Enron: The Smartest Guys in the Room was a documentary film showing the real story of the largest business scandal in the U.S. where top executive officers in Enron Corporation squandered over one billion American dollars while the Corporation investors and employees lost everything. Enron Corporation was a leading commodity, and Service Company established in Houston, Texas.
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It was the seventh largest companies at the time. The executive officers included Ken Lay, the CEO, Chief Operating Officer, Jeffrey Skilling, Chief Financial Officer, Andy Fastow and the Accounting Firm, Arthur Andersen. The film was based on the 2003 award-winning book, The Smartest Guys in the Room by Fortune reporters, Bethany McLean and Peter Elkind.
It also featured insider accounts and fire-raising corporate videotapes audios, interviews with former Enron executives and employees, reporters, former Governor of California and stock analysts. The film significantly examined the collapse of Enron Corporation in 2001.
It showed how smart and powerful men were driven by greed, which brought shame to themselves and severely affected innocent investors and employees (Gibney 1). In 2006, the film was nominated for Best Documentary Feature and consequently won the Independent Spirit Award for Best Documentary Feature.
Enron Natural Gas Pipeline Company was formed in 1985 as a result of the merger of Houston and Omaha, Nebraska’s and InterNorth, natural-gas companies. By 2000, Enron Natural Gas Pipeline Company had grown and dominated the North America natural gas industry and Jeff Skilling pioneered its expansion to a different range of products that included coal, steel, and water.
This resulted to skyrocketing of the company’s stocks and Jeff Skilling was considerably named CEO of the company. Many people invested in the company and with the increase in the range of products, and consequently, the number of employees had to be increased. Meanwhile, Skilling accounting results put Enron’s earnings at 53 million dollars a deal with no profits (Independent Lens 1).
Summary of what happened at Enron
Jeff Skilling declared the company’s earnings of $53 million dollars in a deal that yielded no profits. Essentially Enron faked its bookkeeping to report profits that never existed. The company operated on corrupt and closely-guarded mismanagement by Enron executive officers.
Enron came up with a scheme to artificially increase electricity demand at the West Coast. As a result, many California citizens experienced blackouts, and unfortunately, two people lost their lives while Enron’s West Coast desk pocketed huge profits. Enron also used ghost companies to hide the massive company losses that later toppled the company. Enron crafted to sell products that did not exist and its balance sheets never balanced.
Inexperienced and innocent employees who had dedicated their financial lives to Enron were surprised when Enron Corporation experienced prolonged fallout without their knowledge. About 20,000 employees lost their jobs. The company’s insurance covers crashed, Enron stocks and retirement accounts were equally devalued with urgency.
Similarly, many criminal accusations were prosecuted against several Enron company’s top executive officers. Additionally, Arthur Andersen’s accounting firm collapsed, the 2006 convictions of Ken Lay, Jeffrey Skilling and Chief Financial Officer, Andy Fastow also fell. This was followed by the death of Ken Lay the CEO, two months later.
Organization-related Problems at Enron
Organizational related problems are the problems that come up from a group’s influence. They include the shared beliefs and shared values. Being a well-established company, Enron ought to have had proper records, book keeping, financial statements open to public scrutiny and compliant with all financial standards.
Though Enron was applauded for being innovative, it had various organizational problems. Because Enron was dealing with many cash transactions, entered into future contracts, and acted as a bank for many commodities, it was necessary for them to generate cash flows which they never did.
Their reliance on borrowed cash for their dairy transactions was not a good organization technique. Enron similarly dealt with inexperienced employees, credits, debts and diverse businesses instead of being specific, which brought about organization problems. The idea of Enron dealing with all types of businesses both simple and complex made it impossible for employees to have the required expertise hence resulting to organizational problems.
The entry of Enron into trading activities that were unfamiliar to the employees was an organization problem. As trading expanded, Enron’s, financial status became complex, and unfortunately, they abandoned budgetary controls. The organized structure and policy of Enron clearly did not prevent unscrupulous activities like the artificial electricity scheme (GUIDESTAR 1).
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Enron did not have a mission or a strategic plan, and that can be viewed as an organization lapse. The top management and auditors of Enron were not professionally and psychologically up to the huge task in the company and were more concerned with earnings and hence could not realize eminent business risks (Cunningham and Harris 33).
Root cause of the organizational problems, values, ethical, reward systems, perceptions and leadership
Many companies like Enron have voluntary codes of ethics that prohibit executives from being involved in other business entities that do business with the company they are working for. However, the executive officers of Enron chose not to follow this code of ethics. Enron executives, like some other companies, were allowed to manage their own employee pension funds, which unfortunately, they messed up.
The diverse businesses involved in by Enron left no space for specialization and expertise hence creating organizational problems. The schemes and conspiracies developed by Enron’s executives were unethical and poor show of leadership traits.
The fact that Enron hired and paid its own auditors brought a conflict of interest into the legal and financial system which created an organizational problem. The legal and regulatory structure that allowed firms like Arthur Andersen to provide both consulting and auditing services developed a conflict of interest and thus resulting to an organizational problem.
The senior management at Enron did not receive extensive ethical training and as such did not have enough knowledge to arrive at concrete decisions. Corporate governance and leadership solely relied on the state of mind, will power and personal relationships of management. However, rules were skillfully, cunningly and willfully ignored though they were in place.
