Hiring and Firing System at Enron Company - Case Study Example

Enron Case Study Name Class Unit 1) Synopsis Enron scandal was revealed in 2001. The scandal led to the bankruptcy of Enron and dissolution of Arthur Anderson which was among the largest five auditing and accounting firms globally. At the time, the scandal was the largest recorded bankruptcy in the history of America. The scandal was the largest audit failure at the time. Enron was among the largest companies globally and also one which fell so fast. At the time of the scandal, the complex industrial structure of the company was known to very few outsiders. The company was founded in 1985 and was considered to be one of the most innovative companies in the late 1990s. By the end of 2001, it was revealed that the company financial position had been sustained through institutionalized and systematic fraud which had been carried out creatively. Shareholders lost over $11 billion (Tonge, Greer & Lawton, 2003). The issues identified in the case study are; Lack of transparency, Conflict of interest Engaging with unethical accounting firm Lack of principled executives and senior managers Unethical culture It can also be assumed that Enron’s hiring and firing system was aimed at enhancing fraud. The analysis of the case study will use leadership values and ethics theory while also looking at the company organisation culture. This is through looking at how what happened at can Enron be explained through leadership theories. The paper will also look at ways in which leadership influence culture and lastly, what can reduce the type of unethical behaviour demonstrated in this case. 2) Findings Lack of transparency Lack of transparency about Enron health was a major problem. The company leadership failed to make the company status transparent and instead protected their reputation and compensation. As leaders, they had a duty of acting in good faith and providing full disclosure. For example, when Enron CEO told the employees and stakeholders that the stock prices would rise, he never disclosed that he was selling his stock (Sims & Brinkmann, 2003). The stakeholders only learned that he had sold his shares after the bankruptcy was declared. Transparency in leadership leads to trust. Leaders are required to exercise morality and openness in all their actions (Price, 2008). Lack of transparency was a major failure for the Enron leadership. Conflict of interest The collapse of Enron was also contributed by the conflict of interest. Lack of proper oversight of the company management board contributed to failure. The board of directors is expected to work in the interest of the shareholders. They are expected to guard the firm ethical code. This did not happen in this case where the board failed the shareholders. The company manipulation of the financial accounts went for long unnoticed due to fact that there was conflict of interest. Through use of their lawyers and accountants, the company top leadership was able to create subsidiaries. The subsidiaries looked as if they were in partnership with Enron which enabled them to sell assets while posting false earnings (Tonge, Greer & Lawton, 2003). Through conflict of interest, it was possible for the top executives to benefit from ventures which were questionable. The ventures in most cases were used to drain the company funds. Good leaders are expected to be ethical and effective. The leaders were supposed to act with moral intention while employing their competence (Price, 2008). Engaging with unethical accounting firm The bankruptcy of the company led to more focus being put on Arthur Anderson. The accounting firm had allowed massive accounting errors. The company made it possible for Enron to continue engaging in financial manipulation. The fact that Anderson employees had been able to destroy documents which corresponded to their engagement with Enron was very damaging (Tonge, Greer & Lawton, 2003). This shows a leadership that was ready to help in supporting unethical practices. The leadership of Arthur Anderson was unethical in their actions. The moral standards of the leadership in the accounting firm were low. The firm had to undergo dissolution since it lost its credibility. Leaders are expected to make ethics their priority in their decision making. Ethical leaders are supposed to think about the consequences of their actions (Knights & O’Leary, 2006). In the case, Arthur Anderson leadership did not think about the consequences of their action through helping Enron in fraud. The leadership was unable to influence ethical values to their followers through their behaviours (Yukl, 2013). Lack of principled executives and senior managers The senior management is expected to be the key determinant of firm ethical culture. The management and senior executives failed to subscribe to the set values. This made it hard for the subjects to be ethical. Trust and ethics are intertwined in leadership (Knights & O’Leary, 2006). When the leadership acts unethically, trust is eroded (Rapoport & Dharan, 2004). This may lead to lack of ethics among the followers as seen in this case. Unethical culture The organisation culture at Enron was based on individualism, innovation and relentless pursuit of profits. This culture eroded the ethical behaviour that was practiced by the employees. The organisation encouraged risk taking where incentives and bonus was awarded to employees based on performance. The organisation culture encouraged employees to manipulate profits. Leaders create organisation culture and it reflects their values and beliefs (Ciulla, 2014). The organisation ensured that the performance evaluation system was rigorous and threatening to employees. The low ranking employees were fired. The organisation compensation system was designed to enrich the senior executives instead of generating profits for the stakeholders. Poor organisation culture is a major contributor to organisation failure and is based on the leadership approach used. The importance of ethical culture cannot be underestimated (Petrick & Quinn, 2001). 