Examining a Business Failure – Enron
University of Phoenix
Jerry Hellinga, PhD
October 10, 2010
Examining a Business Failure – Enron
In this paper I will discuss how organizational behaviors theories could have predicted or explain the failure of Enron Corporation and examine a variety of contributors to the organizations failure. Enron Corporation was founded in 1985 by Kenneth Lay after merging Houston Natural Gas and InerNorth. The scandal that led to the bankruptcy of Enron was revealed in October 2001. Jerry Skilling was hired as Chief Executive Officer and was responsible for hiring the additional executives. Skilling and the executives found that ???through the use of accounting loopholes, special purpose entities, and poor financial reporting, they were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron??™s board of directors and audit committee concerning high ??“risk accounting issues???(“Enron Scandal”, p. 1.). The internal and external contributor??™s deceptive practices resulted in Enron??™s bankruptcy.
Enron??™s executive team wanted to give the appearance that the company??™s stock was desirable and drive up the share price. They did this by excluding negative information such as losses and overstated operations value. The executive team relied on capital provide by new investors but they had to conceal the risk. Once Enron began this new type of accounting practice, the need to increase the deception increased with every fiscal year. They wanted to make sure they kept moving forward at all cost. This is why a system of checks and balances was needed (Gudikunst, 2003). To prevent unethical practices separate internal and external auditing systems should be used. Enron used Arthur Anderson for both auditing systems and this was a clear conflict of interest that revealed their inability to make sound business decisions in auditing decisions. Internal auditing systems are put in place to prevent unethical practices and make management transparent entity. External auditing further supports this effort by having a separate external evaluation conducted. Enron??™s employees also contributed to the downfall. Employee incentives were high so he or she would have remained silent and contributed to hiding the corporate deceptions. Many senior managers received stock options as compensation and decided to sell their stocks before the price took a nosedive.
Ethics is a major factor in a business??™ success. Employees interact with people who engage in unethical behavior constantly. To guide employees and other entities of the organization it is important to have a code of ethics. Such a policy at Enron could have help prevent problems in accounting and possibly encourage employees to be whistleblowers. Because of the Enron failure the Sarbanes-Oxley Act (SOA) was adopted to make the conduct of a corporation a matter of federal law. Even the adoption of a code of ethics, previously within the domain of management prerogatives, is a requirement under SOA (Tipgos & Keefe, 2004). In an effort to reduce their employee??™s participation in their deception, Enron Corporation??™s management should have offered an in-house advisor who could have been contacted when employees dealt with ethical dilemmas or ethics seminars and workshops.
Enron??™s failure and bankruptcy was based on contribution from internal and external deceptive actions. The board of director??™s failed to take actions for managements actions. The external auditors were evaluating their internal audit??™s that was a clear conflict of interest. A clear ethical vision should have been what Enron Corporation organizational objective instead of using deceiving techniques to cheat the public, investors, and employees.
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Enron Scandal. (n.d.). Retrieved from http://en.wikipedia.org/wiki/enron_scandal
Gudikunst, A. (2003). Enron – A Study of Failures, Who, How, Why Retrieved from http://web.bryant.edu/~facdev/Web%
Tipgos, M. A., & Keefe, T. J. (2004). A comprehensive structure of corporation governance in post-Enron corporation america. Retrieved from http://www.nysscpa.org/cpajournal/2004/1204/essentials/p46.htm.
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