Enron's Rise and Fall: Analyzing Business Ethics, Case Study

This case study examines the rise and fall of Enron, a major energy company, focusing on the internal and external factors that led to its collapse. It explores issues such as the non-consolidation of Special Purpose Entities (SPEs), accounting irregularities, and breaches of ethical conduct by accounting professionals and auditors. The study highlights the role of corporate culture, leadership failures, and the impact of unethical business practices on stakeholders and the economy. It delves into the failures of auditors, particularly Arthur Andersen, and the lack of effective oversight. Furthermore, the analysis emphasizes the importance of integrity, adherence to regulations, independent judgment, and industry knowledge for accounting professionals. The case study emphasizes the connections between leadership, management, and organizational culture in contributing to Enron's downfall, concluding with the negative effects of unethical business practices and the importance of ethical codes and leadership in preventing such failures.

Running Head: ENRON’S UPS AND DOWNS
Case Study
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Running Head: ENRON’S UPS AND DOWNS
Table of Contents
1.0 Introduction..............................................................................................................................3
1.1 Background..............................................................................................................................3
2.0 The fall of Enron......................................................................................................................5
2.1 Accounting Professionals........................................................................................................5
2.2 Auditors and Accounting Regulations...................................................................................6
2.3 Breaches of accounting and ethical conduct in Enron.........................................................6
2.4 Corporate culture in Enron....................................................................................................7
2.5 Effects of unethical business practices...................................................................................7
2.6 Code of Ethics and Top Leadership.......................................................................................8
3.0 A Follow-Up.............................................................................................................................8
3.1 Integrity....................................................................................................................................8
3.2 Familiar with regulations and laws........................................................................................9
3.3 Independent judgment............................................................................................................9
3.4 Understand the nature of industry.......................................................................................10
4.0 Conclusion..............................................................................................................................10
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1.0 Introduction
Enron organization is a large firm that deals in energy and gas with special duty units which are
allies that keep accountabilities and money on several balance sheet with the aim of justifying
and evade losses, destruction and making monetary statement have a good look at the times of
obtaining cash. The company was damaged when there was an effort of archiving the accounting
annals relatively than the real commercial presentation achievement. Apart from the non-
consolidation problems of SPE, it was revealed in the case that principle of bookkeeping of
auction and reasonable worth had problems too that is based on report on power. Several internal
and external factors together with the triggers Enrol transformation from success to failure. E.g.
external auditing, management, GAAP and FASB.
1.1 Background
There was an indication that the newly appointed CEO, Skilling, to a huge range, reformed the
environment and the culture of Enron company. There was alteration of the organization`s
operations. There was a believe that Skilling tried to twist the rule so that it could favour him.
For instance, followed short-range act attainment and expanded more commercial in the field of
money rather than the initial commercial – gas and pipeline. In addition, the environment within
the Enron company was found to be around because of the strategies that were performance-
orientated plus the policy of inducements that becomes a significant to persons who try to reach
the target irrespective of the code of ethics.
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Undeniably, the failure of Enron was as a result of the CEO`s accountability, governance of the
corporate e.g. the accounting team of CFO Andrew Fastow, the outstanding external inspecting
practice of Arthur Anderson, officer of the risk management, the review and monetary board the
SEC, oversee body. It became a comprehensive and methodical mechanism that Enron should
have been wrought properly and easily. Nonetheless, there was scam in a three-way association
(Figure 1) that comprises ‘culture’, ‘leadership’, and ‘management control’ that result to
conflicts with those who are encountered and the failure ones.
.
The failure encounters and other issues that the Enron faced was based on linkages of three
types. One showed a relationship between leadership with management. This is where the leader
at the top became very vital to the company to obtain the best performances for the resolution of
rewarding individuals so that the organization to create numerical information that is fraud to
have the strategies in lined. Second linkage is where the superiority of the leadership which
would so great in influencing the culture of the organization. The top leader is considered to be
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vital for the company who are sanctioned to have the rules set for the games they desire to have
the management performed. The third linkage is the connection of the management controls and
culture that the followers could prefer to have an acceptance choice on ruling to take the risk to
doing erroneous stuffs that were acknowledged by the company`s own environment and culture.
