Comparative Corporate Governance and International Operations

This article discusses the Enron scandal and its implications for corporate governance and international operations. It explores the factors that led to the collapse of the company, the consequences of the scandal, and the lessons learned from this case.

Running Head: COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Comparative corporate governance and international operations
Student’s Name
University Name
Author’s Note

2
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Table of Contents
1. Introduction..............................................................................................................................3
2. Explanation...............................................................................................................................3
3. Consequences...........................................................................................................................7
4. Lessons learned........................................................................................................................8

3
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
1. Introduction
Enron Corporation is a Texas based company which engaged in one of the devious most scandals
in the 20th century. The Organisation was also involved in the commodities and services
industry. Differential reports published by the organisation revealed a systemic structure that is
accountable for higher level of accounting fraud. The collaboration of the company with Arthur
Andersen has been question several times since 1990. During its prosperous years, the stock
price went above USD $90 for each share. However, the overnight revelation of the scandal
ruined the business and on the 30th November, 2001 the stock price was as low as 26 cents each
share. Finally on 2nd December official bankruptcy of the company was declared.
Analysing the issues at the organisation, this has been revealed that the founder of the company,
Kenneth Lay give highest priority to high stock prices over everything else. Trading of assets and
borrowing money was conducted at a high rate so that the rates of return to be increased. This
help the company to show asset-free balance sheets by means of which they could drag more
investments by making the public realise that the business was highly successful. As emphasized
by Boddy, the Founder Kenneth Lay has the biggest responsibility in this collapse. Second to
him, is the CFO of Enron, Andy Fastow. He had great skills in manipulation of liabilities by
using special purpose entities for relocation of liabilities away from Enron. This helped in
continuous increase in stock price and allowed the company to get a high investment rating.
Thereby false information headed the organisation to carry on the scandal for so many years.
2. Explanation
The model of 4 management truisms can be undertaking for explaining the Enron collapse. The
first truism is simple. The public always tries to follow the stereotyped path to success and

4
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
general tries to avoid action which causes Redemption. This organisation employed the smartest
and the most industrious professionals, to work for the organisation. As Carberry informs,
seeking from the finest MBA schools, collected the best set of employees and which their
collective skills they could challenge any Frontline organisation. The company had no end of
river to keep the employees motivated and strive for hard work. The internal environment was so
competitively set that profit making was primary on everybody's mind and employees began to
complement executive wrongdoing. As per Bhaskar the non standard accounting policies as well
as deal inflation that was practiced in a large way, brought about the collapse of the organisation.
In fact, the organisational culture was moulded in such a way that the executive employees were
also influence to keep up the high growth rate of the organisation. Executive employees were
aware that such eccentric high growth rate who was not sustainable, however the high reward
system emphasized that constant growth of the organisation would the executive large monetary
rewards and paralleling if the system did not help for the company, they would be penalized by
the credit Agencies and the trading partners also. This forced them to undertake corner cutting
policies which ultimately caused massive debt without having any considerable backup option.
Ailon says that there was no internal scope of protesting against this unfair improvement policy
since the performance review committee fostered Dog eat dog atmosphere in the organisation
where the employees who achieved success by following the guidelines of the higher
management was able to sustain and the low performing or the disagreeing employees where
simply skimmed. Under this atmosphere, illegal dealing and accounting fraud became a common
practice. Along with external fraud, The Organisation was running a policy of reward,
punishment and fear to make the job done, internally, by the employees.

