ENRON

WHERE THEY WENT WRONG

Context

Enron was a U.S energy trading company that was the centre of one of the biggest and most shocking accounting scandals of all time..

Before it went bankrupt in 2001 it was one of the largest independent developers and producers of electricity in the world.

Focus

-Unethical practices of Executives

-Corporate Culture

-Failure of Leadership

-Abuse of power

Andrew Fastow

Kenneth Lay

Jeffrey Skilling

1985

Formation of Enron

1995

1998

2000

Enron was formed in 1985 following a merger between Houston Natural Gas and InterNorth Inc.

Enron wins an award for being "America's Most Innovative Company" by Fortune (for 6 consecutive years)

Award winning Company

Andrew Fastow is appointed to CFO- He goes on to lead the creation of companies that help to hide Enron's losses.

Fastow

Enron's shares skyrocket to $90.56- an all-time high

Skyrocketing Shares

timeline CTD.

2001(Aug 14th)

Sudden resignation

2001 (Nov 8th)

2001(Dec 2nd) 

2002

Skilling resigns suddenly after briefly replacing Lay. Share price drops to $39.95

Enron admits to inflating income by millions since 1997

Confession

Enron files for Chapter 11 bankruptcy- its stock closes at a price of $0.26

Bankruptcy

Enron is suspended from the NYSE (New York Stock Exchange) and its accounting firm Arthur Anderson is convicted of obstructing justice

Suspension

What happened?

Enron lied about the profits it was making and hid debts so they didn't show up on bank statements.

HOW?

-Mark-to-Market practice

-Off-the-books corporations

Systemic Issues

- Enron hired its own auditors (this is an obvious conflict of interest).

-Codes of ethics can be put in place but overlooked by board of directors

-Lack of attention from board of directors

Ethical issues

Leadership and culture

- The executives at Enron became greedy and began to think of themselves as invincible.

'-Rank-and-yank performance appraisal system.

-Emphasis on financial goals

Ethical Issues

How codes of Ethics were undermined

Enron's Code of Ethics focussed on values of respect, integrity, communication and excellence.

Questions were raised as to how well Skilling, Lay and Fastow adhered to these values

Analysis of Affect on Stakeholders

Key Stakeholders Affected:

-Executive management

-Employees

-Third party companies (Arthur Anderson)

-Economy

Ethical Theories Applied

Deontological Theory:

-Duty of Executives to offer communication and transparency to stakeholders.

-Arthur Anderson's duty to audit accurately.

Teleological Theory:

-Decision-making was driven by teleological thinking (Cost vs Benefit)

How industry Responded

-Enron's scandal led to an unprecedanted wave of corporate scandals

-New regulations and legislations were introduced i.e The Sarbanes-Oxley Act of 2002

Conclusion

-Despite Enron's thorough ethics policies a massive financial scandal took place

-Need for more comprehensive accoutability

-More transparency needed and ethics policies need to be FOLLOWED THROUGH.

Conclusion

(2017) Reference for business, Available at: http://www.referenceforbusiness.com/history2/57/Enron-Corporation.html (Accessed: 27th March 2017).

BBC News (2002) Enron scandal at-a-glance, United Kingdom: .

Cruver, B. (2002) Anatomy of greed: The unshredded truth from an Enron insider, New York: Carroll & Graf.

Eichenwald, K. (2005) Conspiracy of fools, New York: Broadway Books.

Fusaro, P and Miller, R. (2002) What went wrong at Enron, New Jersey: John Wiley & Sons.

Investopedia (2016) Enron Scandal: The fall of the wall street darling, Available at: http://www.investopedia.com/updates/enron-scandal-summary/ (Accessed: 28th March 2017).

Johnson, C. (2003) 'Enron's ethical collapse: Lessons for leadership educators', Journal of Leadership Education, 2(1), pp. 45-54.

Swartz, M and Watkins, S. (2003) Power failure- The inside story of the collapse of Enron, : Doubleday.