Enron: The Smartest Guys In The Room

Enron, a once thriving Houston-based energy titan, is now reduced to a cautionary adage among Americans to what massive failure corporate greed could lead to. At its core however Enron’s ethical and moral behavior was sound and seemed to be aligned with industry competitors. In an opening statement to the Enron Code of Ethics issued in July 2000, Lay wrote: “As officers and employees of Enron Corp., its subsidiaries, and its affiliated companies, we are responsible

Ken Lay and Jeffrey Skilling were the team known as The Smartest Guys in the Room. This powerhouse team of two people coordinated their work to meet a shared common objective. That objective was to make money. This objected created a culture that was one of “intense pressure to keep Enron stocks on an ever-rising curve.” (Stephens

Enron is considered America’s largest corporate failure in history and is a story about greed, fraud, and human tragedy. In 1986, Houston National Gas and Internorth, a natural gas pipeline company, merged to create Enron with Ken Lay as the chair and chief executive officer (CEO). Lay transformed the company into a high tech global operation that traded water, energy, broadband, and electricity. In less than a year, problems arose of fraud and an investigation confirmed inaccuracies with the companies accounting records. In 2000, Enron’s gross revenues exceeded $100 billion, yet no one really knew how Enron was making its money (Stein & Pinto, 2011). In September 2001 when bankruptcy was imminent, top executives secretively took their stock options worth millions while encouraging employees to keep theirs in the company. Three months later, more than 20,000 employees lost their jobs, insurance, and pensions when Enron announced bankruptcy. The movie Enron, The Smartest Guys in the Room, is about how management, leadership, and organizational structures failed and caused unnecessary harm to many people (Gibney, 2005). This paper will look at how organizational behaviors including; ethics, culture, and leadership styles of top executive leaders caused the debacle of Enron.

Corporate malfeasance has earned a place among the defining themes of the last decade and a half, helping to give birth to the global recession and the Occupy Wall Street movement. Enron, a Houston based commodities, energy, and service corporation, created arguably one of the worst scandals of the past two decades. Due to reporting tactics implemented by Chief Executive Officer Ken Law and Chief Executive Officer Jeff Skilling, which hid huge debts from the company’s balance sheet, the company filed for bankruptcy, shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. Before the accounting scandal became public in 2001 due to whistleblower and Vice President

Enron was an U.S. energy-trading and utilities company that housed one of the biggest accounting frauds in history. Enron 's executives employed accounting practices that falsely inflated the company 's revenues, which, at the height of the scandal, made the firm become the seventh largest corporation in the United States. Once the fraud was detected, the company quickly unraveled and filed for Chapter 11 bankruptcy on Dec. 2, 2001. (Investopedia, 2014)

Enron and “Arthur Anderson LLP (AA)” both started out as reputable companies, but in the end both became unethical (Brooks & Dunn, 2015, p. 98). Many experts believe this was due to a paradigm shift in their “corporate cultures” (Brooks & Dunn, 2015, p. 1-608). This shift in employee behavior can be observed from the many questionable strategies that Enron carried out with the enablement of AA. Therefore, this paper will examine the elements that contributed to Enron and AA’s demise through answering two sets of case study questions, provide a “current update on Enron and AA’s” condition, and will give a “final conclusion/recommendations for Enron” and AA (WBU, 2016). Thus, making this type of an examination should enhance the knowledge of both the academic and business communities.

In 1990 Kenneth Lay hired McKinsey & Co consultant Jeff Skilling to improve Enron’s finances. Skilling joined the company on the condition that they adopt mark-to-market accounting for their long term contracts .

Enron was founded in 1985 by Kenneth Lay and by the mid 90s under the tutelage of Jeff Skilling, it was being touted as a revolutionary company that was destined to change the face of business and the energy industry. However, by 2001 it became clear that Enron’s astronomical growth and sustained profitability was built upon fraudulent grounds. The company was stashing debt but continued to report profits. Employees were taking huge risk and gambling exorbitant amounts and many were outright stealing from the company for their own personal gains. By the end of 2001, Enron’s downfall resulted in the largest corporate bankruptcy in United States history at the time, and more than 20,000 employees were laid off. The company’s fall from grace wasn’t a result of incompetence, instead it was the inevitable consequence of the toxic culture which was incubated and disseminated by Enron’s top management to all other aspects of the company. Enron’s strong culture became a liability because culture defines what is important to the organization and informs employees about how things are meant to be done. As I will demonstrate through various examples of Enron’s questionable business tactics, its potent corporate culture was low on attention to detail while being high on aggressiveness, risk taking and outcome orientation. This combination of factors created the climate for unethical behavior to become a deep-rooted norm within the organization.

