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Enron Company experienced a crisis to its collapse in the year 2001 which was culminated by application for bankruptcy. The firm was characterized by malpractices in its administration that led to embezzlement of funds by top officials and a subsequent accounting cover ups.
The major cause of the collapse of a once prominent company was its selfish leadership that disregarded management’s elements such as organizations theories and behavior leading to inappropriate culture and ethics and practices.
Organizational theory refers to the study of organization with the aim of identifying themes into an organization’s objectives. Organizational theory ensures that issues facing an organization are resolved and responsibilities undertaken.
This paper seeks to discuss organizational theory with respect to Enron Company that was forced into collapse. The paper will look into the issues that faced the company leading to its collapse. The paper will then analyze the problems and then look into organizational behaviors and theories that affected the company.
Problems encountered at Enron Company
Enron Company was characterized by a number of problems in the form or malpractices that led to the eventual collapse of the entity. The collapse was a result of a long time venture into unchecked practices by the company through its executives.
These practices were for a long time concealed from the public and the company’s stake holders such as its investors. The company started by ensuring that it was not under regulation by the government. This meant that the practices and records of the company were exempted from scrutiny that is normally done over business entities.
Under the deregulation, the company’s “executives were permitted to maintain agency over the earnings reports that were released to investors and employees alike” (Laws 1).
As a result of the deregulations, Enron was able to make biased representations of its records to parties who could be interested in such data. Information about losses and debts by the company were not fully reported portraying an untrue status of the company.
Consequently the accounts, which were presented by the company, continually attracted more people to the company in the form of investors. The application for deregulation by the company seems to have been a planned move to help it conceal its malpractices that was to follow the grant.
The company was then reported to have a high level of misrepresentation of its records to its investors and potential investors. As a result, the unreal profitability status of the company stimulated its then existing and potential investors into putting money in the company.
These increased supposed investments were embezzled by the company’s executives rather than being put into the company and further misrepresentations made. Apart from intentionally concealing its true financial status, the company also engaged in practices that were fraudulent in nature.
The company for example posed an energy crisis in the state of California in the year 2000. The major issue that faced the company was however the embezzling of funds by the company’s executives. As people were busy investing the company, the management was on the other hand looking for avenues to channel the company’s finances into pockets of individual executives.
Money that was meant for use on the company’s activities and interests as well as those due to the company’s employees was misappropriated by the company’s top brass. It is actually this embezzlement that led to the company’s insolvency (Laws 1).
The company was also characterized with high level of dishonesty in the delivery of its services and goods to its consumers. Enron is for instance reported to have been inducing problems in transmission of electricity in order to gain more revenues as it posed to solve the unreal problems.
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Accounting malpractices such as “reduced tax payments, inflated incomes and profits and inflated stock piece and credit rating” (Tesfatsion 1). The company’s money was then channeled by the management to their accounts or those that belonged to their friends of relatives (Tesfatsion 1).
Root Causes of the Problems at Enron
The Enron Company was driven into collapse by a number of factors that fuelled its malpractices. One of the causes of the malpractices was the competitive nature that the company had, or was assumed to be having. The firm had strived to be one of the best and gained favor with the business community, including the press that helped in refining the company’s image.
The company, having been ranked among the country’s top ten firms, had to look for avenues to keep its feet on the economic ground and avoid at least as much as possible any eventuality that could lead to its collapse. It is this need to protect its gained untrue competitive status that the company had developed which fuelled its cover up avenues.
The company could not afford to compromise its credit rating which would translate into its stock prices and its investor’s attitude. The desired competitive culture is therefore responsible for driving the organization into actions that were meant to protect the firm but which later spilled to its collapse.
This particularly led to the company’s engagement in partnerships that were not actually at the firm’s interest such as profitability, but to help the management in hiding the true status of the organization. It similarly led to adoption of compromised accounting practices that were also meant to hide the true status of the company (Garsten and Hernes 107).
The environment that was created in the Enron Company that forced it into its desire to competitive was a significant development into the subsequent practices that compromised the business. It was actually this desire that led to the company’s loss of ethical practices as anything had to be done in order to protect the organization’s hidden secrets.
