CASE ANALYSIS

ENRON
Problem of the Case

There are a lot of reasons that led to Enrons collapse. To summarize, Enrons collapse was caused by:
First, A corrupt leadership at the top. Lay and skilling created a corrupt elite coalition among
themselves, Fastow, and several of the traders in the company. The now classic film , Enron: The
Smartest Guys in the Room reveals the inside workings of this corrupt subculture that became the
dominant engine that drove the company into bankruptcywithout the lower level employees ever
knowing. Do values count? Yes, in Enrons case, the dominant coalitions values were greed, waste, and
win-at-any-cost.

Second, the lack of regulation of Enrons ethics code in the industry. The collapse of the company
clearly illustrates that written ethics and compliance codes alone do not work. Corrupt leaders at the
top (and middle) of organizations is a recipe for disaster. Probably no code or law can prevent the willful
intent with the available means for criminally minded and greedy CEOs (Lay and Skilling), CFOs (Fastow)
and other top level officers (individually and as coalitions) from defrauding and stealing from their
organizations.

Third, The lack of truthfulness by management about the health of the company. Enron Corporation,
which once ranked among the top companies, collapsed under a mountain of debt that had been
concealed through a complex scheme of off-balance-sheet partnerships. The top management decides
to deceive the people by giving them falsely Public financial reports.

Alternative Solution of the Case

1. A more complete system is needed for owners of a company to supervise the executives and
operators and then get the idea of the companys operating situation. There is no doubt that more
governance from the board may keep Enron from falling to bankruptcy. The boards of directors
should pay closer attention on the behavior of management and the way of making money. In
addition, Enrons fall also had strikingly bad influence on the whole U.S. economy. Maybe the
government also should make better regulations or rules in the economy. And maybe business
ethics is the most idea point people doing business should focus on. As a loyal agent of the
employer, the manager has a duty to serve the employer in whatever ways will advance the
employer's self-interest. In this case, they violated the principle to be loyal to the agency of their
ENRON. Especially for accountants, keeping a financial statement disclosed with true profits and
losses information is the basic responsibility that they should follow.

2. The business should implement those rules and policies which are favourable for almost every
stakeholder of the company. Nothing should go wrong while implementing the right rules and
policies. The Internal Audit Team should keep proper check and balance on the companys records.
Such team should fulfill its work with honor, as it is an obligation for the team itself.
While implementing the rules and policies, focus should be onstakeholders benefits, not just
personal benefits. A rule or a policy, when implemented, must have a legal and ethical purpose.
Implementing an ethical but illegal policy is no longer successful and vice versa.
3. There should be a healthy corporate culture in a company. In Enrons case, its corporate culture
played an important role of its collapse. The senior executives believed Enron had to be the best at
everything it did and the shareholders of the board, who were not involved in this scandal, were
over optimistic about Enrons operating conditions. When there existed failures and losses in their
company performance, what they did was covering up their losses in order to protect their
reputations instead of trying to do something to make it correct. The to-good-to-be-true should
be paid more attention by directors of board in a company. The next thing to do is to think of
another way of accounting. Mark to market and hypothetical future value accounting is a plan
that Jeffrey Skilling and Andrew Fastow proposed to pump the stock price, cover the loss and attract
more investment. But it is impossible to gain in a long-term operation in this way, and so it is clearly
immoral and illegal. However, it was reported that the then US Security and Exchange Commission
allowed them to use mark to market accounting method. The ignorance of the drawbacks of this
accounting method by SEC also caused the final scandal. Thus, an accounting system which can
disclose more financial information should be created as soon as possible.

Suggested Solution

The third alternative should be chosen because it answers all the objectives needed to be achieved.
First, bend the corporate culture from harsh competition to a smarter and a friendlier one.
Eliminate those people who are fraudulent and selfish through evaluation, even those who are
in the top management. The corporation needs a new set of honest officers.
The next thing to do is to change its accounting policy. Even though the first one covers major
losses, still, it is not effective on the long run, so changing the accounting policy will cover losses
in a slower but a surer manner.
Attract investors, prove to them that Enron is still on the hook, hanging tightly, needing to be
trusted once again.
Change the auditing firm it is in partnership with.
Lastly, Skilling must utilize the strengths of his corporation, since it is an energy distributor, it
can once more become one of the biggest companies in the world specializing in energy.

Conclusion/Recommendation

Greed and a lack of fundamental ethical values drove a potentially successful company into the ground.
Had the executives of the corporation instilled values into their corporate culture that reflected dealings
with them and others in a value driven and ethical light; Enron might have never collapsed and tens of
thousands of lives wouldnt have been ruined.

Transparency and Accountability are the two key words and lack of both in the financial systems result
in scandals like the Enron. It is a basic conception in finance that increased debts can increase the
financial risk of an entity but how the investors of a company would know if debts do not appear on the
financial statements of the company? Therefore it can be argued that if Enron had presented their
financial reports with transparency and had shown their assets and liabilities accordingly, the financial
losses to the investors would have been minimized. Financial analysts use financial information for
valuations purposes and forecast the earnings of the company which has impact on the security prices.
The Enrons earnings were inflated fraudulently and debts were shown as profits. Which in turn inflated
the stock prices but it did not create value to the shareholders as these prices were based on false
information. Therefore it can be argued that quality reporting can lead to quality forecast and estimates,
which will be based on true and fair view and can help investors in quality decisions and it can create
value to shareholders and value to corporate in the long run.
Recommendation

After analyzing the collapse of Enron, there are many lessons we have learned about preventing similar
acts of corruption. One of the most important recommendations we can give to a firm is to create and
embrace a strong code of conduct. By rigorously enforcing a strict conduct policy,both legally and
ethically. In addition, it is equally important to create a series of checks and balances from both in-house
and third parties. It is just as important for corporations to provide honest and frequent business
reports. Whether it is a daily expense or a quarterly report, it is necessary that we are transparent with
our operations. It shows that the firms we represent are being honest and open, providing a sense of
security and faith in the company. If we are able to use these practices in our careers, we will be aware
of the pitfalls that may lead to unethical practices, as well as how to prevent them.Lastly, we
recommend that a firm has clear and accurate accounting practices. As we saw in the film The Smartest
Guys in the Room, Enrons use of market to market accounting system allowed them to report their
earnings based on potential profit from business transactions, regardless if they collected payments. In
addition, they hid debt by transferring it to subsidiaries, making Enron appear profitable and healthy. If
companies are capable of having clear and accurate accounting systems, they establish a sense of
transparency in their reports, building trust for investors and in the public.