Introduction
Enron Corporation was a trading company in services, energy, and commodities. Before its downfall, Enron was one of the largest companies in the United States, and its share price was among the highest in the market. Financial statements showed that the company was doing relatively well. As a public traded company, it was considered a good investment, and many investors were buying its shares daily.
The employees were also among the best paid in the country, and many graduates wanted to join it. However, the company’s success was short-lived (Sterling, 2002). Trouble began when the company changed its organizational structure. The company employed many new people at managerial levels and gave them autonomy in making crucial decisions, which affected the company. With the change in organizational structure, the company reward system was changed such that high performing employees were given hefty bonuses and stock options. The new reward system was controlled by an internal authority, but this turned out to be a bad system.
The people who carried out the reviews and those who were reviewed worked on the same level, and they, therefore, started forming alliances. Employees were ‘looking out’ for each other, and the results of the reviews were skewed to the advantage of the employees. Everyone received a good review, and this created a culture of dishonesty that ultimately led to the company’s failure (Dharan & Rapoport, 2004).
On December 2, 2001, the company filed for bankruptcy, and this led to one of the most cited corporate litigation processes. The case revealed the accounting fraud employed by the company and demonstrated how organizational structures in a company could be a major cause of downfall. This paper will look at company management, processes, and individual responsibility that led to Enron’s failure. It will further recommend the various things the company would have done to avert the downfall.
Discussion
Analysis of the company management, processes, and individual responsibility in causing the downfall
The company’s earlier organizational structure was based on constructivism. This organizational structure encouraged the employees to work hard and achieve more. The adoption of a new system, however, gave too much authority and power to the new managers. The new managers were in no way related to the company and, therefore, they used the new powers bestowed on them to enrich themselves (Dharan & Rapoport, 2004).
They were unaware of the company’s values and norms, and this made them abuse many of the powers they had been given. The new managers did not give sound guidance to the employees, and this caused the company to run into losses. Because the new organizational structure rewarded top performers, many young managers employed dubious methods to get the bonuses. This led to a culture of individualism and perfectionism in the company, which resulted in its downfall (Sterling, 2002). According to Kirk Hanson during an interview with Nakayama:
There are many causes of the Enron collapse. Among them are the conflicts of interest between the two roles played by Arthur Andersen, an auditor and a consultant of Enron. The lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations contributed to the company’s failure.
In some ways, the culture of Enron was the primary cause of the collapse. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures (Nakayama, 2002).
Another thing that made the company fail was that the financial statements of the company did not reflect its operations and financial position to its owners. The unethical practices in the company required it to change and misrepresent its earnings to show that the company was doing relatively well. According to Bethany and Peter, “The Enron scandal grew out of a steady accumulation of habits, values, and actions that began years before and finally spiraled out of control” (Elkind & Bethany, 2003). The company changed figures of income, cash flow, inflated the value of the assets, and dramatically reduced the liabilities in the books (Sterling, 2002).
The company’s executives adopted market-to-market accounting and tried their best to hide the company’s debts. These would help the company to report profits on investments even though they would later turn out to be a source of losses. Because of the large discrepancies that were aimed at matching up the profits and cash flow, investors and creditors were given misleading and, at times, false reports. One example of a deal that Enron reported as profitable when actually it was resulting in losses is 2000, a twenty-year contract with Blockbuster Video. The agreement would have seen the company introduce on-demand entertainment in various cities in America.
After rolling out several pilot projects, the company announced an estimated profit revenue of close to $100 million from the agreement. Many financial analysts were up at arms, asking the viability of the project and the demand for the services. When the agreement failed, Blockbuster terminated the contract, but Enron continued to recognize the expected profits from the venture in its books. This did not keep up with the agreement hence resulted in a loss (Fox, 2003).
The company had also created several offshore entities that were used to plan and avoid taxes as well as raise the company’s profits. These entities gave the management and owners of the company freedom to move currency, and its anonymity allowed the company to hide its massive losses. The practice of using these entities helped the company’s stock prices to rise, and the management of the company was accused of insider trading. The Chief Financial Officer of the company, Andrew Fastow, helped create these shell companies and used them to enrich himself and his friends. By the time the Enron scandal was unearthed, it is claimed that he had siphoned hundreds of millions from the corporations he had worked for and their investors (Sterling, 2002).
The dubious practices at the company management level ultimately led to its downfall and rendered the company bankrupt. The downfall was not only a result of the improper accounting standards and alleged corruption but also stemmed from the organizational structure that was adopted. The organizational structure that was adopted by the company can be described as very competitive and individualistic to a point where there was no teamwork in the company (Fox, 2003).
It can also be described as one that promoted perfectionism and encouraged power-seeking among the employees. This kind of culture in the company made the employees to be scared of their superiors and made them become ‘yes men.’ They agreed to the decisions made by their superiors and rarely made contributions or pointed out mistakes in the company (Fox, 2003).
Recommendations
Various things should have been done differently at Enron. The organizational structure that was adopted by the company should have been replaced after it was noticed that it was changing the values and norms of the company. The employees should have been encouraged to work as a team, and the goals set should have been realistic and achievable. The review of employees should have been done by an external firm instead of the internal authority created. This would have made the reviews honest, and the culture of individualism and “looking out for each other” would not have sufficed.
The new members of the management should not have been given autonomy and authority to carry out transactions on behalf of the company without senior management supervision. The senior management should always be the one to guide young managers and help them adapt to the company.
The management should have been more honest about the financial situation of the company. There should have been mechanisms in the company’s management that require it to report and make available the balance sheet report to shareholders. To avert issues like those that faced Enron, companies should thoroughly keep checks on their top management. This is because if they are left to run the company without proper supervision, they might connive and cause a company to fail just like Enron.
References
Dharan, B. G., & Rapoport, N. B. (2004). Enron: corporate fiascos and their implications. New York: Foundation Press.
Elkind, P., & Bethany, M. (2003). The smartest guys in the room: the amazing rise and scandalous fall of Enron. New York: Portfolio.
Fox, L. (2003). Enron: the rise and fall. New York: Wiley & Sons.
Nakayama, A. (2002). Lessons from the Enron Scandal. Santa Clara University. Web.
Sterling, T. F. (2002). The Enron scandal. New York: Nova Science Publishers.