Enron

The Enron scandal has far-reaching political and fiscal implications. In just 15 years, Enron grew from nowhere to be Americas seventh largest comp some(prenominal), employing 21,000 staff in more(prenominal) than 40 countries. simply the tightens success turned out to assume involved an figure scam. Enron lied about its profits and ties accused of a range of comical dealings, including concealing debts so they didnt show up in the companys accounts. As the depth of the deception unfolded, investors and attributeors retreated, forcing the firm into Chapter 11 blastcy in December.More than sestet months after a venomous inquiry was announced, the guilty bursties cast allay not been brought to justice. Leaders Leadership is critical to the creation and main tennerance of polish there is a constant interplay between finishing and mavininghip. Leaders take a leak the mechanisms for cultural embedding and reinforcement. Cultural norms arise and change because of what le aders tend to focus on their attention on, their reactions to crises, their role modeling, and their recruitment strategies.Referring to Enron, the major mistake made by leaders argon as follows Compensation Programs As in almost separatewise U. S. companies, Enrons management was heavily compensated using source options. Heavy use of received option awards linked to short-term birth price may explain the focus of Enrons management on creating expectations of rapid growth and its efforts to puff up reported earnings to jibe Wall Streets expectations. The stated intent of stock up options is to forwardness the interests of management with shareholders.But most programs award sizable option grants ground on short-term business relationship performance, and there are typically few requirements for managers to hold stock purchased through option programs for the long term. The experience of Enron, along with many other firms in the last few years, nobbles the possibility t hat stock pay programs as currently designed can motivate managers to fall upon decisions that pump up short-term stock performance, but fail to hold medium- or long-term value (Hall and Knox, 2002). Dishonestly concealed debt and oerstated earnings. trouble t Enron Corp. admitted it overstated earnings for nearly five years. In an indorsement filing, Enron said pecuniary statements from 1997 through the third quarter of 2001 should not be relied upon, and that outside businesses run by Enron officials during that period should have been included in the companys earnings reports. As a result, Enron is reducing earnings for those years by $586 zillion, from $2. 89 billion to $2. 31 billion. The company also acknowledged that part of earnings came from deals with partnerships controlled by recently sacked CFO Andrew Fastow.These transactions are already being investigated by the Securities and Exchange Commission. Enron said these deals enabled Fastow to earn more than $30 milli on. Enron also conceded that three entities run by company officials should have been included in its financial statements, based on generally accept accounting principles. In addition, the company revised its debt upward in each year from 1997 to 2000. As a result, Enrons debt at the end of 2000 was $10. 86 billion, $628 million more than previously reported. Enrons Performance Review System.PRC have two basic motivational forces fear and greed. Skilling wanted to keep simply the very best, meaning those who produced their profit and volume target so every six months one or two out of every ten employees were dismissed. In pitting employees against each other, the rank-and rank System acted to stress the imagined weaknesses of individuals and to change organizational problems. In sum, this led to an erosion of employee confidence in their bear comprehensions and, most crucially, to further compliance with the organizations leaders in a way that strengthened conformist behavio r.In practice, the PRC remains encountered to encourage entourages or fiefdoms (Dallas 2003) of loyal employees who gravitated towards unchewable players for protection. The PRC was a top executiveful mechanism for preventing the emergence of subcultures running counter to the organizational tone set by Enrons hierarchy. Members of the endangerment Management and Assessment Group who reviewed the cost and conditions of deals (and who were largely inexperienced recent MBA graduates) as well as national auditors, were fearful of retaliation in the PRC from persons whose deals they were reviewing (Chaffin and Fidler 2002 Dallas 2003).At best, control was compliance-based, rarely encouraging employees to follow either the letter or the intent of laws (Dallas 2003). This penitentiary environment brought the consequences of dissent sharply into focus. Enrons culture has been characterized as unmerciful and reckless lavish rewards on those who played the game, while persecuting those who raised objections (Chaffin and Fidler 2002, 4-5). conduct by Skillings cavalier attitude to rules, top management conveyed the low that all that mattered was for employees to book profits.In sum, this led to an erosion of employees confidence in their own perceptions and, most crucially, to further compliance with the organizations leaders in a way that strengthened conformist behavior. Former employees have noted how loyalty required a sort of group hypothecate (Chaffin and Fidler 2002, 2) and that you had to keep drinking the Enron water (Stephens and Behr 2002, 2). A myth of smooth, flawless trading operations was perpetuated with problems papered over (McLean 2001, 58).The net effect of the rank-and-yank system was to decrease the likelihood that employees would raise objections to any illegal or unethical behavior of powerful players. The battle the PRC created was exacerbated by Enrons bonus regime. As one insider edit it, sure, the culture at Enron was treacher ous, but that was the point (Swartz and Watkins 2003, 56). Ultimately, the overestimation of profits and underrating of costs was endemic to the organization.The cheat on debt and financial report lead to character erosion which destroys the image of this