Though unethical values can be checked and controlled easily in an organization that has an ethical top brass that is ready to influence and control ethics in the organization, it is very difficult to first of all detect and then even control such practices if they manifest in an organization’s top management.
In Enron, the problem was an organized scandal that was planned and started by the organization’s founder and then fuelled by the company’s executives.
Since it’s such leadership that should “create, reinforce or change the organization’s culture” through “attention, reaction to crises, role modeling, and allocation of rewards” among others, a compromising leadership in the organization was a cause to its problem (Garsten and Hernes 107).
A good ethical leadership could have for example advised against the practices that were going on in the firm or even informed the public of the happenings. The organizations reward system, or its lack of reward system to its employees was another factor in the resultant problem that was later to be realized.
While the top management ripped the firm of its finances through embezzlement, the firm’s other employees were not taken care of in terms of rewards or motivation. Consequently, they were discouraged and probably lost interest in working for the company.
Though the company was making losses due to its poor investments and embezzlements, there is a possibility that reduced efficiency of the company’s workers must have as well contributed to the firm’s loss making (Garsten and Hernes 110).
Sims records that the Enron Company was also a victim of its own culture of greed that was formed after the energy industry was deregulated. The firm then went into experimental activities that stretched its workers through continuously raised standards that forced the workers off ethical values.
The high targets that were set for the workers were at the same time not healthy as they were forced to overstretch their capacities (Sims 150).
Analysis of the Problem: Organizational Theories
The failure by Enron Company leading to its collapse was based on the firm’s deviations from principles that ought to have guided it through to its success peak.
The short term objectives that the organization relied on that for instances forced its workers into unethical measures in order to meet the company’s high standards and the accounting malpractices that the firm employed fell short of professional expectations of management.
Organizational theories that help managers into understanding their activities were for example greatly ignored by the organization. Motivational theory for instance provides that a management should understand the terms of contracts of its employees under psychological considerations.
Any alteration to such terms should be undertaken in a way that will motivate the employees. On the contrary, the firm contravened its employees’ psychological contracts by continuously hiking their targets. Role theory on the other hand provides that an organization recognizes the efforts that employees are putting with respect to their roles.
Management should therefore ensure that roles are allocated in a manner that is not oppressive because this can cause conflicts among employees. Personality theory also explains the eventuality of the firm. The type of individuals that ran the company was characterized by a high level of impatience with respect to their targets.
The bright guys at Enron wanted a faster achievement of objectives for the firm as well as for themselves. This is why the firm’s employees were driven to high targets even if they were to break rules. The top officials also had to make their way to quick wealth even at the expense of the firm.
Personality theory explains that these traits never lead to long term success. The firms can therefore be said to have ignored organizational theories (Barzilai 1).
Organizations behavior refers to people’s reactions with respect to an organization. Reactions such as thoughts, emotions and actions within or around an entity form the behavior. The actions of Enron’s management that was evidenced in their embezzlement of funds, malpractices and disregard to employees form behavior that led to the collapse of the firm (McShane and Steen 1).
The Enron Company was faced by a scandal that was caused by the firm’s management. It is revealed that the management was driven by selfish motives that aimed to enrich the top individuals and disregarded the organization and its other stakeholders. Cases of unethical behavior, poor organizational culture together with disregard to organizational theories and behavior contributed to the firm fall.
Barzilai, Kathryn. Organizational theory. Organizational Theory, n.d. Web. <https://case.edu/>
Garsten, Christina and Hernes, Tor. Ethical Dilemmas in Management. New York, NY: Taylor & Francis, 2008. Print.
Laws. (2010). Enron scandal summary. Finance Laws, 2010. Web. <https://finance.laws.com/enron-scandal-summary>
McShane, Steven and Steen, Sandra. Canadian organizational behavior. Canada: McGraw-Hill, 2009. Print.
Sims, Ronald. Ethics and corporate social responsibility: why giants fall. Westport, CT: Greenwood Publishing Group, 2003. Print.
Tesfatsion, Leigh. The Enron scandal and moral harzad. Iowa University, 2011. <http://www2.econ.iastate.edu/classes/econ353/tesfatsion/enron.pdf>