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Evelyn Guerrero

Assignment 8e: Case Study Analysis Final Draft

Enron Corporation was formed in 1985 after Houston Natural Gas was purchased by

InterNorth. This created the longest natural-gas pipeline network. In 1986, it was renamed to

Enron and quickly converted into a natural gas, electricity, and communications company

(InfoPlease). In the year 2000, it was the 7th largest United States corporation. At the time, it

was the “largest bankruptcy and stock collapse scandal” (InfoPlease). I will now be analyzing

where Enron Corporation went wrong.

Before the scandal, the Enron Corporation was considered one of the top and largest

companies, as stated before. Now it is seen as an example of how companies can get away with

cheating the books as well as the consequences that follow. Enron used the coercive power and

one of the biggest factors of this fraud scheme was the aggressive environment. The corporate

culture was not only aggressive but toxic. It was led by “corruption, greed, and deception”

(Martin). There was no trust between the employees and the environment was extremely

competitive. Employees who stood up to the unethical practices being condoned were often

belittled, ignored, or fired. The organizational culture made high performance a priority rather

than praising loyalty and ethical behavior. The authorities in charge were solely focused on

their own personal gains rather than their employees, customers, or company as a whole. This

led to the action of falsifying records to inflate earnings.

The main ethical issue was bad leadership behavior, which led to the unethical and

deceptive accounting practices. They “cooked the book” to inflate their profit. The corporation

was also “accused of manipulating the electricity markets during the California energy crisis of
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2000-2001” (InfoPlease). The profits from this were concealed by changing their financial

reserves. The ethical dilemma for many employees at Enron was to play the scheme game,

resign, or whistle blow and lose their job. Ethical standards and practices were ignored, and

performances were praised. Many employees were caught up in who could cheat better to beat

the other.

Furthermore, Enron used fake holdings as well as off-the-books accounting practices to

fool regulators (Segal). Enron was able to pull off-balance-sheet partnerships. This allowed the

debt to be concealed for a long time. They also used the technique “mark-to-market

accounting” to hide their financial troubles (Bondarenko). This technique made it possible to

create deception of high profits. This being because it measures by the current market value

rather than the book value (Segal). They also used SPE’s, also known as Special Purpose Entities,

to keep certain assets off the record. By doing this, they were able to make their losses less

critical (Chron).

From this, Enron Corporation had no choice but to file bankruptcy, which led to many

employees being laid off as well as losing their retirement savings. The shareholders of the

company also suffered a great loss of money. In reality, in 2000, Enron had produced a net

income of $42 million rather than the $979 million they had originally claimed. The same

situation occurred with their cash flow in the same year. Enron’s cash flow was negative $154

million when they had claimed $3 billion. They now had 22,000 claims that amounted to $400

billion.

The vice president, Sherron Watkins, had noticed some off-the-books activities and took

her concerns to the new CEO and Chair, Ken Lay. However, nothing was done after addressing
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her concerns, and was punished for speaking up. In 2002, Watkins testified before Congress.

Enron could have not falsified so many records without the legality and approval of attorneys,

auditors, and banks. Bankers were found guilty of assisting the company to alter financial

records. Attorney, Vinson & Elkins, helped structure some special purpose partnerships by

supporting the legality of most transactions and approving them.

Enron’s auditor, Arthur Andersen, played a major role in all of the decisions that were

made as he was responsible for the financial statements as well as internal bookkeeping. He

and the firm were found guilty of destroying important auditing documents during the

investigation. However, it was later overturned. This firm was involved in poor accounting

practices by approving many falsified reports and statements for many years. Due to the firm’s

behavior, many public shareholders lost over $25 billion (SpriggHR).

The brain of the operation, CFO Andy Fastow, was found guilty for inflating Enron’s

profits and charged for fraud, money laundering, conspiracy, and obstruction of justice. Then,

“the SEC filed a civil lawsuit against Fastow claiming that he defrauded investors and violated

securities laws” (Chron). Likewise, the former CEO Jeffry Skilling “was convicted of conspiracy,

fraud, and insider trading” (Segal). The CEO Kenneth Lay was also convicted for fraud but

passed away before sentencing.

