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Enron: What Caused the Ethical Collapse?
Enron: What Caused the Ethical Collapse?
Enron: What Caused the Ethical Collapse?
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In the Enron scandal there have been many failures and the outcome to this is a practical standpoint which included a moral hazard in the company where managers where elaborating and not managing the companies risks. Take in to account the risks that had not been managed properly to certain extent in the company. Anglo-American system of corporate governance is centered as the ownership of an establishment and it is extensively circulated between the differences in shareholders than the ownership of being focused on the Sarbanes Oxley Act of 2002.
Anglo-American corporate governance is a primary aim of maximizing the shareholders value, which improves the access of savers on firms to make investments opportunities. As a company Enron was seen
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The executives tried to cover up their own failures when some of their business trading ventures started to perform poorly. The main aspect to the failure of Enron as a business was greed. The reason why this started was the moment when Jeff Skilling merged a mark to the accounting in Enron’s policy, which the system of the business had been taken advantage of.
Over the 10 years the business was trying to generate new revenue streams to make the company prosperous as it was before. The streams of these revenues had been sustained through illegal dealings on the part of Enron and negotiations they did with other businesses. This scandal demonstrates the need of substantial reforms in corporate governance in the United States, and the ethical situation that should be dealt with in a business.
Moreover, risk management failure that occurred in the Enron collapse is one of the outcomes where it does not accord with the company’s instability. The risks the Enron did to trade businesses, which they did not manage well and ended up destroying the firm. When the company does not have a correct alignment between the managements interests and the shareholders interest it could end up in chaos.
The unethical behaviour of the company the structure was
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A manager in a business should understand what motivates an employee. To reward an employee helps the company achieve its objectives of the firm.
According with Weinstein and Wild the reason board of directors of Enron did not have a way out to resolve the business management situation is due to the fact that the directors in Enron failed the risk management structure and was reliance on the information from business units example would be the responsible heads of Enron risk arising from inappropriate
Another reason for Enron’s bankruptcy was the unnecessary personal spending by corporate managers. It was a direct loss to the company’s shareholders. In the later stages before its bankruptcy, the luxuries were paid from the company’s borrowing, as it had no real profits. Therefore in the later stages, the creditors were at a loss rather than its shareholders.
On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose its complicated financial dealings were all wrong and downright deceptive. The company’s lack of accuracy in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its downfall. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.
The Enron Corporation was founded in 1985 out of Houston Texas and was one of the world 's major electricity, natural gas, communications, and pulp and paper companies that employed over 20,000 employees. This paper will address some of the ethical issues that plagued Enron and eventually led to its fall.
The American Dream typically involves working hard to build up an organization, maintaining it well, and reaping the benefits. This vision most certainly drove the formation of the energy powerhouse known as the Enron Corporation. The company began as two average sized organizations and within 15 years emerged as America’s seventh largest company. The organization employed close to 21,000 staff members with locations in over 40 nations around the world. Unfortunately, this success was decimated by numerous scandals involved with accounting practices. From lies of profits to questionable dealings, such as concealing debts, the parties involved with running the company had made some fatal errors. The end result left Enron without creditors and investors, leading to the firm to file for Chapter 11 bankruptcy (British Broadcasting Corporation, Enron Scandal at a Glance). The story of this once remarkable company is one that can be traced from the decisions made from its inception leading all the way to the much publicized trials that ensued.
Enron was a Houston based energy, commodities and services company. When people hear the name Enron they automatically associate their name with one of the biggest accounting and ethical scandals known to date. The documentary, “Enron: The Smartest Guys in the Room,” provides an in depth examination of Enron and the Enron scandal. The film does a wonderful job of depicting the downfall of Enron and how the corporate culture and ethics were key to Enron’s fall. As the movie suggests, Enron is “not a story about numbers, it is a story about people.”
