Case Studies: Enron’s Fall and Tyco International’s Leadership Crisis Grand Canyon University
November 4, 2009
Case Study: Enron’s Fall and Tyco International’s Leadership Crisis
The tight Federal regulations now governing businesses and their accounting practices came about because one corporation, Enron, took risks their company could not withstand without taking some rather extreme measures in its accounting to hide the risk. Tyco International went down a different path in that the CEO used corporate accounts as his personal bank account. He placed certain business associates on the Board of Directors to ensure his behavior would not be found out nor questioned. As corporate ethics goes, Enron and Tyco International are prime examples of bad business ethics run amok. The CEOs of both companies expected not to get caught doing what they were doing and both were taking large risks with the companies. The following will examine Enron’s Fall and Tyco International’s Leadership Crisis as portrayed in the case study in Ferrell, O. C., Fraedrich, J., & Ferrell’s book Business Ethics: Ethical Decision Making and Cases, by answering the questions at the end of the prospective studies. Case Study: THE FALL OF ENRON: A STAKEHOLDER FAILURE
1. How did the corporate culture of Enron contribute to its bankruptcy? The company’s culture was very much part of its demise. With Skilling indicating to other energy corporations that he was going to “eat your lunch”, spells it out pretty convincingly that the top executives felt “overwhelming pride and deep-seated belief that they could handle increasing risk without danger”. In an article in Business Ethics Journal, the authors suggest the Enron debacle incurred widespread and inefficient unethical behavior resulted in the company’s collapse virtually from its own configuration. The firm’s appraisal system caused political power struggles, with lower-level employees finding any way possible to find management-level supporters and peer allies; thus, the system was certainly not effective in separating high from low performers; it was instead one that rewarded effective politicians at the cost of efficiency. (Kulik, B., O’Fallon, M., & Salimath, M., 2008). This appraisal system was created by Skilling which encourage risky behavior due to the fierce competition amongst the employees. This mentality led many to turn a blind eye to what was happening. This highly competitive risk culture existed in a corporation that was trying to redefine how the energy industry did business. 2. Did Enron’s bankers, auditors, and attorneys contribute to Enron’s demise? If so, what was their contribution? The attorneys tended to close their eyes to what was going on because of the relationship they had with Enron. There is probable conflict of interest with the law firm, Vinson & Elkins due to several of Enron’s general counsel and legal department came from the law firm. The firm also provided legal opinions supporting the creation of the Special Purpose Entities (SPE), which increased Enron’s ability to follow through on the transactions. Although there are allegations that the firm also helped structure some of the SPEs, no legal proof has been found and the firm has, so far, escaped civil or criminal liability. Merrill Lynch, the company’s Investment Banking firm, may have played a small role in its demise only to the extent that it pursued a not-so-appropriate deal to purchase Nigerian barges from Enron which was partially financed on the CFO’s oral assurance that the company would buy out Merrill Lynch’s investment in six months with a guaranteed 15% rate of return. Then there is Arthur Andersen, the auditing firm charged with ensuring the accuracy of Enron’s financial statements and internal bookkeeping. There is alleged conflict of interest with this firm...