Enron Scandal and Corporate Governance

This assignment examines the Enron scandal, a major accounting fraud that led to the collapse of the energy giant. Students are tasked with analyzing the factors contributing to the scandal, including unethical accounting practices, weak corporate governance, and flawed leadership. The analysis should explore the consequences of the Enron scandal for businesses, investors, and society as a whole. Additionally, students are expected to identify best practices for preventing similar scandals in the future.

Running Head: HUMAN RESOURCE MANAGEMENT
Human Resource Management
Name of the Student
Name of the University
Author Note

1HUMAN RESOURCE MANAGEMENT
Executive summary
The aim of the report is to analyse the energy company called Enron established in
Houston Texas. The company was involved in transmission and distribution of the power. The
crucial factor that led to the failure of the company towards its stakeholders is the unethical
leadership. It affected all the stakeholders of the company including the investors, creditors,
thousands of employees, senior executives, suppliers, clients, shareholders, community and the
government. The company started with innovative idea and gained enormous profit. Later, it
misled the investors and the creditors with false financial information. It had impacted the
stakeholders of the company financially and emotionally. Other financial firms, banking,
insurances and brokerages were drawn into the legal battles.
The report then highlights the organisational factors that contributed to the failure. It
includes unethical leadership, dominating culture, inappropriate decision making-authority and
poor management controls that led to faulty corporate governance structure. Based on SWOT
analysis, it was found that the company had many strengths such as innovation, and human
capital. The scandal occurred due to its main weaknesses which are failed board of directors,
unethical leadership, and pessimistic corporate culture. If the company would have worked
ethically, it would have grabbed many opportunities such as Business merger and acquisition,
and market development in Asian countries. The company had many threats due to its fall and
faulty remedial options.
The only strategy recommended for preventing another Enron case is to conduct the
business in an ethical manner using the exhaustible human capital and maintaining the

2HUMAN RESOURCE MANAGEMENT
innovative character. There is a need of government regulations and rules that needs to be
updated on timely basis and should not be relaxed and eliminated.

3HUMAN RESOURCE MANAGEMENT
Table of Contents
Introduction..........................................................................................................................4
Company and its failure towards its stakeholders...............................................................4
Description of the event.......................................................................................................4
Organisational factors that contributed to the failure..........................................................5
Analyse the identified OB factors........................................................................................6
SWOT of Enron...................................................................................................................7
Analyse the company’s strength and weaknesses...............................................................8
Analyse the opportunities and threats..................................................................................9
Remedial response of company and recommendations.....................................................11
Conclusion.........................................................................................................................12
References..........................................................................................................................13

4HUMAN RESOURCE MANAGEMENT
Introduction
The aim of the assignment is to analyse the energy company called Enron established in
Houston Texas. The key components of the report include discussion of the company’s failure
towards its stakeholders with a brief discussion on the infamous Enron’s scandal. Further report
identifies and analyses the organisational behaviour factors that contributed to the failure
followed by the SWOT analysis of the company. The report highlights the strength and he
weakness of the company and analyses the opportunities and threats. The remedial response
taken by the company to address the failure is discussed briefly and strategies to overcome such
failure is recommended.
Company and its failure towards its stakeholders
Ken Lay created Enron in 1986, an energy company established in Houston Texas.
Within ten years of span, it was recognised as seventh largest company in Texas. The company
was involved in transmission and distribution of the power. The crucial factor that led to the
failure of the company towards its stakeholders is the unethical leadership. The leadership issues
for the purpose of gaining prosperity made the company bankrupt. It effected all the stakeholders
of the company including the investors, creditors, thousands of employees, senior executives,
suppliers, clients, shareholders, community and the government (Prebble 2016).
Description of the event
The company failed to cope up with the internal and external situation due to lack of
competency and ethical leadership. The managing directors of the company were driven by the
goal of profit maximisation and Jeffrey Skilling employed the narcissistic leadership. It is the