3) Discussion As evidenced, the major problems at Enron that led to bankruptcy and collapse of the organisation. The organisation lacked transparency required towards all stakeholders. There was also conflict of interest among the company management and senior executives who used illegal means to drain the firm funds (Tonge, Greer & Lawton, 2003). Arthur Anderson accounting also worked in aiding fraud at Enron. The accounting and auditing firm helped in financial manipulation for Enron and also their employees destroyed correspondence documents with the firm. Enron management and senior executives lacked principles required for leaders (Petrick & Quinn, 2001). The organisation culture at Enron encouraged fraud where employees were rewarded for manipulation. The culture was based on risk taking with intent if making maximum profit. This culture aim was to maximize compensation for senior executives without making profits for the stakeholders. This points out that Enron lacked ethics in their leadership and culture (Yukl, 2013). The actions that led to the downfall for the firm are all based on poor ethics among the executives and management (Rapoport & Dharan, 2004). Unethical behaviour that is demonstrated in this case can be solved in various ways. As evidenced, the impacts of fraud were devastating. Shareholders lost money and the organisation became bankrupt (Rapoport & Dharan, 2004). The organisation should have reported the fraud. This is through use of whistle-blowers before it had escalated. This is achieved especially if there is a fraud reporting policy. Reluctance to report fraud is unethical as it leads to bad repercussions to firm and other stakeholders. The main advantage is the fact that this method would have saved shareholders money. It would also have protected the organisation from bankruptcy. The main disadvantage is the fact that those who were mostly involved in fraud are executives and board management. This would have drawn attention to Enron illegal activities. Whistle-blowers in organisations also face tough times since they can be fired. The other solution for the unethical practices by Enron would have prosecution for the firm and its executives. The executives had taken the organisation revenue for their personal use instead of taking care of the shareholders. The board of directors did not act to the shareholders’ interests as expected (Rapoport & Dharan, 2004). Legal action against the firm has the capability to prosecute those who are guilty of fraud and hence make it possible for truth to be known. It is clear that the company management acted on self-interest knowingly without caring for the shareholders. The main disadvantage of legal proceedings is the cost and time taken. Lastly, fraud response and management system can help a lot in addressing the problems experienced by Enron. This is due to fact that the system allows for timely and thorough investigation for fraud once it occurs. The system should be able to detect weakness in management that enhance fraud and prevent the occurrence of the incident. This would help a lot in showing organisation good faith in their efforts to investigate and eliminate any misconduct. This is a system that requires a lot of capital investment for materials and human resource (Treasury, 2003). 4) Conclusion The case study on Enron scandal shows how unethical leadership and corporate culture can lead to bad outcomes. The organisation engages in fraud which led to bankruptcy and loss of shareholders revenue. The analysis shows the company as a great audit failure. The main problems that have been identified in the case are; lack of transparency, conflict of interest, unethical engagement with Arthur Anderson, lack of principled leadership and poor organisation culture. The problems that are identified in the case study can be solved through fraud reporting policy, prosecution and lastly fraud response and management system. These solutions would have helped a lot in addressing unethical practices demonstrated in the case. 5) Recommendations From the solutions outlined, the best to take to avoid unethical practices such as those evidenced at Enron is having a sound fraud reporting policy. This is through encouraging whistleblowing and ensuring there is a detailed fraud policy. A fraud policy should be able to facilitate the development of tools that can help in detecting and preventing fraud (Treasury, 2003). Through the policy, the organisation is able to make the management more responsible for irregularities and misappropriations. The organisation through the fraud policy will be able to encourage reporting of any detection or suspicion of fraud. This move is a great step towards ethical organisations. The fraud policy makes the organisation to have a no tolerance to fraud attitude. The policy makes it possible to enhance transparency, eliminate conflict of interests and create a culture based on ethics. The fraud policy will also ensure that everyone in the organisation is principled and responsible (Treasury, 2003). 6) Implementation The fraud policy is implemented by the management of an organisation. This is through drafting the document and making it public for all employees. A fraud policy must have a background, scope, policy and listing all actions that constitute fraud. The document drafted should also indicate the person whom to report to. There are also the reporting procedures which should be listed in a clear manner. The organisation executives must approve the fraud policy to make it binding. The policy indicates the officers who will be involved in the process of investigation and actions to be taken of guilty. Implementation of a fraud policy should commence once approved by all in the organisation (Treasury, 2003). References Ciulla, J. B. (Ed.). (2014). Ethics, the heart of leadership. ABC-CLIO. Knights, D., & O’Leary, M. (2006). Leadership, ethics and responsibility to the other. Journal of Business Ethics, 67(2), 125-137. Petrick, J. A., & Quinn, J. F. (2001). The challenge of leadership accountability for integrity capacity as a strategic asset. Journal of Business Ethics, 34(3-4), 331-343. Price, T. L. (2008). Leadership ethics: An introduction. Cambridge University Press. Rapoport, N. B., & Dharan, B. G. (2004). Enron: Corporate Fiascos and their Implications. Foundation Press. Schein, E. H. (2010). Organizational culture and leadership (Vol. 2). John Wiley & Sons. Sims, R. R., & Brinkmann, J. (2003). Enron ethics (or: culture matters more than codes). Journal of Business ethics, 45(3), 243-256. Tonge, A, Greer, L & Lawton, A (2003). ‘The Enron story: you can fool some of the people some of the time….’, Business Ethics: A European Review, vol. 12, no. 1, pp4-22 Treasury, H. M. S. (2003). Managing the risk of fraud: A guide for managers. HM Treasury. Yukl, G (2013). Leadership in Organizations 8th. Ed. Pearson, Harlow, Essex. Read More