Enron ??“ Business Overview
In 1985, Enron was formed due to the merger of Houston Natural Gas and InterNorth under the direction of CEO Kenneth Lay. This merger made Enron one of the leading companies in the United States. After the merger, deregulation caused the company to not have exclusive rights to its pipelines. This coupled with an excessive debt was the beginning of a downward spiral for Enron. In order to survive, the company had to come up with a new and innovative business strategy to generate profits and cash flow (Thomas, 2003). In the eyes of the public and on paper, Enron was a large profitable company. What the people did not know was Enron was billions of dollars in debt. In October 2001, Enron reports a substantial lost that caused The Securities and Exchange Commission (SEC) to request further explanation and information on the reported losses and financial restatements (Gudikunst, 2003). Poor leadership and management is what caused Enron to go bankrupt. The following paper will discuss the management and leadership failures.
According to Bierman (2008), Enron??™s biggest mistake was the departure of Rich Kinder. The second biggest mistake was the appointing of Andrew Fastow as CFO. Bierman feels the second mistake would not have taken place had Lay and the Board of Directors appointed Kinder CEO. John Wing was another manager that was relieved of his post at Enron. The top executives were more focused on the shareholders wealth being increased. To do this they need like minded people in charge. Rich Kinder and John Wing did not fit in the structure design of management that Kenneth Lay had in mind. With increased stock prices and a decreasing desire for the stock, executives decided to use unapproved accounting methods on the financial statements to get the desired numbers. The downside that was not anticipated by Enron was that if things did not change financially, they would have to continue using aggressive accounting methods. They wanted to keep their jobs, personal wealth and public acclaim, which meant keeping ENRON moving forward by any means. But had there been ethical checks and balances the aggressive accounting method would have been recognized in the financial statements (Gudikunst, 2003). Enron and their accountants took advantage of the loopholes in the regulatory system.
Leadership and Management Failures
The Audit committee which was designed by the board of directors consisted of many prior employees of the accounting firm, Arthur Anderson. The problem that lies here is the Audit committee failed to review the financial statements provided to them for accuracy. The board of directors then relied on the internal accountants??™ information as being accurate. The Audit Committee of the Board should have been more critical of the auditors and their work. But, with the stock price and earnings rising, they were perhaps lulled into a false sense of security about ENRON??™s internal accounting, and the favorable opinion letters (Gudikunst, 2003). More concerned with their status within the company and enjoying the lavish lifestyle that came with the positions, the Board neglected to live up to their duties of as leaders of the company. This could have been prevented had it not been a matter of every man for himself and the concern for personal wealth.
Employees help contribute to the downfall of the company by not questioning management regarding the large salaries and increased incentives they were receiving. The employees knew of the debt the company was in. They continued to assist management with the creating false financial statements to help benefit themselves and shareholders. Due to their failure to question or raise awareness to the issue they lost their jobs, retirement benefits, investments and wreaked havoc in people lives both internally and externally. The employees were affected the most because some of the top executives still received large amounts of funds. Over a hundred trained, professional accountants were on Enron??™s payroll. They were under the guidance of the management team that was backed by the executive team. Leadership and management knew how to encourage employees to cover up the truth about the financial statements. Most likely they used bonuses and incentives to entice employees to cover up the fraudulent reports.
Due to Enron??™s deceptive way of reporting internal and external financial transactions which caused a huge scandal, Congress passed the Sarbanes-Oxley Act in 2002. The Sarbanes-Oxley was designed to improve corporate governances. Companies will now have to include internal audit reports with all other financial reports. The purpose of the Sarbanes Oxley is to prevent fraud for happening. A code of ethics is required to be placed in affect by management. It applies to all public companies in the U.S. and international companies that have registered equity or debt securities with the Securities and Exchange Commission and the accounting firms that provide auditing services to them (http://www.sox-online.com/basics.html). This is a way to get management to verify the accuracy of financial reports to avoid fraudulent reporting of their finances.
Management and leaders of a company should make known the goals and objectives of the company. It is management??™s responsibility to ensure the employees are focused on obtaining the goals. Management must lead by example in order to motivate employees to adhere to the company??™s goals and objectives. Enron??™s leadership team was self absorbed and more concerned with building self wealth. The motives behind decisions that lead to the company??™s demise where individual and collective greed in corporate arrogance (Cook, 2008).
Enron??™s errors have left its mark on the accounting profession more so than any of other case in the U.S. history. The SEC and the public accounting profession have been among the first to respond to the Enron crisis. Companies similar to that of Enron have noticed a decline in their stock prices (Thomas, 2003). Had Enron developed and maintained a code of ethics much of this could have been prevented. Many companies are using the flaws of Enron as a guide in their place of business of things not to do. By allowing greed to cloud their judgment, top executives hurt the company as well as those employed for the company. This includes the accounting firm hired to oversee the daily operations of their finances.
Enron??™s failure was largely related to not having an organizational structure. An ethical organization culture is the foundation of a business structure. According to Yukl (2006), leadership occurs only when people are influenced to do what is ethical and beneficial for the organization and themselves. Therefore a company with a good code of ethics and adhere to them is more stable than a company without.
Enron should have been more adapt to review the financial reports created by the accounting firm to insure the accuracy. Directors and upper-management should be assigned certain responsibilities to guarantee the code of ethics is being met. Regular reviews of financial reports by internal auditors should have been established. The actions of employees should have been monitored to in order to keep control. The CEO and Board of directors need to be more involved in the daily operations of the company. There should be an open door policy to make employees feel comfortable with bringing issues and concerns to leadership and management attention.
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