The organizational structure of Enron was a calculated one with a clique that was thought as being the “smartest” guiding the rest of the workers. It included Kenneth Lay: Chairman, and Chief executive officer, Jeffrey Skilling: President, Chief operating officer, and CEO (February–August 2001), and Andrew Fastow: Chief financial officer. With the leaders known to be wise and smart, the workers and traders believed in them. They did what was asked of them by the employers. The clique ensured money was not an issue for the workers and subsidies were allocated to them at will. This in itself encouraged the workers to be hardworking and yet

The reprehensible story of the Enron Corporation’s rapid rise to success followed by their consequential disgraceful fall is one that has captivated the attention of the public for more than a decade. Not only was this scandal highlighted largely due to the widespread publication of the Enron Corp’s actions in the newspapers and television but must notably their substantial contradictory actions against not only basic ethics but Enron’s published Code of Ethics. Outlining the reputation of Enron, Kenneth Lay, Chairman and Chief Executive Officer (CEO), in a foreword within Enron’s Code of Ethics stated, “to be proud of Enron and know that it enjoys a reputation for fairness and honesty and that it is respected.” Even though Kenneth Lay spoke to the company as a whole on manners in ethics and good conduct, it was he and a number of other high placed executives who choose to ignore their own statements and act in complete disregard. When running an organization executives are held responsible and expected to maximize their shareholders interests and enhance overall capital gain while upholding to the practice of ethical processes and abiding by common governing virtues. Through the study of three key virtues (integrity, fairness, and justice) and applying them to the Enron case, it will quickly be seen how evident the leaders of this organization choose to neglect ethical practices and virtues to gain personal financial growth.

Imagine that we were stockholders of one of the biggest company, and our stock value has been on the rise and is now up to almost 100 dollars a share, but one day, our share value drops below one dollar. This happened to shareholders of Enron. The total debt amounted to over $ 16 billion, which was the largest corporate bankruptcy in American history. Shareholders lost 60 billion dollars within a few days, 4500 employees lost their jobs, and the employees lost billions in pension benefits. I had never heard the name of Enron nor Enron’s scandal until I watched a film, “Enron: The Smartest Guys in The Room,” but I realized the Enron scandal affected the whole of the business in the United States.

Since Enron's ethical dilemma provides numerous lessons for the corporate world, especially with regards to corporate ethics and ethics, it also offers some learning objectives. The first learning objective for the case is to examine how leaders face moral and ethical dilemmas or issues i.e. lessons for corporate leaders and managers. Secondly, the case shows how systems thinking can be used to analyze organizational issues and develop appropriate solutions for the issues. Third, the case is used to demonstrate how questions can be used to stimulate thinking in order to address the underlying issue.

Enron’s corporate culture had a great deal to do with the benefits it gave to its employees as well as its top managers beginning with overlooking unethical behavior as long as it provided monetary value. Their corporate culture is described as arrogant, and rightfully so, by the end of 2000 Enron had become the sixth largest energy company in the world (United States Government Publishing Office, 2003, p. 67). This mindset of superiority and pride lead employees to believe they could increase risks without regard for the consequences. Excellence was expected of Enron employees at all cost. Their success in business lead to various incentives, those that ranks 1’s and 2’s in their peer evaluation was often rewarded with

The first failure of Enron is that it lacked a solid accounting information system. Instead, the firm adopted a concept called mark to market. This is where all accounting records of a company’s assets were based on the prevailing market price. The failure of this system is that it allows the accountants to record the value of the assets and liabilities at any value. This orchestrates mass cover ups and conspiracy as revenues will be based on speculation and derivatives. In the end the financial statements produced are highly in accurate and do not show the true position of a corporation. For instance, through this accounting system Enron was able to show that its revenues were growing while in fact the revenues were non-existent in the first place. A good case in point is the offshore partnerships opened by the CFO Andrew Fastow, and Enron official. The strategic offshore partnerships were used by Enron to project revenues that were reported in the company’s financial statements (Seabury, n.d). Other deals such as the blockbuster live streaming movie using bandwidth technology was used to inflate the revenues of the company by recording projected revenues from such deals. In return, financial analysts gave the company’s stock a higher rating based on projected revenues and derivatives. This explains why Enron was the golden goose for Wall Street prior to its collapse. From the above analysis it is apparent that the accounting information

Ethical conduct is a representation of leader’s self-expression of who they really are, and with past multi-billion dollar companies reported committing unethical and unmoral acts of behavior, it is imperative that leaders fully comprehend the ramifications related to their unethical behavior. Furthermore, an ethical virtue demonstrated by a leader paves the foundation for their followers to behave with the same ethical behavior established within the organization thus establishing a followers’ commitment to their constitution. Additionally, the rise in corporate ethical scandals today representing the unethical behavior and, raising awareness relevant to the probe into their illegal and unethical acts of behavior. The fact that leaders represent the key ingredient within an organization expected to exhibit the utmost ethical behavior has become the cutting edge of issues involving acts of unethical conduct.