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Enron Case Study

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Enron’s Case Study

Enron, the company titled as “America’s Most Innovative Company” in 1995 was forced

to declare bankruptcy in 2001 due to its financial manipulations. It started off with a power

abusive culture in the company which resulted in the overall culture being deceptive, secretive,

and manipulating. Moreover, Enron, in order to maintain a positive image within the market, hid

its actual financial information from the public by using the "Mark to Market Accounting".

However, the main issue that Enron faced was not just from their management’s unethical

behavior but also their bankers, auditors, and attorneys. There was an extreme case of unethical

behaviors in the workplace in the upper management of the company which led to the downfall

of the Enron company.

Enron’s Culture

Enron’s culture was focused on one thing, making more and more money for the

company. The main problem with the culture lied at the top-level of the hierarchy by utilizing

tactics of corruption, dishonesty, and deception (Coffee, 2002). These problems created an

underlying effect which was the absence of trust between the upper and the lower level

employees. Moreover, it was quite common that whenever an employee would question the

decisions of the upper management, he/she would either be disregarded or even sometimes fired

(Sims, 2003). Moreover, Enron highly under-appreciated employees who raised the issue of

ethical behavior within their organization and forced them to follow their pattern (Knottenerus,

Ulsperger, Cummins, & Osteen, 2006). Initially some of the employees had ignored the bad

habits of the upper-level management, however, when it continued for years, they became

dissatisfied with the company in general.


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In essence, it can be stated that the culture of Enron was "Every man for himself." The

implied meaning here is that the upper management did not care about the employees, rather

were in continuous pursuit of money (Hosseini, 2016). This enticed attributes such as secrecy,

politics, harassment and even negative competition in the employees (Abdel-khalik, 2019).

Moreover, it also created sub-groups in the employees of those who did not approve of the

management’s methods and those who simply cared about getting their pay.

Role of Bankers, Auditors, and Attorneys

Moreover, the bankers, auditors, and attorneys had also contributed towards the fall of

Enron. The primary banker, Merrill Lynch had arranged for Enron to sell off their Nigerian

Barges. The Nigerian Barges yielded a $12 million dollar return for the company which Merrill

had kept for herself (Lemus, 2014). Moreover, this was merely one of the frauds that the bankers

did in Enron.

Initially, the auditor's part was next to none because the accounting regulatory authorities

were not well-established in the late 1980s and even in the 1990s. However, later on, the need for

a proper check on the accounting books of all organizations increased which led to the formation

of the House Banking Committee, which was followed by more authorities (Nguyen, 2016). In

the early days of the investigation, Anderson destroyed the documents which stated that Enron

was overstated their profits and manipulated their financial statement. This only increased the

need for a proper Auditor as well as raise suspicions of the authorities towards Enron. The fall of

Enron and the investigation resulted in the charges pressed against the CEO, CFO, and the

Chairman of Enron. The major charges were pressed against the CFO because he was personally

responsible for manipulating the financial data. Moreover, Congress was hesitant to impose more
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strict accounting rules and regulations initially (Cunningham, 2012). However, after the Enron

unraveling, they agreed to do so in order to avoid any problem like this in the future.

In addition to the auditors, the attorneys of the company were also hand in hand with the

company’s unethical activities. Moreover, Vinson & Elkins were acting as the attorneys for

Enron. An important thing to note is that Enron was responsible for almost 7% of V & E’s total

billing (Coffee, 2002). For that reason, Enron was a huge client of theirs and because of that,

they helped Enron get hold of some major deals. In addition to that, they also provided their legal

support and created a legal backbone for Enron. However, it was later revealed that the attorneys

were also contributing towards the fraud by helping with their transactions and providing legal

terms.

Enron’s Financial Problems

As mentioned earlier that Enron employed the “Mark to Market Accounting” technique

in order to hide its actual financial information. The acting Chief Financial Officer of Enron at

that time was Andrew Fastow. Moreover, this technique would measure the value of their

investment with their market value, which due to their manipulation was an inaccurate

representation of their intrinsic value (Perin, 2002). Furthermore, the CEO and the CFO along

with a third-party company, Arthur Anderson utilized off-the-book organizations to transfer their

own losses through which the losses would not occur on their own financial statements. By doing

so, the company showed a high market value and an interactive investment opportunity for

investors. Although the unethical acts were majorly done by the upper management of the

company, the lower management was also affected by their actions (Knottenerus et al., 2006). In

fact, a few strategical problems within Enron were ruled out to be the main cause of the ethical

issues faced by the company


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The general rule of consolidation implies that the organization relies on the voting power

of the company’s ownership of the financial statements. However, even if the total voting power

of the company is less than 50%, consolidation may still be a requirement. In addition to that, the

rules of consolidation also grant the flexibility to the organization to sign out-sourced contracts

for requisite control (Cunningham, 2012). The other methods within these rules include the

substantial non-majority method and equity method. Enron, however, had followed all the

consolidation GAAP guidelines which were applicable at that point in time. However, the own

personal interests of the management had convinced them to use unethical measures and show

more profits than their actual profits due to the conflict of interest.

The main misuse of the rules was writing incorrect profits within their income statements.

Moreover, this misapplication was consistent from 1985. For instance, Enron reported a $79

Million loss in 1985 and a $556 million profit in 1986, while the actual profit of that year was

just $230 million (Perin, 2002). In addition to that, the managers of Enron were using Special

Purpose Entities to cover up their loans and debts in order to show maximum profits within their

financial statements (Sims, 2003). Moreover, they also manipulated the mark to market

technique to gain more and more contracts by showing greater profits and try to attain their trust

cunningly.

Therefore, the culture of Enron was based on greed and deception. The upper

management would take advantage of their power and use the lower management to do their

unethical work. Moreover, they would manipulate the financial statements to make them

attractive for investors as well. Lastly, it was not only the management that was at fault rather,

the banks, the auditors, and the attorneys all played their roles in committing fraud.
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References

Abdel-khalik, A. R. (2019). How Enron Used Accounting for Prepaid Commodity Swaps to

Delay Bankruptcy for One Decade: The Shadowy Relationships With Big Banks. Journal

of Accounting, Auditing & Finance, 34(2), 309-328.

Coffee, John C., Jr. "Understanding Enron: 'it's about the gatekeepers, stupid'." Business Lawyer

Aug. 2002: 1403+. Business Insights: Global. Web. 16 Apr. 2019.

Cunningham, Lawrence A. "Sharing accounting's burden: business lawyers in Enron's dark

shadows." Business Lawyer Aug. 2002: 1421+. Business Insights: Global. Web. 16 Apr.

2019.

Hosseini, S. B. (2016). The Lesson from Enron case - Moral and Managerial Responsibilities.

International Journal of Current Research, 8(8), 37451-37460.

Knottenerus, J. D., Ulsperger, J. S., Cummins, S., & Osteen, E. (2006). Exposing Enron: Media

representations of ritualized deviance in corporate culture. Crime Media Culture, 2(2),

177-195.

Lemus, E. (2014). The Financial Collapse of the Enron Corporation and its Impact in the United

States Capital Market. Global Journal Of Management And Business Research, 14(4),

40-50.

Nguyen, K. Q. (2016). Enron: Flaws In Organizational Architecture And Its Failure.

International Journal Of Scientific & Technology Research, 5(5), 143-146.

Perin, M. (2002). Enron chief denied problems weeks before financial scandal broke. Houston

Business Journal, 32(6), 1-3.

Sims, R. R. (2003). Enron Ethics (Or: Culture Matters More than Codes. Journal of Business

Ethics, 45(3), 243-256.


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