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ENRON CASE STUDY 2
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
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
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.
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
ENRON CASE STUDY 4
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.
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
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.
ENRON CASE STUDY 6
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
Coffee, John C., Jr. "Understanding Enron: 'it's about the gatekeepers, stupid'." Business Lawyer
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.
Knottenerus, J. D., Ulsperger, J. S., Cummins, S., & Osteen, E. (2006). Exposing Enron: Media
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.
Perin, M. (2002). Enron chief denied problems weeks before financial scandal broke. Houston
Sims, R. R. (2003). Enron Ethics (Or: Culture Matters More than Codes. Journal of Business