5HUMAN RESOURCE MANAGEMENT
destructive leadership where the subordinates and the employees were dominated for selfish
motto of the organisation. The top executives of the company breached the code of conduct
(Broni et al. 2017).
The company started with the innovative idea of buying electricity from different
companies and selling it to individual customers while charging everyone along the way. This
ground breaking idea generated enormous profit and led to competitive environment. The
company focused on share price tactics obsessively. It purchased the electricity and deliberately
shut down the power plant in California due to increase in value of the power outages. Major
cash drain occurred due to excessive compensation plan. The company misled the investors and
the creditors with false financial information. Enron manipulated the energy market, and earned
money at the immense cost of others. The firm projected itself as “highly profitable, growing
company”. This later turned out to be a negative popularity as analysing the company’s financial
statements showed massive debts that were concealed in a manner to show profits. However, the
auditors did not perform their duty well and failed to highlight the red flags. After the
performance evaluation, the lowest portion of the employees was fired without consideration
(Dibra 2016).
It had impacted the stakeholders of the company financially and emotionally. Other
financial firms, banking, insurances and brokerages were drawn into the legal battles.
Organisational factors that contributed to the failure
Organisational behaviour (OB) refers to the behaviour of leaders and the employees in
the work that differs from that in social setting and effects the management in the organization.
A company’s success is determined by the organisational behavioural factors such as culture,

6HUMAN RESOURCE MANAGEMENT
change management, motivation, and decision making (Hosseini and Mahesh 2016). In this
context the OB factors that contributed to the Enron’s scandal and failure towards stakeholders
are- unethical leadership, dominating culture, inappropriate decision making-authority and poor
management controls that led to faulty corporate governance structure (Stahl et al. 2016).
Analyse the identified OB factors
According to Broni et al. (2017), the employees are likely to act ethically if the managers
and the executives of the company lead in ethical direction. Enron did not maintain the ethical
standards that resulted in the breakdown of the corporate governance and culture. The autocratic
and dominative leadership created a pessimistic culture where the leaders demanded only
conformity. The leaders focused on profit-making, obsessed with the bottom line and penalised
employees for dissent (Markham 2015). Therefore the employees too accepted the unethical acts
in daily duties due to cutthroat competition. Employees did not report the harsh organisational
behaviour for fearing of losing jobs and considered the leadership trait of integrity as non-factor
(Meymandi et al. 2015).
Employees are motivated with rewards that are fair and equitable. The auditors did not
honesty disclose the financial statements of Enron. These employees completely lost the integrity
to speak the truth as they were rewarded for obeying dishonest rules in Enron ad focusing on
profit. In order to know the massive debts and real financial situation of Enron one of the
important group member Andrew Fastow, gave external motivation to the employees (Tan and
Yeo 2013). The poor cooperate governance in the Enron was attributed to egoism or self interest
of the top executives. These leaders put their own interests above those of their employees, and
public. The company failed to shoulder responsibilities for unethical events.

7HUMAN RESOURCE MANAGEMENT
According to Friedman and Gerstein (2017), a company’s culture can be influenced
positively if the managers are clear about the vision and values and practicing them on a daily
basis. This aspect was lacking in Enron and is evident from the lack of transparency in financial
accounting. Innovation and creativity in the organisation is simulated by informed risk taking.
This proves requires robust, effective communication between employee and executives. In any
organisation, the decision-makers should have adequate experience and information for
delegation of decision-making authority (Shapiro and Stefkovich 2016). In case of inappropriate
delegation of decision was observed as the company radically shifted to new risk-taking business
areas without having risk managing skills. At higher level the new risk-taking financial schemes
lacked a certain degree of control. It was found that the chief financial officer of the company
operated without professional accounting qualification. In accounting system the performance
evaluation revealed five types of manipulations. There was no information sharing with
employees (Breevaart et al. 2014). This internal mechanism that is playing the decisive role
indicates poor corporate governance.
SWOT of Enron
SWOT analysis is the useful tool to determine the strength and weakness of the company,
the opportunities and threats. It can be defined as a systematic model that gives direction to
develop the market plan. SWOT indicates what an organisation can do and cannot do, the
favourable conditions available for success (Alleyne 2016.). The SWOT of Enron is presented
below
Strength Weakness Opportunities Threats

8HUMAN RESOURCE MANAGEMENT
 Marketing and
value delivery
 Human capital
pool
 Innovative
company
During failure the
weaknesses observed
are-
 Failed board
of directors
 Conflicts of
interests
 Unethical
practices
 Corporate
culture
The innovative
strategies of Enron
provided many
favourable conditions-
 Supply of high
quality energy
 Clean energy
 Business
merger and
acquisition
 Market
development
in Asian
countries
Threats due to global
environment and the
external business are-
 Increase in
competition
 Regulation
 Subprime
Mortgage
crisis
 Terrorist
threats
(Source: Hosseini and Mahesh,2016.)
Analyse the company’s strength and weaknesses
Enron met the needs of the clients and the customers by robust marketing strategies. It
was successful in delivering the customer value at profit which was strength of the company.
According to Khan (2017) human capital is the factor that determines the success of the
company. Enron was using experienced skill set that has helped it to manipulate the accountings
and the financial statements while manipulating the regulations in the logical way. They
recruited pool of workers who intelligently used different accounting standard. This aspect was

