Enron: Questionable Accounting Leads to Collapse

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Enron: Questionable Accounting Leads to Collapse

The Enron Corporation was established by integrating two major gas pipelines in 1985. The Company provided products and services related to natural gas, electricity, and communications and it was one of the world’s leading organizations at these sectors with claimed revenues of nearly $101 billion in 2000. Throughout the 1990s, Chair Ken Lay, chief executive officer Jeffrey Skilling and chief financial official officer Andrew Fastow transformed Enron from an old style electricity and Gas company into a $150 billion energy company. However, after the bankruptcy of Enron, it was revealed that Enron used accounting loopholes, special purpose entities and poor financial reporting to hide billions of debts from failed deals and projects. And it was found that top executives of Enron were involved in this accounting fraud which led Enron to bankruptcy. In addition, Enron’s corporate culture also contributed to its demise. The following essay is a study of Enron’s case and an attempt to find out what went wrong for Enron. This essay would try to analyze the role of Enron’s culture, the role of its bankers, auditors and the role of chief financial officer Andrew Fastow to its bankruptcy.

The Contribution of Enron’s Corporate Culture to Enron’s Bankruptcy: In general culture means the sum of social behaviors, beliefs, attitudes, human thoughts and creations. It affects every aspect of our lives—the way we look at things, the way we act and react and how we express our feelings (Wong). Corporate culture also indicates the same thing. Corporate culture or organizational culture has been defined as "the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization." (Charles & Gareth, 2001). Ethical and healthy competitive corporate culture can take a corporation to the peak of success; on the other hand, toxic corporate culture can lead a corporation to bankruptcy. Unfortunate to say that Enron’s corporate was not ethically healthy enough and it has contributed to push the company to bankruptcy. According to Enron Chairman Ken Lay, Enron’s ethics code was based on respect, integrity, communication, and excellence in short ‘RICE’. However, history does not say that moral sentiments like respect, integrity communication and excellence ever existed in Enron’s corporate culture. By criticizing Enron’s corporate culture Dembinski et al. defined ‘RICE’ as risk-taking, individualism, contempt and exploitation. William Thomas describes Enron as characterized by ‘individual and collective greed born in an atmosphere of market euphoria and arrogance’ (2002, p. 41). People usually describe Enron’s corporate culture by the word ‘arrogant’. Enron’s executives loved to believe that there is no competitor for Enron. They frequently used to quote that Enron’s people could handle increasing risk without danger. The reason behind the behavior of executives was that they might want to make their employees confident on their work. However, ‘confidence’ and ‘over confidence’ has very little difference. Overconfidence makes people to underestimate opponents’ strength. Enron’s executives became overconfident. According to Sherron Watkins, “Enron’s unspoken message was, ‘Make the numbers, make the numbers, make the numbers—if you steal, if you cheat, just don’t get caught. If you do, beg for a second chance, and you’ll get one.’” Enron’s corporate culture did little to promote the values of respect and integrity. Enron employed top MBA graduates from high ranked business schools of USA by offering rapid promotions and financial incentives. The ultimate goal of the corporation was made to maximize the stock price and these MBA graduates were very familiar with this. The ethic of short term stock price maximization was promulgated ruthlessly and at any cost. Those who...
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