Enron's Downfall: A Case Study on Accounting, Ethics, and Bankruptcy

This case study examines the corporate culture and questionable accounting practices that led to Enron's bankruptcy. It highlights how an aggressive and unethical corporate culture, coupled with executive compensation strategies focused on wealth accumulation rather than shareholder profit, contributed to the company's downfall. The study also discusses the roles of bankers, auditors, and attorneys in the demise of Enron, emphasizing their involvement in manipulating financial statements and overlooking fraudulent activities. Andrew Fastow, the chief financial officer, is identified as the mastermind behind off-balance-sheet transactions and fraudulent financial reporting, which concealed significant debt and ultimately led to Enron's financial meltdown. The case study concludes by referencing scholarly sources that provide further insights into the ethical and financial aspects of the Enron scandal.

ENRON: QUESTIONABLE ACCOUNTING LEADS TO COLLAPSE
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Question 1
The corporate culture of Enron has significantly contributed to its bankruptcy which is evident
based on the following aspects.
Enron’s bankruptcy was considered largest corporate bankruptcy in United State at the time. It is
apparent from the case study that the corporate culture of Enron was aggressive and more likely
to be arrogant in nature. Such corporate nature fortified unethical behaviour in the organisation
with the aim of getting monetary gains irrespective of any questions on practice conducted by the
employees of the company. In this regards, the executive compensation strategy of Enron was to
increase the wealth of their executive partners rather than focusing on deriving profit for the
respective shareholders (Ferrell, Fraedrich&Ferrell, 2005). They were following “rank and yank”
system in the organisation which resulted in a “fierce environment” that meant that bottom 20%
of company’s employees were forced to leave the company. It indicates that various unethical
practices and decision were continuously followed by the company and no one was reporting this
unethical behaviour. Moreover, rather than encouraging integrity values and respect, the
company was involved in “innovation and punished employees deemed week” in regards to
accomplish corporate culture reward. Also, the company was more likely to reward high point
performance employee and if any employee does not show high performance on their
performance measuring criteria, then the company directly fired the employee from the
company. As a result, the employees were following the philosophy of engaging in high risk
transactions that could lead to high profits for the company irrespective of the fact that high risk
or beyond the risk tolerance level of Enron can lead to minimal profit, which created a “survival
for the fittest” environment of employee.It made the system of the organisation as “the last
straw” which caused various issues in the organisation. As a result of this, employee pitched
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against one another employee and also minimized the communication and cooperation. Unethical
corporate practices were also seen in the financial statements of the company which represent
company to be more successful in order to keep the high share prices (Fusaro & Miller, 2002)
Question 2
Yes, it can be said based on the case facts that bankers, auditors and attorneys played a major
role in the demise of Enron in many ways.
Bankers
It is evident that many banks were supportive to the manipulation process of Enron to
misrepresent the financial statements in order to show profit to the shareholders. For example:
three British bankers fraudulently worked for Enron to represent false financial statements and
made a secret profit of $7.3 million. Also, a brokerage and investment banking company called
as Merrill Lynch was also part of unethical practice of Enron because it was having significant
involvement in fraudulent manipulation of income statement by doing severe false transactions
(Zimmerli, Richter & Holzinger, 2007).
Auditors
It is apparent that accounting firms were one of the critical business associates of Enron and due
to the presence of common interest, low independence of auditing, the auditors had a quid pro
quo relation with the management. It caused several unethical and also unprofessional practices
of auditing. This is because investors would keep an eye to the financial statements of the
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company in order to measure their level of investment in the company. Hence, the reliability and
independence of the auditor Arthur Andersen LLP was limited by Enron in order to show better
financial position of the company and not providing accurate position of the company by
eliminating the losses in order to attract the investment of the investors (Jenkins, 2002).
Attorneys
The duty dereliction on behalf of attorneys was also an imperative aspect behind the demise of
Enron. This is because Vinson & Elkins, the respective law firm wrote many opinion letters in
support of the lawful deals and transactions of Enron. However, in reality most of the times,
Enron had not made such transactions. Therefore, it can be said that significant contribution in
the bankruptcy was made because of the fraudulent act of attorneys (Brooks & Dunn, 2017)
Based on the above factors, it would be fair to conclude that bankers, auditors and attorneys
played a significant role in the demise of Enron.
Question 3
It is evident from the facts that Andrew Fastow who was the chief financial officer of Enron was
the mastermind of the off balance sheet transactions and fraudulent financial statements. He
played a dominant role that directly sparked the bankruptcy and collapse of Enron. As a result of
this misrepresentation nearly $1 billion debt was concealed in the financial records. This was the
major fraud that was responsible for the bankruptcy of Enron. Also, the illegal income made by
Andrew Fastow of worth $37 million was also seized by the government officials which he
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earned by stating that he took various unconsolidated partnerships in several firms that resulted
such a significant income. However, in real he did not work for such special work entities and in
order to falsify his true financial condition he stated such claims. This is the reason that Andrew
Fastow was charged for fraudulent conduct, conspiracy and also in money laundering (Fraedrich,
Ferrell & Ferrell, 2013). Additionally, he was charged for obstruction of justice. Also, Andrew
took income for himself that should have been disbursed to the other personals. Moreover, the
central financial officer Andrew also received various kickbacks which were defined as gifts
from the relevant family members of Andrew. In this fraudulent conduct, his wife Lea Fastow
was also involved because she was working as a former assistant treasurer and hence, made
many guilty felony tax crimes in regards to help Andrew. Finally, in 2000, Enron suffered a
financial meltdown and as a result long awaited demise of Enron’s bankruptcy took place
(Ferrell, Fraedrich & Ferrell, 2005).
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References
Brooks, J.L. & Dunn, P. (2017) Business & Professional Ethics for Directors, Executives &
Accountants.(8th ed.). Boston: Cengage Learning.
Ferrell, O.C., Fraedrich, J. & Ferrell, L. (2005) Business Ethics: Ethical Decision Making and
Cases. (6thed.). New York: Dreamtech Press.
Fraedrich, J., Ferrell, L. & Ferrell, O.C. (2013) Ethics Decision Making in Business: A
Managerial Approach. (9thed.). Nashville: South Western.
Fusaro, C.P. & Miller, M. R. (2002) What went wrong at Enron: Everyone’s guide to the largest
bankruptcy in US history. (2nded.). Brisbane: John Wiley & Sons.
Jenkins. J.G. (2002).The Enron Collapse.(2nded.). New Jersey: Prentice Hall.
Zimmerli, W.C., Richter K. & Holzinger, M. (2007) Corporate Ethics and Corporate
Governance.(5thed.). Berlin: Springer Science & Business Media.
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