9HUMAN RESOURCE MANAGEMENT
both positive in terms of profit generation and negative in terms of unethical behaviour. As
Enron was involved in five different lines of businesses, the large number of employees was
having a big chunk of stocks or shares. Innovative strategies more than following the mundane
guidelines make a business successful (Mariani 2017). Shifting to energy trading company from
the energy and natural gas transportation was an innovative idea. With the expansion of the
business the Enron was gaining more and more financial support from the top most financial
institutes (Prebble 2016).
According to Markham (2015) it is the role of the board of directors to act through its
committee and monitor the business to be ahead of developments both in and out of corporation
and address the limitations. In addition to monitoring, the directors should evaluate the decisions
of the management, reflect on its influence and actively design an alternate plan. However,
Enron failed to take these steps. Enron’s board of directors failed to delineate the mission of the
organisation and specify to management about the strategic methods. When Enron collapsed, the
Sarbanes ACT was already enacted. It was also necessary for a company to adhere to the conflict
of interest policy (Broni et al. 2017). Unethical practices of Enron led to conflict of interest.
Malfunctioning in accounts department ruined the entire business infrastructure. It led to
pessimistic corporate culture. The autocratic leadership in Enron shaped a negative behaviour of
the employees that helped in the artwork of the fraud accounting.
Analyse the opportunities and threats
In the book of the managerial economy the supply is defined as amount of services and
good that people sell in a given time at different prices, where other factors remain constant
(Armstrong and Taylor 2014.). Enron was a leading business in terms of supply high quality

10HUMAN RESOURCE MANAGEMENT
energy. In North America and all over the Europe there was an increase in demand by the
economies in need of energy. This gave new opportunities to Enron such as meeting new
demands for clean energy. With the reduction of pollution being the main concern in US, Enron
had bright opportunity with its franchise policy, innovative culture, online established market,
technology and other assets to be a prime contributor of clean and renewable energy (Prebble
2016). The strengths of the company gave it an opportunity to open to merger or acquisition.
Enron could use one or more strategy in this aspect to grow due to its experience of merger.
According to Abdel-Khalik (2016), a business can go global by market penetration, development
of new markets or capture a large portion of existing market by market saturation. If Enron
would not have collapsed it had a golden opportunity to tap into the market of India and China
using its many options such as joint ventures, franchising, acquisition and licensing. These two
countries are emerging as big energy consumers and are in need of energy to keep their
industries operational (McLean and Elkind 2013).
Since, Enron failed due to unethical practices it is unable to experience the fierce
competition by big companies in US that are ready to engulf a large share of the energy market.
It is the treat to the company that the other threat includes the new regulation due to the
greenhouse gas emission. The national and international regulation as a response to the global
warming would have effected Enron in Europe for instance the Kyoto protocol (Markham 2015).
There would have been decrease in the company’s profit due to recession in economy and
foreclosure. It would have also resulted in the decreased consumption of natural gas. The
subprime mortgage caused the economic recession and mortgage delinquencies (Hosseini and
Mahesh 2016). Terrorist attack on Enron line of business was another major threat that may have
affected the initiatives and the investments.

11HUMAN RESOURCE MANAGEMENT
Remedial response of company and recommendations
The remedial option for Enron was innovation in business expansion to different lines.
Business merger and acquisition was other remedial option to prevent the profit decline and
fraud practice in accounting. It used its assets for more investment in energy and natural gas
transportation, which helped Enron to move towards paper and pulp business, develop energy
trading markets and increase is business communications. Further, Enron tried to focus more on
the growth strategies such as concentration and diversification. These strategies helped the
company to have long term profits in all business lines. As per the literature evidence these
strategies were all effective in having successful business (Friedman and Gerstein 2017).
However, only due to unethical practice it was unsuccessful.
The only strategy for preventing another Enron case is to conduct the business in an
ethical manner using the exhaustible human capital and maintaining the innovative character.
The board of directors should closely monitor the internal environment of organisation. There is
a need of reforming the auditing system that will reduce the possibility of the financial disaster
(Adams et al. 2017). Further, Auditor’s independence is required. It is the cornerstone of the
capital market. There is a need for the auditors to objectively assess the accounting and financial
statements of the publically traded company. It should not be hampered by the long term
partnership established between auditors and firms. Auditor’s response is effective method and
should be under scrutiny by the “Public Companies Accounting Oversight
Board”, that was created by Sarbanes-Oxley Act. It will help reduce the conflict of interest.
There is a need of government regulations and rules that needs to be updated on timely basis and
should not be relaxed and eliminated (McLean and Elkind 2013).

