Enron Corporation was a prestigious firm that reigned in Houston, Texas. The firm was declared bankrupt after immersing itself in huge debts and fell from grace. The firm came to its demise due to complex partnerships they established and used to balance the balance sheet (Ferrell, Fraedrich, & Ferrell, 2008). The company managed to carry out fraudulent acts with the aid of different individuals both within the organization and outside the organization. This paper seeks to give a clear understanding of Enron’s corporate culture and significant players that led to the demise of this giant firm. The most significant accounting fraud at that time occurred with Enron and analysis of these acts guide other corporations in maintaining a code of ethics in their operations so that they also do not end up as this once giant corporation.
Role of Enron’s Corporate Culture in Company’s Bankruptcy
Ken Lay wanted to create a corporate culture that enabled employees to receive their full potential. Kay had proclaimed that he had desired ethical and moral culture where excellence, respect, and integrity were valued by all that was associated with the company. Vision and Values was the paper slogan that Enron stood on. On the ground, the corporate culture is described by many as being an arrogant one (Benke, 2018). Their slogan proclaimed the title of being the leading company in the world with the banner that displayed along the corridors of the company’s headquarters. Even the executive attitude portrayed this arrogance thinking that no competitor could outdo them. This aura of pride rooted in the employees and believed that they could handle any risk that came their way.
The corporate culture of Enron encouraged infringement of rules to achieve profits, and the compensation plan for this company was management wealth creation rather than shareholders wealth creation. Skilling was the mastermind for the system of employee rating culture that happened after six months the employees that fell on the bottom twenty fired. This system was duped rank and yank system (Ferrell, Fraedrich, & Ferrell, 2008). The environment that resulted from this system that Stilling propagated was fierce and very competitive. The rivalry was so fierce that it consumed the employees from desk to desk and even outside the company. The problems that existed in the trading operations ended up being covered up and management was not aware of them.
Integrity was not adhered to by management and by other Enron employees. With the aid of statistical modelling, Enron traded anything as financial products (Lemus, 2014). From this corporate culture the company relied on intellectual capital to trade. For instance, the special-purpose entities that Enron used to hide their loss problem. The company used these partnerships to conceal assets and debts so that cashflow would be manipulated to seem to be created from the sale of these assets. The corporate culture encouraged this fraudulent financial reporting as Enron wanted to maintain at the top. The corporate culture of Enron encouraged the punishment of employees who were rated as wea and rewarded those who brought that they deemed beneficial to them. Indeed, Enron’s corporate culture was flawed and thus attributed to its ruin.
Role of Enron’s Bankers, Auditors and Attorneys to Enron’s Demise?
Vinson & Elkin was Enron’s firm and Enron’s was the top client for this firm as Enron contributed to 7 percent of the revenue for Vinson’s & Elkin. The legal department members of Enron constituted of legal experts that cam from Vinson & Elkin and general counsel was associated with this firm. Vinson & Elkins had a civil and criminal lability to Enron’s even though they dismissed the fraudulent allegations that Sherron Watkin’s had put forward after carrying out an investigation of their own (Ferrell, Fraedrich, & Ferrell, 2008).
The law firm had a hand in the demise of Enron’s as it was the one that helped Enron in committing the falsification of the balance sheet. This they did by being the ones who structured some of the special purpose partnerships that Enron used to balance the balance sheet. And as earlier stated, Enron was able to give a false financial representation of the financial health of the organization with the Chief Executive Officer rewarding himself funds which led to Enron’s bankruptcy (Lemus, 2014). The law firm also wrote letters supporting the legality of the special purpose partnerships which Enron used in many of its fraudulent transactions. These transactions could not have been possible without the lawyer’s opinion letters. The law firm had duty of care to Enron which it failed to provide and so paid a huge sum of money to Enron for contributing to Enron’s collapse.
Merrill Lynch was the banking firm that aided Enron in falsifying records of a 12 million dollar earning in its financial statements and report having met its earnings goal for the financial year 1999 according to Ferrell (2008). The banking institute did this by aiding the sale of the Nigerian barges which claimed that Enron funded 21 Million on the deal which Merrill Lynch bought at 28 million dollars. Fastow had given his word that Enron would buy out the investment from Merrill Lynch in less than a year with a rate of return of fifteen percent (Ferrell, Fraedrich, & Ferrell, 2008). There was an allegation that Enron had threaten to exclude Merrill Lynch from stock offering that was worth seven hundred and fifty million dollars when research analyst from Merrill Lynch had initially reported a stock rating that was not favorable to Enron. From this threat, the bank replaced this research analyst and readjusted the stock rating favoring Enron firm in its fraudulent deals of stock manipulation. Merrill Lynch attributed to the fall of Enron as it assisted Enron and abetted Enron to carry out fraudulent act on its revenue declarations which made the income statement of Enron to give a false position of the position of the company and manipulated Enron’s stock value.
Arthur Andersen LLP was Enron’s auditor and was in authority for safeguarding that the financial reports and internal book keeping were accurate and followed the required standards. This is because investors and other interested parties used these reports to make decisions on the financial soundness of Enron both present and future state (Li, 2010). And so, Arthur Anderson LLP was expected to act in professional manner that the firm carried and so the need for the audit firm to give certifications that were accurate, be independent in their audit opinion and ensure Enron used proper accounting procedure. This was not the case. The audit firm was not independent in its audit work as Enron employed executive officials from Arthur Anderson and the huge consulting fees that Enron awarded the audit firm destroyed their independence.
Arthur Anderson obstructed justice when they destroyed audit documents that the court argued had been relevant for the case against Enron. The audit firm had duty of care to the public and all that used their financial statements to make investment decisions to guarantee that Enron gave a better explanation for the partnership deals that were so complex before certifying their financial statements. For all the reasons highlighted above, it is without a doubt that the auditors had a hand in the demise of Enron as the firm aided the fraudulent acts that Enron carried out.
Role of the Chief Financial Officer in Enron’s Financial Problems?
Andre Fastow, was charged with obstruction of justice on one account, fraud, money laundering by the United States Justice Department in 2002. He was tried based on fraudulent acts and theft and not an issue of exotic accounting practices. Andrew Fastow was the brains behind the 1 billion debt that Enron covered up that was said to have influenced the bankruptcy declaration on Enron.
According to Ferrell et. all (2008), Fastow had defrauded the company and the shareholders with the partnerships that were used to balance the balance sheet off the books which had made Enron seem to be performing very well than what the reality was. Fastow also contributed to Enron’s bankruptcy by rewarding himself 30 million dollars by using these fake partnerships to pay himself salary that would have been used by other sectors of the entities that needed the funds more and also disguised that money was coming to him family members that was actually company money.
It is without a doubt that Enron’s downfall was a result of different individuals who attributed in its demise with their actions and some for lack of it and the corporate culture provided the environment that allowed these fraudulent acts to happen unquestioned for the time it did.
References
Benke, G. (2018). Risk and Run: Enron and the culture of American Capitalism. Philadelphia, Pennsylvania: University of Pennsylvania Press.
Ferrell, O., Fraedrich, J., & Ferrell, L. (2008). Business Ethics : Etical Decision Manking and Cases. Boston: Houghton Mifflin Company.
Lemus, E. (2014). The Financial Collapse of the Enron Corporation and Its Impact in the. Global Journal of Managememnt and Business Research: Accounting and Auditing, 1-11.
Li, Y. (2010). The Case Analysis of the Scandal of Enron. International Journal of Business and Management, 1-5.