Enron Corporation – one of the largest energy-based companies in America, eventually fell into the abyss of bankruptcy in the year 2001. The dramatic rise to power by Enron to later facing a dizzying fall shook the Wallstreet and affected thousands of people. This failure has been majorly been attributed to the unethical practices of the senior management. However, further examination of the case reveals ethical shortcomings in multiple corporate aspects discussed below.
Enron is the classic case of overlooking holistic parameters. The excessive priority placed on shareholder value creation hindered the organization’s form. The belief that Enron had to be the best at everything and that the executives had to protect their reputation and compensation was proven detrimental to the company. Enron’s board did not have any oversight of the ongoing management conflicts and this contributed to the collapse. Additionally, the compensation policies that Enron followed stirred a short-sighted emphasis on stock price and earnings. The regulatory changes focused on enhancing the accounting for SPE’s and bolstering the internal accounting framework.
The revelation of accounting irregularities at Enron led the media and the regulators to shift attention to Andersen and the conflict of interest between the two roles that he played. This coupled with the alleged errors in accounting garnered a necessary setting to explore how an auditor’s reputation can affect market prices for the client in the situation of a failure.
In accordance with the external sources of governance, Enron was exposed to pressures in the market, credit rating agencies, auditors, analysts, and many others. To deal with it, they followed a Mark-to-Market method which required that in a long-term contract, the value at which the asset will sell in the future is accounted for in the current financial year. High future cashflows were forecasted to appease the investors. The variation between the originally paid value and the calculated net present value was considered as Enron’s profit. The issue with this reporting is that the reported NPV by Enron might not really happen in future years. All the projections for such incomes were overly inflated.
Another issue was with Special Purpose Entity. As per the rules, a company can exclude an SPE from its financial statement if an independent party controls the SPE. Enron had to hide its debt so that banks would not recall their money due to high debt levels and subsequently lower investment grades. To do so, Fastow headed an SPE and used Enron’s stock as collateral to obtain such investments and this was used to counteract all the inflated contracts. The presence of this SPE guaranteed that all of Enron’s loans could be converted into income. Moreover, when SPE took over Enron, it made sure that more stock was transferred to SPE, but these debts were not reported in Enron’s financial report. All the shareholders were made to believe that debt was not increasing, but revenue was.
Lay and Skilling were at the top of the hierarchy and had immense power. Whenever someone expressed their concerns with Lay or appeared to be a threat, they were removed from their positions. They succeeded in eliminating corporate rivals. Also, at most times, the managers did not have an overview of what their employees are working on or how new markets opened up. Board members did not try to challenge the management decisions and failed to exercise their oversight. These members were selected by Lay and received significant contributions from Enron.
Enron officials deceived the public and protected their interests by manipulating data. Few claimed that they were unaware of Enron’s off-the-book partnerships. However, board members were fully aware and chose to waive the code of ethics for the company regarding the formation of certain troublesome partnerships. Employees followed whatever the senior official’s did-hiding expenses and deceiving regulators.
Most workers were forced to spend their money in investing in Enron’s stock and then later when the company was failing were forced not to sell their shares, when all the top executives could sell their part. There was a huge discrepancy in retention bonuses paid as well. The company also indulged in political donations so as to gain exemption from several laws by the government agencies in exchange for promoting Enron projects.
Ethics enable us to recognize how to perceive a situation. Enron went bankrupt and no company following such practices can progress any further than Enron. Whatever damage had to be done to the company’s reputation was already done in the form of contrary perception of ethics.
As seen from the reasons above, there is a dire need for the management to follow certain methods while solving the issues faced.
Firstly, the corporate structure should always be healthy in a company. As in Enron, where senior officials tried to be the best at everything and the people not involved in the scandal, were hopeful about the operating conditions. Instead of trying to make things right in the face of adversities and losses in the performance, they tried to cover their failures just to protect their reputations. This proves that the board directors should pay more attention and heed.
Secondly, the owners should have more insight into the company’s operating situation by supervising day-to-day work along with the behavior of management. Enron’s fall impacted the US economy heavily, so the government should also be more concerned with bettering the regulations in the economy.
Thirdly, the ‘Mark to Market” method used to inflate stock prices and cover the losses is not practically viable. It is immoral, illegal, also impossible to sustain long-term operations. The SEC allowed Enron to use such a method which clearly depicted the ignorance of the SEC. Hence, a better accounting system has to be created at the earliest which discloses more financial information.
Fourthly, people should focus on business ethics. Managers have a duty to serve their employers, however, they failed to remain loyal to Enron. Especially accountants, who did not disclose the financial statements with genuine profits and losses information.