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2.0 The fall of Enron
2.1 Accounting Professionals
Accounting professionals were blamed for bankruptcy of the Eron company. Errors that are
related to the unfinished and less accurate monetary reports that led to a great loss in the
reaffirmed reports. there are identified issues that are associated to the accounting professional
that includes non-consolidating SPEs, inventory stock, accounting treatment, fair value
accounting and income recognition and the monetary reports that are disclosed.
In precise, for instance, investment gain of the Enron in SPE (JEDI) plus the acquisition of
CalPERS (known as JEDI as joint venture) which were eliminated only half in the monetary
reports consolidated even though it has to be eliminated fully. In addition, Enron had used the
SPEs to resist the negative info to be printed to the shareholder, that did distortion of the rule in
the accounting. In addition, Enron made that the mistakes are elementary in the accounting
treatment salary, where the income has to be recognized over several over a period of time of the
contract that is recorded directly as the present revenue. Moreover, there could be argument that
GAAP in an aspect that could not provide a precise direction for the company but Enron made
power to prance regulations. For example, despite GAAP not allowing increased record value of
the organization`s own records as an income where the company had a record gap of between the
higher fixed value in a strike price and contract in the bazaar as a gain in order to increase fund.
Seemingly, the bookkeeping faults, in form of the surfaces of method and scam, accounted for
large amount of the weakening.
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2.2 Auditors and Accounting Regulations
Auditors have the responsibility of detecting the material that is miss stated in the in the financial
archives. Just as mentioned in the section two of the introduction part, the Enron organisation
had a mechanism that was confiscated to have the operation controlled that included committees
of auditing. Nevertheless, there was a revelation that the checkup committee that entailed many
professionals who failed or rather avoided to have the best performance procedure that is
sufficient to detecting problems. For example, in most meetings, there was no agender that had
been referred to the critical issues and the checkup committees that never had any queries of
SPEs plus the disagreement on some dubious businesses. it is obvious that the external practice
of auditing of Arthur Anderson was the biggest firm that failed to make its own execution on
duties. With the above faults, it becomes so hard to have an understanding how capable auditors
never had a chance to detect and have a suggestion on the accounting team to have them
corrected. Auditors have to bring out the suspicion within an organisation and have the ethical
procedures to get access to the proof and have the errors adjusted.
2.3 Breaches of accounting and ethical conduct in Enron
The breach of integrity was conducted but wrong behavior conducted by the accounting, this
required act of professional honesty and following the right principles that help in making of
skilled judgement and also dealing with relationship of other business partners. To be specific it
required that the skilled professions should be able to produce ‘true and fair’ financial statements
that do not have mistaken and errors and imitation of the information required. In addition, that
there was any arose of misconduct, it was to take action to avoid and also correct. In Enron’s
case evidence showed that professionals in accounting made intentional errors on some primary
and simple accounting issues, and also showed they failed to act honestly. In the meantime,
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objectivity should focus on Eron’s case. Professionals in accounting were required to have their
own ruling and not compromise the weight and bias. other organisation. Professional in
accounting lost the right ruling under the unmoral environment of Eron case, this simply attained
individual interest.
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2.4 Corporate culture in Enron
Eron was poor in risk management as indicated, this was the culture to expand the thing in
approach of reaching the edge. In persuasion of higher return, it took risking without considering
bad consequences. In the meantime, comparing industries of traditional energy, eversion of old
attempted and routine exploration of business in new ways, which focused on returns from the
trading financials instead of those from hard assets. Also, it invested on ‘fancy’ and other lavish
things e.g. image and advertisement in the operation of business. The unethical dilemma was
much pushed by the Enron’s negative transformation culture.
2.5 Effects of unethical business practices
The negative effects of illegal business bring harm to both society and community. This leads to
loss of confidence on the recorded firms and their financial statements as they are indicated from
the Enron’s fall. Although reports financials have comments of auditors and administrations, the
public would be reluctant in accepting the superiority of such financial reports. As such a
company is required to get more accredited and external statement which could turn to be
inefficient and costly in economical aspect. Also, there will be wastage of society resources, e.g.
