It took less than 24 days for Enron to go bankrupt from having almost $10b in assets. According to me, the most important factor that resulted in Enron’s doom were two-fold.
1. Enron is a classic example of failure of Stewardship Theory. By this theory, it is good to have one person as the chairman and CEO since it will cut down the levels of decision making and the person would act on the interests of both the shareholders and the stakeholders. However, at Enron, Kenneth Lay was functioning as the chairman & CEO because of which too much power vested in his hands. He used every possible way to increase stock price and increase profits. Mark to market mechanism gave great scope for manipulation.
People who could have found the fraud were blinded by Enron’s management either by giving them too much money as bonus or by removing them.
a. Analysts, for instance, received huge sums of money as bonus. Analysts were on-boarded only if they gave strong-buy or buy recommendations. Any analyst who was sceptical about Enron’s profits was eyed as an enemy. They were also blinded by Enron’s certified financial statements which showed huge imaginary profits although their business was performing badly. For instance, Enron invested in India in a big way but failed to notice that India was not capable of paying for the power that Enron produced. Lost about a billion dollars on the project. Paid multimillion dollar in bonuses to executives based on imaginary profits.
b. The auditors were also blinded by huge bonuses and the audit committee and board of directors comprised of people who hardly attended the meetings and were irresponsible.
In essence, the top management made sure that none of its actions are questioned by any person at any level by all means.
2. The company’s culture was deeply rooted in greed. Every person in the management was after money. Pride, Arrogance and Intolerance had deeply penetrated Enron’s culture. Profits were the main...
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