5
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
The second truism emphasizes that all organisations do not act morally in the same way. The risk
manual of the organisation supported false reporting of organisational earning and the data which
was provided by the Accountants against that became acceptable. The business culture of risk
management as well as wealth growth was highly dependent on the superficial accounting
records which were handled like a easy scapegoat for the business ventures that were really
profitable. Moon discusses that the obvious outcome of this business ventures can be illegal
accounting practices which food give immediate success and on relation of the accounting fraud
would lead to the ultimate collapse. In this context, researchers like Markham also points out that
the organisation considered development against the money which was never actually theirs.
Underperformance issue is settled by some organisations by the policies like restructuring or
relocating of the workers. On the contrary, Hardin states that the organisational culture of this
organisation supported the dismissal of the last 10 to 15% employees, based on the perception of
Peer reviews. However, there was greater objective behind this stringent organisational policy.
The organisation wanted employees to mistrust each other so that they would never interfere or
ponder about the unethical managerial practices with high fear of being challenged if they did so.
As an outcome, the executive management was free to implement strategies of debt creation
instead of profit creation. Ethical organisations always pay attention to employee issues and try
to maintain positive workplace environment. On the contrary, Enron's Policy was to develop fear
in the company and remove those employees who went against the management. This blatant
disparity was revealed and the suspiciousness regarding the moral code of the organisation was
also raised as an outcome. Analysing the downfall of the organisation Li reflects that the
executive realised at a point of time that the success of the organisation was not sustainable and

6
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
this initiated them to make decisions to fulfil personal monetary interests at the cost of
sacrificing the organisational interest which leads to the aggravation of the collapse.
The third truism state the organisation and the people in the organisation are different and ethical
voices of employees are often melted away by a corrupted organisational hierarchy. Ass
informed by Coglianese, Employees like Jim Alexander or Sherron Watkins alerted the directors
that the ethical break was going to cost monetary loss. However, the company believed that
accounting, trading or reserve frauds would never be revealed in the open. However, suspicious
activities of Enron were being tracked by other organisations.
Business partnerships were another way of making money efficient, but success in partnership
scheme at the cost of being unable to keep the promises later. For evidence, the project
Braveheart was a business concept developed by blockbuster for delivering movies over phone
lines. As informed by Petrick and Robert, Documentation of USD $110.9 million of earnings
was made by the organisation shortly after the partnership with blockbuster was made. The
project was cancelled very soon after the false accounting was done. The organisation mostly did
fictional Investments with organisations which really provided any profit. It is evident that, the
organisation would have faced market situation at some point when there would be enough
victims of their fraud investment policy to alert one another.
The fourth truism reviews that ethical scandals are not prevent it because of worthless in house
and external oversights. The deregulation laws provided the energy traders with exercise power
over prices. Naturally, Huse says that the company encouraged power blackouts in cities like
California so that the price of reliable energy can be enhanced by at least 20 times of its normal
value. Deregulation of Companies in the energy sector provided the overconfidence to Enron
regarding Investments and they started accumulating as much market capital as they could.

7
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
The organisation had strategic relationships with political representatives and their well
connected with the public figures. That is why they placed the people with similar mind set in the
position of directors as well as the audit committee so that they would also support corner cutting
when needed. Rapoport et al. Identifies that the organisation handpicked people to make their
business environment suitable and there was also empowered to modify the business laws in
their favour in whatever way would be suitable to provide them business outcomes.
3. Consequences
The company fell apart after the collapse. They were forced to renounc the earnings as well as
give up the multiple partnerships with companies like Chewco investments or JEDI. In 2005,
Organisation was forced to recall their entire earning dating back till 1997 which calculated yo
only USD $586 million and that was only 20% of what the company had officially reported in
there business accounts and Audit. The stock prices of the company fail immediately to about 20
or 30 cents and financial buoyancy of the organisation was absolutely destroyed.
The shareholders were not able to profit because of excessive financial greed of the executive
members. The public who had their pension funds financedwith the organisation had lost entire
savings. The SEC as well as the Congress immediately started restructuring for loss reduction of
those who had massive monetary outcome. A lawsuit of 40 billion US dollars was filed against
organisation after that collapse and compensation for the worthless stock of the shareholders was
demanded. About 2 billion US dollars Money invested by the people under the pension plan of
the company, was destroyed by this collapse.
The employees also suffered losses and internal members who had invested money into the
organisation almost lost everything. For example, Charles Prestwood, an employee of the

