterparts outside the company but also that next desk. d. The reporting system within the company only encouraged good news reporting; reporting bad news was not encouraged. Reporters of bad news risked being punished or even being laid off (Griff 2014). e. The company top management encouraged unethical practices; integrity was put aside by the top managers. This allowed employees to develop a no concerned attitude across the company. f. Employees were made to believe that almost anything could be transformed into a monetary product and traded for profit. Given the above reasons, employees were compelled to adopt unquestionable attitude to the Enron’s financial accounting practices. Conclusion Corporate governance is a framework of rules, relationships, and systems together with processes through which authority is exercised and controlled in an organization. Corporate governance is tasked with ensuring that the company operates within ethically acceptable corporate culture. It is a mechanism within the company whereby the company and those in control are held responsible. Good and effective corporate governance structures demand that corporate organizations create value for the company through innovation, entrepreneurialism, exploration and development as well as provide control and accountability systems with regard to the risk involved. However, poor corporate governance within any organization is a recipe for unethical corporate practices which eventually result into the demise of the company. The above discussion using Enron’s has excellently provided a clear picture how poor corporate can culminate into complete destruction of the company’s reputation together with its final failure. 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