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Enron:

Questionable Accounting Leads to Collapse


By Imran Ayaz
Welcome to Enron

Introductio
Enron Corporation, based out of Houston, Texas
was an American energy, commodities, and
n
services company.

Cover-up by top executives and board of


directors: Chairman Ken Lay, CEO Jeffrey Skilling,
CFO Andrew Fastow and the accounting firm of
Arthur Anderson.

Employed approximately 20,000 staff

Claimed major revenues of $111 billion during


2000.

Was named Americas Most Innovative Company


for six consecutive years by Fortune Magazine.

Enron filed for bankruptcy in December 2001.


Circumstances Leading to Exposure
Ethical issues went unregulatedorganizational behavior was
isolated.

Established the appearance of debt/equity ratio on the


companys books with the use of off-balance sheet
partnerships or Special-purpose Entities (SPEs)

Billions of dollars were manipulated as long as stock prices


were highpossible to keep the truth hidden.

Borrowed money from outside Enron the belonged to others


(Chandra, 2003).
Enrons Culture
The Employees and
Stakeholders
The company began as a place where people could reach
their full potential, a corporate culturehighly moral
and ethical.

Systems encouraged a fierce environment of competition


both internally and externally.

Employees deemed weak were forced out.

Denied the chance to sell stocks when the firm came


crashing down.

In 2001 Sherron Watkins, Vice President of Enron,


warned then CEO Jeffrey Skilling of potential accounting
scandal.
Leadershi
Abused p
power, acted unethically and believed they were invincible eventually uncovering willful

corporate and accounting fraud.

CFO Andrew Fastow and Chair Ken Lay stated, lawyers and accountants reviewed and approved

what was being done. (Ferrell, Fraedrich, and Ferrell (2013, pp. 398 & 400).

Fastow stated, that his tactical strategy to move assets and debt off its balance sheet and

increasing the appearance of cash flow was justified.

Misguided by personal financial rewards, forfeited generating profits for shareholders was

circumvented.

Serious problems were ignored by Enron accountants.

Accounting firm of Arthur Anderson played a dual role as auditor/consultantscompromised ethical

decision making for the sake of profit margin.

General culture was unethical believing that anything could be turned into an economic product

and traded for profit. (Ferrell 2013, p. 396).


Analysis

Enron acted in defiance against a system that they created.

Lack of checks & balances for decision-making structure or accountability.

Undefined ethical standards became legal issues.

Solutions should enhance the nature and direction of the organization.

Cornerstone components of leadership affecting behavior and internal


practices was absent.

Limitations of leadership in a practical sense were left unexplored.

Underlying problems of compliance require a regular review process.

Senior and middle management failed to create a climate that was conducive
to include the organizations goals and objectives.
Recommendati
ons
Enable safeguards to protect ethical climate.

Comprehensive understanding of assets, tools and resources can prepare


leadership and managers to find new solutions for new problems encountered.

Core values guide the most useful principles.

Provide support and guidance through an ethics audit .

Implement systems that measure the effectiveness of ethics initiatives.

Visible code of ethics to encourage ethical business decisions as a priority.

Refuse to tolerate misconduct from the top down .

Transparent leadership communicate corporate governance and system of


principle-centered leadership.