12HUMAN RESOURCE MANAGEMENT
Conclusion
It can be concluded from the above discussion that Enron hit the financial world very
drastically. The main cause of failure includes unethical leadership, dominating culture,
inappropriate decision making-authority and poor management controls that led to faulty
corporate governance structure. It was the biggest corporate bankruptcy. In future such scandal
can be prevented by increased regulation and oversight. The only strategy for preventing another
Enron case is to conduct the business in an ethical manner using the exhaustible human capital
and maintaining the innovative character. There is a need of government regulations and rules
that needs to be updated on timely basis and should not be relaxed and eliminated.

13HUMAN RESOURCE MANAGEMENT
References
Abdel-Khalik, A.R., 2016. How Enron used Accounting for Prepaid Commodity Swaps to Delay
Bankruptcy for One Decade: The Shadowy Relationships with Big Banks.
Adams, T., Krishnan, J. and Krishnan, J., 2017. Client Influence and Auditor Independence
Revisited: Evidence from Auditor Resignations.
Alleyne, P., 2016. The influence of organisational commitment and corporate ethical values on
non-public accountants’ whistle-blowing intentions in Barbados. Journal of Applied Accounting
Research, 17(2), pp.190-210.
Armstrong, M. and Taylor, S., 2014. Armstrong's handbook of human resource management
practice. Kogan Page Publishers.
Breevaart, K., Bakker, A.B., Hetland, H. and Hetland, H., 2014. The influence of constructive
and destructive leadership behaviors on follower burnout. In Burnout at work: A psychological
perspective (pp. 102-121). Psychology Press, New York City.
Broni, G., Velentzas, J. and Papapanagos, H., 2017. Marketing Ethics and Communication
Strategy in the Case of Enron Fraud. In Advances in Applied Economic Research (pp. 269-278).
Springer, Cham.
Dibra, R., 2016. Corporate Governance Failure: The Case Of Enron And Parmalat. European
Scientific Journal, 12(16).

14HUMAN RESOURCE MANAGEMENT
Friedman, H.H. and Gerstein, M., 2017. Leading with compassion: the key to changing the
organizational culture and achieving success. Psychosociological Issues in Human Resource
Management, 5(1).
Hosseini, S.B. and Mahesh, R., 2016. THE LESSON FROM ENRON CASE. Journal of Current
Research, 8(08), pp.37451-37460.
Khan, C., 2017. Corporate Governance, Management Strategies and Social
Responsiveness. Journal of Management Science, Operations & Strategies (e ISSN 2456-
9305), 1(2), pp.1-6.
Mariani, G., 2017. M&A and Value Creation: A SWOT analysis. G Giappichelli Editore.
Markham, J.W., 2015. A financial history of modern US corporate scandals: From Enron to
reform. Routledge.
McLean, B. and Elkind, P., 2013. The smartest guys in the room: The amazing rise and
scandalous fall of Enron. Penguin.
Meymandi, A.R., Rajabdoory, H. and Asoodeh, Z., 2015. The Reasons of Considering Ethics in
Accounting Job. Economics, 2(2), pp.136-143.
Prebble, L., 2016. Enron. Bloomsbury Publishing.
Shapiro, J.P. and Stefkovich, J.A., 2016. Ethical leadership and decision making in education:
Applying theoretical perspectives to complex dilemmas. Routledge.
Stahl, G.K., Miska, C., Noval, L.J. and Patock, V.J., 2016. IN publicized THE corporate WAKE
scandals, OF A MAJOR ECONOMIC CRISIS and highly calls for more responsible corporate

15HUMAN RESOURCE MANAGEMENT
governance and leadership continue to grow (eg Pearce & Stahl, 2015; Waldman & Galvin,
2008). Ethical breaches have become front-page news, such as: Enron and Arthur Andersen’s
questionable accounting practices, misuse of company funds at Merrill Lynch and Elf in France,
the collapse of Lehman Brothers, improper payments to government officials by Xerox managers
in India, Nike’s use of .... Readings and Cases in International Human Resource Management,
p.416.
Tan, P. and Yeo, G., 2013. Accounting scandals and implications for directors: Lessons from
enron. In Encyclopedia of Finance (pp. 495-499). Springer US.