The fact that the law left considerable discretion to managers and executives to exercise their own business judgment about what was in the best interests of the company, enabled the executive officers of Enron to mismanage and practice corruption. Finally, the shareholders of Enron were not allowed to vet the management of the organization (Markkula Centre for Applied Ethics 1).
Detailed Analysis of the Problems Identified
Every corporate organization operates under its own set of code of ethics. The code of ethics details how employees, employers and company business should be transacted. Once this code of ethics is followed, smooth running of a company is guaranteed.
However, since this code is voluntary, top management in most cases ignore it and hence create organizational problems in a company. The executive officers in Enron ignored the code of ethics and conspired, mismanaged and engaged in corrupt activities that crushed the company.
Training of management team and employees ensures a good understanding of the business and required expertise. However, no such training was offered or sought in Enron, and thus it can be said that employees did not understand the newly introduced trading activities in the organization. The diverse business activities deny a company a sense of specialization and hence no mission.
This leads in business being executed in any way and thus there is no perfection. The loopholes in the legal framework are used by the wise to defraud companies. The fact that the law allowed the senior management to make personal decisions they saw fit for the company, also gave them a chance to do the opposite. Hence, the law can protect or be used to suit the highly ranked in a company.
Senior management should at all times demonstrate good governance in a company where the interest of the company should come before personal interests. In a situation where personal gains prevail, the shareholders and employees feel the wrath as in the case of Enron.
Conflict of interest destroys all company plans. In a position where an auditor is hired and paid by the management, chances of auditors giving decisions that suit the employer are high. External auditors are recommended in a public company to display the true financial position of a company.
Organization behavior theories that led to problems at Enron and how they relate to the Event at Enron
Organization behavior theories relate to ethics that dictate how companies should be run. For many years, philosophers have in literature stated and analyzed different theories that form the basis for ethics in business. Technological theories of ethics put more emphasis on the results of an action and can be classified into egoism and utilitarianism.
In this case, egoism defines what is correct and what is wrong with respect to oneself. In such a case, when required to give any business decision, an egoist will put self-interest first. This theory is believed to lead to illegal behavior. In the case of Enron, the management put self first in the west coast where they leaped a lot of profits as employees lost their jobs while some lost their lives due to the artificial electricity demand scheme.
Utilitarianism theory, on the other hand, puts more emphasis on the overall amount of good that might be produced by an action or a decision. In this case, a company might decide to expand its business physically or across the borders. Utilitarianism will analyze the amount of good that can be derived from this action.
In the case of Enron, the management decided to introduce other trading activities like coal and water on top of the initial natural-gas business. This act was well rewarded since Enron stocks skyrocketed to generate high revenues in a short period of time.
Deontological theories of ethics put more emphasis on: the rights of all individuals, and the intentions of the person(s) performing an action. It cannot harm some to benefit others but treats all equally. In the case of Enron Corporation, the government declared the corporation bankrupt, prosecuted all that mismanaged the company and participated in corrupt deals that severely affected the employees and investors. By doing this, it treated everybody accordingly.
A Justice-based theory of ethics is concerned with the perception of fairness of actions. To determine the fairness of an action; distributive, procedural, and/or interaction rules are used. A just action treats all fairly and consistently in accordance with the set ethical or legal standards.
In the case of Enron Corporation event, the court delivered justice on the criminal proceedings against the corrupt management officials and the accounting firm. Relativism theory of ethics dictates that there are no universal principles of ethics and that right and wrong must be determined by each individual or group.
It observes that standards of right and wrong may change with time and cultures. And hence the rights and wrongs are subject to interpretation (Barnett 1).
Any of the above listed problems will obviously befall a company if not checked well in advance. Enron Corporation was highly affected by organizational problems to the point of a closure and bankruptcy declaration of their accounting firm. The schemes demonstrated by the management were a sign of poor leadership, bad governance, greed for money, and self-centeredness.
Mismanagement affects the employees, investors and the management itself. In the case of Enron, more than 20, 000 lost their jobs, two people died out of the faked electricity demand, senior management was taken to court, investors encountered losses, accounting firm declared bankrupt and the sudden fall of Enron Corporation.
But since some of these problems are due to ignorance, lack of personal will to do right, bending the law, and selfish interests, personal conscience and good governance are required to protect the interests of all in a company.
Governments should prescribe stiff penalties for all forms of mismanagement, corruption and conspiracy in a public owned company. As of such, managers and directors in such companies should be vetted before assuming management positions to ensure transparency and professionalism.
Barnett, Tim. Ethics, Reference for business, Encyclopedia of business. Reference for Business, 2011. Web.
Cunningham, Gary and Harris Jean. “Enron and Arthur Andersen: The Case of the Crooked E and the Fallen A.” Global Perspectives on Accounting Education 3.1 (2006): 27-48.
Gibney, Alex. Enron The Smartest Guys In The Room. HDNET FILMS, 2005. Film.
GUIDESTAR. How Ethical Is Your Nonprofit Organization? GUIDESTAR, 2011. Web.
Independent Lens. Enron: the smartest guys in the room. Public Broadcasting Service, 2011. Web.
Markkula Centre for Applied Ethics. What Really Went Wrong With Enron? Santa Clara University, 2011. Web.