The actions of the company should have benefited everyone and should not have

caused harm to the society or environment. Since Enron had unethical leadership, this directly

impacted the corporate culture of the firm. Therefore, they were not socially responsible, and

they impacted the whole industry. Enron did not abide by a code of ethics, which clearly stated

the principles of human rights, the securities trades regulations, the business ethics, the
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responsibility for reporting, and the consequences. They also did not respect or treat their

customers, employees, shareholders, or stakeholders in a good manner, nor did they show any

forms to “maximize its positive impact on stakeholders and minimize its negative impact” (Book

Definition). Only until 2001, when they incorporated some corporate social responsibilities

which included:

“1. Secured board oversight of social/environmental performance.

2. Expressed support for Universal Declaration of Human Rights.

3. Established formal partnerships with WBCSD (World Business Council on Sustainable

Development), IBLF (International Business Leaders Forum), and CI (Conservation

International).

4. Responding to stakeholder concerns on an ongoing basis” (Medium).

This scandal set forth many sets of standards and practices to avoid future schemes

from different companies. For example, the Sarbanes Oxley Act was put in place to prevent

business fraud. “The Financial Accounting Standards Board [also] raised its levels of ethical

conduct” (Segal). Enron filed bankruptcy and began to collapse in 2001 but the demise of the

corporation was not final until 2007. Furthermore, this case study has taught me a lot about

ethics in accounting especially how morals, integrity, respect, and responsibility are necessary.

It has also shown me what could happen in my work environment and how I could handle the

situation if present.
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Work Cited

“6 Ethical Issues in Business and What to Do About Them.” SpriggHR. 19 Febuary 2020.

[Link]

about-them/#:~:text=Fundamental%20ethical%20issues%20in%20business,with%20the

%20organization's%20core%20values. Accessed 10 September 2020.

Bondarenko, Peter. “Enron scandal” Britannica. [Link]

and-Exchange-Commission. Accessed 24 August 2020.

CNN Editorial Research. “Enron Fast Facts.” CNN. 24 April 2020.

[Link] Accessed 24 August

2020.

“Code of Ethics.” Enron. July 2020.

[Link]

%20%D7%90%D7%AA%D7%99%D7%99%D7%9D%20%D7%A9%D7%9C

%20%D7%90%D7%A8%D7%92%D7%95%D7%A0%D7%99%D7%9D

%20%D7%A2%D7%A1%D7%A7%D7%99%D7%99%D7%9D/Enron%20Code%20Of

%[Link]. Accessed 4 October 2020.

Deonath, Kamalini. “CSR and Enron.” Medium. 24 January 2018.

[Link] Accessed 10

September 2020.

“Enron Corporation.” Info Please. [Link]

science/economy/business/enron-corporation. Accessed 10 September 2020.

From Staff and Wire Reports. “Ex-Enron CFO Fastow indicted on 78 counts.” Chron. 31 October

2002. [Link]

[Link]. Accessed 24 August 2020.

Martin, Jason. “Organizational Culture and How Enron Did it Wrong.” LinkedIn. 23 Feb 2017.

[Link]

mba/. Accessed 10 September 2020.

Segal, Troy. “Enron Scandal: The Fall of a Wall Street Darling.” Investopedia. 4 May 2020.

[Link] Accessed 24 August

2020.

“Social Responsibility and Ethics.” Pachamama Alliance. [Link]

justice/social-responsibility-and-ethics#:~:text=Social%20responsibility%20is%20an

%20ethical,of%20society%20and%20the%20environment. Accessed 10 September 2020.

“The Enron Scandal: An Ethical Analysis.” The Busines Scholar. 18 June 2014. [Link]

[Link]/2014/06/the-enron-scandal-ethical-

[Link]#:~:text=Key%20stakeholders%20affected%20by%20this,the%20economy

%20as%20a%20whole. Accessed 10 September 2020.

Wang, Xiaomeng. “The Fall of Enron-An Analysis of Ethical Issues.” 29 April 2012. [Link]

[Link]

Accessed 10 September 2020.