Where public had invested money in the unethical firm like Enron. They could have deposit
money in the stable firms but ending up in the unstable companies, where resources are used in a
wasteful manner which can lead to the downfall of economy to a huge extent. The unethical
business consequences forced in the coming of the new polices that would cost firms to comply
with. This would reduce the development cost in business eventually this brings negative effects
of the improvement. On the other hand, mitigation of unethical behavior would be curbed by the
new regulations.
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2.6 Code of Ethics and Top Leadership
Leaders at the top could have some influence on the execution conduct or code of ethics. There
was a research mentioned the code of ethics highlighted in Eron, e.g. ‘we work …honestly and
sincerely’ and ‘we do not tolerate abusive or disrespectful treatment’ were confirmed reaffirmed
by employees each year. In addition, separated the power of supervision in a robust mechanism.
These infrastructures nevertheless were to window-dress what is inside the organisation. The
higher management not pay any attention to some of these issues. The fading efforts which
helped in setting up of the ethical code undermined the value of ethical code in Enron. Also, the
hierarchy and reinforced management helped the top officers to have strong powers that lead
them to exploit and change the value of code so as to accept their unethical conduct.
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3.0 A Follow-Up
3.1 Integrity
Basing on the Enron`s case, it shows that honesty became the main and vital characteristics for
the professionals that deal with accounting on critical and information confidentiality. Just the
way the accounting professionals had provided archives on finance, to stick with the decision
making from the stakeholders for honesty and integrity purposes to provide correct and info that
is fair. Enron also engrossed on attainment in numbers rather than real processes that had been
reports provided by the professionals of the accounting which didn’t replicate the actual state of
the organisation have the shareholders mislead.
3.2 Familiar with regulations and laws
Considering the Enron’s case, office experts were well rained, it still holds that they did not have
consciousness of the essentials of 8 laws and procedures. Rules and policies would be altered
with the change in environment and people’s wishes, the office experts are expected to have
information and be mindful on the field of policies that are connected to the corporate they
operated on. In case scenario where policies e.g., the inauguration of the law on the environment,
the office experts are supposed to have aware of it and make changes of connected operation and
financial records, this is to assure the superiority of info.
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3.3 Independent judgment
During working atmosphere, it is most preferred to work as a group to finish a certain duty.
Nonetheless it is probably you would be losing or give in your thought that you see is not much
of importance but it is. On Enron’s case it could be seen that office experts might have pressure
from higher administration or lacked to have their own verdict under the unsuitable functioning
atmosphere. Under this condition, the sovereign ruling becomes more of a value. In addition, it is
not wise to just count on others. According to office specialization, it is important to regularly
have a vivid route and also behave morally no matter what people may say or think.
3.4 Understand the nature of industry
The fall of Enron was comprised of the issues of norms or business revolution. Later 2000,
Enron left the ancient ship and discovered the new property of trading of merchandise which it
lastly got misfortune with. To be an expert in financial records, it is expected to be have
comprehension of the nature of professional and business so as to help in in utilization of
resources and perform the right thing.
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4.0 Conclusion
Enron’s struggles opened the disadvantages in the administration and secretarial polices. In
addition, the inspiration of Enron’s issues attracts extra attention on the like business and also the
office manager, it would also lead to changes and developments of policies and the gift of the
management of the well recorded and large firms. In addition, it cannot evade the wicked
influence from the tumble of Enron, which brought to the loss of confidence and options of
humanity and the harm of economy.
To evade the same plight, its recommended that body in firm should achieve a principled
conduct and start a hands-on code of behavior to make a well and ethical atmosphere and norm
in an organization. Also, there should be guarantee to the mechanism separating powers the of
directors poses which should be set up and operated in a correct manner. Nonetheless, auditors
and professionals in accounting, they should remember the reputation of honesty and
independence that should refuse to embrace. Lastly the administration and regulators in
accounting should try to improve on elasticity of policies and attempt to maintain companies
ethical conduct and also the superiority of financial statement.
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