Enron Case Study: Ethical Leadership in Business - University Course

This case study delves into the Enron scandal, which unfolded after the merger of Houston Natural Gas and InterNorth Inc., leading to the rise of Kenneth Lay as CEO. Enron became a dominant force in the natural gas and electricity sectors, only to collapse following a $618 million loss announcement ...Read More

RUNNING HEAD: ENRON’S CASE STUDY AND ETHICS 1
PROFESSIONAL ETHICS AND LEADERSHIP
COURSE
UNIVERSITY
DATE

2
ABSTRACT
According to Ailon (2015), Enron was created in 1985 after a merge between Houston
Natural Gas company and Omaha-based InterNorth Inc. After the amalgamation, the C.E. O of
the former Houston Natural Gas Company, Kenneth Lay became the overall C.E. O and the
chairman of the company. Later, Enron became the 7th largest U.S company and the largest U.S
trader in Natural gas and electricity by early 2001. Agrawal & Cooper (2017), state that on 16th
October 2001, the company announced a huge loss of $618 million which raised a lot of
concerns hence on 22nd October the same year, the securities and exchange commission started to
audit the company’s financial practices and the company was charged with fraudulence in
securities according to the financial results report that was publicly reported and the company
was declared bankrupt in 2nd December 2001. It surprised many that the natural gas pipeline
company that had experienced great success in business experienced a great downfall and the
collapse left thousands of employees jobless. Most of the investors in the company and the
retirees who were on their pension were left with valueless stock. Cherno& Sornette (2016), state
that During its peak, it had total shares worth $90.75 and after been declared bankrupt, the
company was trading at $0.26. This signifies the worst ever experienced bankruptcy for the
America’s most innovative natural gas pipeline company.

3
INTRODUCTION
The Enron ‘s scandal ended many years ago but the experience will stay in our minds
forever (Chen, 2015). The C.E.O, Jeffrey Skilling had hidden all the financial losses the
company had experienced before the down fall which was evident that he had a hand in the
collapsing of the company and as a result he was imprisoned for ten years and just ended his
imprisonment in 2017. According to Chu & Hsu (2017), this scandal created a new perception of
business ethics. It was found that the management kept two set of books that hidden billions of
dollars which were the debts owed to the outsiders by the company. This in deed was not a
professional ethical practice because the company managers are people who should be
responsible for the success of the organization in charge. Business ethics require leaders to be
transparent in all their dealings and be ready to be accountable for any failure rather than trying
to hide the evidence.
From the research done, it was established that the board of directors was not interested
in questioning the management regarding the state of the company when it was evident that the
profits and the stock prices were appreciating without having the knowledge that there were
many things hidden behind the bars (Hosseini & Mahes 2016). Business ethics requires a
thorough audit of the company frequently to have full information regarding its progress which
gives a clear direction of the company presently and in future. The management board was
interested majorly in the stock holder’s information without having a concern for the general
public. Business ethics require equality in dealing with all the company stake holders. The
management intended to enrich themselves with the company’s resources by lack of
transparency in debt management. This is because the debts were not inclusive in the general
financial records for the company which clearly outlined how dishonest they were. Business

4
ethics requires leaders to be honest in all their dealings on behalf of the company which is
usually a key aspect to the success of any company. The board of management in the
organization have the overall role to over see everything that the management does for the
success of the organization.
Markham (2015), states that there was a conflict of interest because Arthur Andersen
who was the consultant to Enron had good intentions for the company and most of the time was
in charge of auditing the firm’s finances just to ensure that everything worked well for the
company and been an auditor he knew everything but had no intention to expose the fraudulent
books that the company kept. The board never bothered much regarding the financial status of
the company because they were just happy with the fact that there was continuous flow of cash
to the company. According to Chernov& Sornette (2016), business ethics requires those in
leadership to be committed in all the business aspects to enhance the monitoring and control of
the enterprise to maximize the profits.
From the research done, it was discovered that the people were influenced by the
pursuance of short term profit due to the evidence of rising stock prices making quick fortunes
for all the investors blinding them. The stock holders represented by the board sought dividends
and capital gains on their holdings and in the process, they completely lost their focus on the
general financial status of the company which costed them when the company finally collapsed.
Business ethics requires the stake holders to develop interest for feedback from the company.

5
References
Ailon, G. (2015). From superstars to devils: The ethical discourse on managerial figures involved
in a corporate scandal. Organization, 22(1), 78-99.
Agrawal, A., & Cooper, T. (2017). Corporate governance consequences of accounting scandals:
Evidence from top management, CFO and auditor turnover. Quarterly Journal of
Finance, 7(01), 1650014.
Chernov, D., & Sornette, D. (2016). Dynamics of information flow before major crises: lessons
from the collapse of Enron, the subprime mortgage crisis and other high impact disasters
in the industrial sector. In Disaster Forensics (pp. 175-221). Springer, Cham
Chen, J. (2015). Off-Balance Sheet Financing and Bank Capital Regulation: Lessons from Asset-
Backed Commercial Paper
Chu, B., & Hsu, Y. (2017). Non-audit services and audit quality---the effect of Sarbanes-Oxley
Act. Asia Pacific Management Review
Hosseini, S. B., & Mahesh, R. (2016). THE LESSON FROM ENRON CASE. Journal of
Current Research, 8(08), 37451-37460.
Markham, J. W. (2015). 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.
.