8
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
company, lost about 1.3 million US Dollars in the collapse. The amount interested in retirement
savings was disbanded overnight and the SEC declared that they would attempt recovery of
maximum proportion of lost money, as far as possible. The executives also sent the
consequences after the collapse when Paula Reiker was charged for insider trading as she had
sold 1 million worth of shares top of the company immediately before the collapse. The CEO of
the company was charged with 24 years of imprisonment mainly because of the securities fraud.
The owner was charged with 45 years of imprisonment, who embraced death before scheduling
of the sentence. The financial officer was entrusted to 10 years of imprisonment. The predators
associated with organisation had a tough time in regaining the money owed to them.
CrossCountry Energy which was acquired by Indian farmer was sold for 2.45 billion US dollar in
order to compensate some of the outstanding credit. After the sale of their last business, Enron
was left with absolutely no assets. In 2007, the name of the organisation was changed with the
objective of paying back all the creditors and resolving all ambiguous business activities.
4. Lessons learned
The first lesson that can be taken from this scandal is that there is an acute need of evaluating the
accounting practices that is utilised by the corporations. Making high end transaction and living
is not enough to believe that they are racing in business. The sceptical mind set of the
government audit agencies is one of the reasons why the scandal continued for so many years
without being noticed. Another area where organisations need to focus is conflict of interest
which can be extremely detrimental particularly in accounting and this is a factor that is
essentially eminent in the Enron collapse case. The higher management should be more
authoritative in determining which accounting firms will be associated with the company and

9
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
they should also be knowledgeable about how these farms are being paid. Such strategies can
eliminate major proportion of conflict of interests within the organisation.
The second lesson from the sandal is that ethical choices of companies need to be observed more
closely. In case if the organisation is left unchecked, it can abuse the system, like this company
had done by developing interest with political stakeholders and external auditors. it is evident
that after the collapse of this company, the public will be more cautious about purchasing shares
and will do so only after attentively analysing the way corporations operate.
The final lesson is that organisations have the liberty to be as much ethical or unethical they want
to be. They can treat their workers, partners, creditors as well as the shareholders in whichever
way, they feel right. Sometimes corporations work for the best interest in the short term and
conduct many answer collections which will lead them to long-term loss. The level of risk
tolerance exhibited by this company accounted to the exorbitant amount of financial loss that we
had to face in the long run. The shareholders can demand for Regulation and criticized the
business objectives and actions, but in the end it is the call of the executives and directors to
conduct the business activities in an ethical and sustainable way.

10
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Reference List
Ailon, Galit. "From superstars to devils: The ethical discourse on managerial figures involved in
a corporate scandal." Organization 22, no. 1 (2015): 78-99.
Bhaskar, Krish, and John Flower. Financial Failures and Scandals: From Enron to Carillion.
Routledge, 2019.
Boddy, Clive R. "Enron Scandal." Encyclopedia of Business and Professional Ethics (2017): 1-4.
Carberry, Edward, and Edward Zajac. "How US Corporations Changed Executive Compensation
after Enron: Substance and Symbol." In Academy of Management Proceedings, vol. 2017, no. 1,
p. 15134. Briarcliff Manor, NY 10510: Academy of Management, 2017.
Coglianese, Cary. "Legitimacy and corporate governance." Del. J. Corp. l. 32 (2007): 159.
Hardin, J. S., Ghassan Sarkis, and P. C. Urc. "Network analysis with the enron email
corpus." Journal of Statistics Education 23, no. 2 (2015).
Huse, Morten. "Renewing management and governance: new paradigms of
governance?." Journal of Management and Governance 7, no. 3 (2003): 211-221.
Li, Yuhao. "The case analysis of the scandal of Enron." International Journal of business and
management 5, no. 10 (2010): 37.
Markham, Jerry W. A Financial History of the United States: From Enron-Era Scandals to the
Subprime Crisis (2004-2006); From the Subprime Crisis to the Great Recession (2006-2009).
Routledge, 2015.
Moon, Christopher J. "Economics and Ethics. Applying lessons from ENRON to the VW
emissions scandal." (2017).

11
COMPARATIVE CORPORATE GOVERNANCE AND INTERNATIONAL OPERATIONS
Petrick, Joseph A., and Robert F. Scherer. "The Enron scandal and the neglect of management
integrity capacity." American Journal of Business 18, no. 1 (2003): 37-50.
Rapoport, Nancy B., Jeffrey D. Van Niel, and Bala G. Dharan. Enron and other corporate
fiascos: The corporate scandal reader. Foundation Press, 2009.