Enron was formed following a merger between two natural gas companies in 1985, Houston Natural Gas and InterNorth.3 When Enron formed, it had accumulated a large sum of debt, roughly 2 billion dollars.4 As a result of deregulation, Enron no longer had the exclusive rights to its pipelines, resulting in the company hemorrhaging money. Kenneth Lay5, the chief executive officer (CEO) of Houston Natural Gas, became Enron’s CEO. Lay knew he had to quickly come up with a new innovation to keep the company afloat. Lay hired McKinsey & Company6 to help in coming up with a business strategy for Enron. McKinsey & Company assigned Jeffrey Skilling7 to Enron’s company as a consultant. Skilling, who had a background in banking, asset and liability management, came up with a solution to Enron’s financial crisis in the gas pipeline business. He said to create a “gas bank”, in which Enron would buy gas from a network of suppliers and sell it to a network of consumers, allowing them to control the supply and price of the gas. Enron’s debt was no more, and Lay was so impressed with Skilling, that he created a new d...
The three main crooks Chairman Ken Lay, CEO Jeff Skilling, and CFO Andrew Fastow, are as off the rack as they come. Fastow was skimming from Enron by ripping off the con artists who showed him how to steal, by hiding Enron debt in dummy corporations, and getting rich off of it. Opportunity theory is ever present because since this scam was done once without penalty, it was done plenty of more times with ease. Skilling however, was the typical amoral nerd, with delusions of grandeur, who wanted to mess around with others because he was ridiculed as a kid, implementing an absurd rank and yank policy that led to employees grading each other, with the lowest graded people being fired. Structural humiliation played a direct role in shaping Skilling's thoughts and future actions. This did not mean the worst employees were fired, only the least popular, or those who were not afraid to tell the truth. Thus, the corrupt culture of Enron was born. At one point, in an inter...
Investors and the media once considered Enron to be the company of the future. The company had detailed code of ethics and powerful front men like Kenneth Lay, who is the son of a Baptist minister and whose own son was studying to enter the ministry (Flynt 1). Unfortunately the Enron board waived the company’s own ethic code requirements to allow the company’s Chief Financial Officer to serve as a general partner for the partnership that Enron was using as a conduit for much of its business. They also allowed discrepancies of millions of dollars. It was not until whistleblower Sherron S. Watkins stepped forward that the deceit began to unravel. Enron finally declared bankruptcy on December 2, 2001, leaving employees with out jobs or money.
Enron was in trouble because of something that almost every major corporation during this time was guilty of. They inflated their profits. Things weren't looking good for them at the end of the 2001-year, so they made a common move and they restated their profits for the past four years. If this had worked to their like they could have gotten away with hiding millions of dollars in debt. That completely admitted that they had inflated their profits by hiding debt in confusing partner agreements. Enron could not deal with their debt so they did the only thing that was left to do, they filed for chapter 11 bankruptcy. This went down as one of the largest companies to file for bankruptcy in the history of the United States. In just three months their share price dropped from $95 to below $1.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
When an ethical dilemma arises within an organization, it is difficult to separate right and wrong with what is best for the majority. Sometimes the answer is not a simple “yes” or “no.” In 2002, Enron Corporation shows us just that. By 2002, the sixth-largest corporation in America filed for Chapter 11 bankruptcy. The case of the Enron scandal is one of the best examples of corporate greed and fraud in America.
Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron.
Enron Corporation was based in Houston, Texas and participated in the wholesale exchange of American energy and commodities (ex. electricity and natural gas). Enron found itself in the middle of a very public accounting fraud scandal in the early 2000s. The corruption of Enron’s CFO and top executives bring to question their ethics and ethical culture of the company. Additionally, examining Enron ethics, their organization culture, will help to determine how their criminal acts could have been prevented.
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,
The main ethical issue with the Enron scandal is that Enron allowed legal loopholes to supersede ethical principles (Bowen & Heath, 2005). Enron used legal principles to justify what they were doing instead of acknowledging that the accounting processes they were using were unethical. Another one of the ethical issues is that Enron faced was that