Enron

Enron

 

 

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Enron

Introduction

Enron was one of the largest energy, services and commodities companies in the United States and worldwide. It was ranked the seventh largest company in the fortune 500 list. The company offered products that ranged from natural gas, communications and electricity for both wholesale and retail customers. Since its foundation in 1985, the company recorded an unprecedented growth to become a global company. The company was transformed into a $150 billion energy company with the most traded stocks in Wall Street between 1990 and 2000. Enron had also received numerous awardssuch as being named the most innovative company for six consecutive years. After years of rapid domestic and international expansion through complex deals, the company could no longer pay its debts. The top executives concealed the debts using partnerships with other companies, illegal loans and fraudulent accounting. In 2001, the company filed for bankruptcy.

Facts and Issues

Several issues were evident in the case of Enron that led to its collapse. The first issue came from the corporate culture that allowed executives to ignore rules in pursuit of profits. This resulted in unethical conduct within the company that saw the executives engage in illegal dealings to pursue increased profits every time. In addition, the company rated its employees every six months and fired those who came in the last 20%. This encouraged competition between employees, which hindered honesty because workers feared losing their jobs (Moore & Bazerman, 2012).

The other issue was in its accounting schemes that concealed losses. The company used Special Purpose Entities (SPE) to conceal its losses from the public. An SPE is a legal entity, usually a limited company or partnership that is created to achieve specific of temporary goals of a company. Enron used such partnerships to transfer assets and debts, which kept them off their books. This provided the company with a good image to the stakeholders, which allowed its stocks to remain high and competitive within the market. The high stock price allowed the scheme to work. However, its drop meant there was no money to cover its debts.

Recommendations

It is evident that the corporate culture and lack of ethical consideration while pursuing profits by Enron executives led to its collapse. Corporate governance is the main issue that needs to be changed in order to prevent such cases in the future. The first action is examining the ethical climate and putting in place a safeguard (Ethics Resource Center, 2009). It should be recognized that corporations are composed of cultures that determine how people behave. Some of the things to consider include values of the company, what employees are rewarded for, what pressures exists that could push people to commit misconduct and problems that exist to make people result in bad decisions.

After conducting an examination, values and ethics should be printed and communicate to all the members starting with the top executives who are responsible for their implementation. This should be followed by establishing a self-sustaining strategy to keep the members under check. This can be done by establishing an independent committee of non-executive directors in the board. This committee should ensure that all systems are in place and followed (Moore & Bazerman, 2012).

The other issue is to separate the auditing firm from consultations. In the Enron case, Arthur Andersen was the auditor and also a consultant to the firm. The auditing firm is very crucial in ensuring proper and correct disclosure of a firm’s financial position. Therefore, its integrity is very crucial in ensuring truthfulness of any firm. Reasons that could allow an audit firm to engage in misconduct such as conflict of interests should be avoided. Therefore, the government should implement regulations that ensure this does not happen (Ethics Resource Center, 2009).

How to ensure recommendations remain effective

To ensure that the recommendations remain effective, an ethics committee should be established. Its work should be keeping the firm focused on the code of ethics. The committee can also ensure that the firm abides to the provisions of federal sentencing guidelines established in 1991 (Ethics Resource Center, 2009). These guidelines ensure top officials oversee compliance of standards and procedures of an organization. In addition to the committee, the code of ethics established should be able to evolve and remain flexible enough to allow changes when necessary. This would ensure regular update of the ethics to remain relevant considering the market is quite volatile.

Legal, economic or political issues Impeding Implementation

Factors that could impede implementation of the recommendation come from political and legal issues. To change the rules in order to prevent auditors from becoming consultants of the same firm requires legal regulation from the government. This means involving the government and legal officials in order to make the changes, which could take long before a decision is made. In addition, corporations that stand to be affected might lobby against this recommendation. Fighting against huge corporations would be quite hard considering the amount of money it would require. Another issue would be changing the culture of the organization. In many companies, making changes is one of the hardest tasks due to resistance from employees especially those benefiting from the status quo.

Overcoming these constrain would require conducting a lot of research in order to convince all the affected parties. This can be done by proving its benefits to the firms and convincing all involved parties especially investors of its advantages such as prevention of fraudulent behavior. Resistance to change can be overcome by gradual implementation and enhanced communication at all levels.

Organizational and corporate changes required

To implement this recommendation, the organization would require changing or reviewing its corporate culture. It would also require establishing an ethical infrastructure since a code of ethics is not enough. This can be done by communicating the ethical code to all employees and ensuring it is followed on a daily purpose (Silverstein, 2013).

How to implement the decisions and strategies I would pursue

In implementing the decision, I would use the utilitarian theory that considers the good of the majority. Utilitarian theory recommends that one should balance between minimizing harm and maximizing benefits when it comes to solving ethical dilemmas. According to this theory, interests of all parties involved should be considered when making a decision. In the case of Enron, I would consider the decision with the biggest benefit to all the involved parties (Wang, 2012).

Alternatives in Solving the Issue

There are three alternatives that can be used in this case study to change the organization. The first one is changing the corporate culture, which is contributing to misconduct in pursuit of profits. Managers and top executives support a culture that encourages competition within the organization. This puts pressure on employees to make wrong decisions. The second one is establishing a robust ethical infrastructure. Although the company has a code of ethics, it does not work because it is not implemented. The third one is using business ethic theories and teaching all employees how to use them in making decisions (Wang, 2012).

Stakeholders

Internal stakeholders in this case include the managers, and employees of the firm. These stakeholders will be impacted by the decision in different ways. For the top executives who benefited from the status quo, having a system to check their work will ensure they do not receive undeserved benefits. To employees, rewards for pursuing profits without ethical consideration will be over. In addition, the six month rating will be removed, reducing competition and fear of losing job. The new culture will allow employees to air their concerns (Silverstein, 2013).

External stakeholders include shareholders, creditors and suppliers. Interests of shareholders will be considered and safeguarded. The creditors will be guaranteed to receive their money back while suppliers will also receive their payment after delivering goods and services to the company.

 

 

References

Ethical Resource Center. (2009). Ten things you can do to avoid being the next Enron. Retrieved from http://www.ethics.org/resource/ten-things-you-can-do-avoid-being-next-enron

Moore, D. & Bazerman, M. (2012). How can we prevent another Enron, or worse? Retrieved from http://management.fortune.cnn.com/2012/07/10/how-can-we-prevent-another-enron-or-worse/

Silverstein, K. (2013). Enron, Ethics and Today’s Corporate Values. Retrieved from http://www.forbes.com/sites/kensilverstein/2013/05/14/enron-ethics-and-todays-corporate-values/

Wang, X. (2012). The fall of Enron – An Analysis of Ethical Issues. Retrieved from http://blogs.bgsu.edu/wxiaom/2012/04/29/the-fall-of-enron-an-analysis-of-ethical-issues/

 

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