company and loss of business and friendly standing. The harsh policy alliance the relationship between managers and ordinary workers, coiffure well-intentioned employees were inhibited from doing the right thing. mount up get on with of Directors in Enrons collapse concluded that the firm had developed a pervasive culture of deception (Senate Subcommittee 2002). As such it was designed and operating at the direct of connivance.CEO Lay used direct force to fire any possible successor with whom he disagreed and either he or other top Enron managers used indirect force to deceive and manipulate employees and other stakeholders for top executive advantage. Whatever standard operating procedures were developed at the level of confo rmance were honored except to the extent that they did not offend upon executive perks or interfere with top executives exercising a symbol of feudal control over internal subjects.When external compliance exist to restrict Enron corporate prerogatives, aggressive tactics to reduce or liminate restrictive standards were routinely employed. The extent and degree to which illegal non-compliance was the cultural norm at Enron will be determined in the courts. Enron did not reach the trueness level it never democratized its power structures so that employee and community input could check strategic direction or restrain executive perks. For all intents and purposes, the work culture of Enron was that of a moral jungle where abuse of power predominate principled economic democratic norms it was a moral powder keg ready to explode.(1) Fiduciary Failure.The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest human s company in the United States, by allowing Enron to engage in racy risk accounting, inappropriate negate of interest transactions, extensive undisclosed off-the-books activities, and unjustified executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates. 2) High Risk Accounting. The Enron Board of Directors knowingly allowed Enron to engage in high risk accounting practices.(3) Inappropriate Conflicts of Interest. Despite clear conflicts of interest, the Enron Board of Directors approved an unprecedented array allowing Enrons Chief Financial officer to establish and operate the LJM secluded equity funds which transacted business with Enron and profited at Enrons expense.The Board exercised scant(p) oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair de aling. (4) Extensive unrevealed Off-The-Books Activity. The Enron Board of Directors knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public revelation of material off-the-books liabilities that contributed to Enrons collapse.(5) Excessive Compensation.The Enron Board of Directors approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enrons 2000 annual bonus and performance unit plans, and failed to monitor or bar abuse by Board Chairman and Chief Executive Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line. (6) Lack of Independence. The independence of the Enron Board of Directors was compromised by financial ties between the company and certain Board members.The Board also failed to ensure the independence of the companys auditor, allowing Andersen to provide internal aud it and consulting services while serving as Enrons foreign Accountants/Auditors Andersens auditors were extortd by Enrons management to defer recognizing the charges from the special purpose entities as their credit risks became clear. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss.To pressure Andersen into meeting Enrons earnings expectations, Enron would occasionally allow accounting firms Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new firm to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest.Revelations concerning Andersens overall performance led to the break-up of the firm, and to the following assessment by the Powers perpetration (appointed by Enron s board to look into the firms accounting in October 2001) The evidence for sale to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enrons financial statements, or its obligation to bring to the attention of Enrons Board (or the Audit and accordance Committee) concerns about Enrons internal contracts over the related-party transactions.Ethical Code/ work at Enron senior management gets a failing grade on right and disclosure. The purpose of ethics is to enable recognition of how a particular spotlight will be perceived. At a certain level, it hardly matters what the courts decide. Enron is bankruptwhich is what happened to the company and its officers before a single day in court. But no company engaging in similar practices can issue forth encouragement for any suits that might be terminated in Enrons favor.The damage to company reputation through a negative perception of corporate ethics has already been done. Enron s top managers chose stakeholder deception and short-term financial gains for themselves, which destroyed their personal, and business reputations and their social standing. They all risk criminal and civil prosecution that could lead to imprisonment and/or bankruptcy. Board members were in like manner negligent by failing to provide sufficient oversight and simplicity to top management excesses, thereby further harming investor and public interests (Senate Subcommittee 2002). Individual and institutional investors lost millions of dollars because they were misinformed about the firms financial performance ingenuousness through questionable accounting practices (Lorenzetti 2002).Employees were deceived about the firms factual financial condition and deprived of the freedom to diversify their retirement portfolios they had to stand by helplessly while their retirement savings evaporated at the selfsame(prenominal) time that top managers cashed in on their lucrative stock options (Jacobius and Anand 2001). The government was also harmed because Americas political tradition of chartering only corporations that serve the public good was violated by an utter overlook of economic democratic protections from the massive public stakeholder harms caused by aristocratic abuses of power that benefited select wealthy elite.