Management Case Study: Examining the Enron Scandal and its Lessons

This case study examines the Enron scandal, tracing the company's history from its origins as an interstate pipeline firm to its dramatic collapse. It delves into the mistakes committed by Enron, including accounting abuses, risky investments, and a culture of aggressive expansion fueled by incentive schemes. The study identifies the responsibilities of Enron's leaders, highlighting conflicts between key figures like Rebecca Mark and Jeff Skilling, and the impact of their differing management styles. It explores the learning outcomes of the scandal, emphasizing the need for corporate governance reforms and ethical conduct. The analysis offers recommendations for future business practices, such as implementing a strong code of conduct, establishing checks and balances, and fostering transparency in accounting. The Enron case serves as a cautionary tale about the importance of trust, ethics, and sound management in the business world.

Running head: MANAGEMENT
Case study of ENRON
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History of ENRON
The origin of the company Enron is dated back to the year 1985 in the form of an
interstate pipeline firm, which happened out of the legal union of Omaha based InterNorth and
Houston Natural Gas (Cbc.ca, 2017; Markham, 2015). The former CEO of Houston Natural Gas,
Kenneth Lay became the Chief Executive Officer of Enron. Later on, the consultant of
Mckinsey, Jeff Skilling, through his vision, wanted to change the pipeline industry to the gas
industry.
During his time, the company was straitening its operations of pipeline into a wider
business in power supply. In the beginning, the pipeline had been extended to United States of
America and then it was extended on a global scale, by completing a larger plant in the United
Kingdom and contracting to construct a large plant in India near Mumbai (Markham,
2015 ).However, under the inspiration of Jeff Skilling, Enron started moving into new fields. In
the year 1999, the company has launched its broadband service as well as its official website
(Cbc.ca, 2017; Abrogast, 2013). The company’s website had been used for the commodities,
which were meant to be used for the trading purpose. The firm took the decision to build itself as
a global leader in the hydro industry and bought a big water company in the United Kingdom.
In the year 2000, the growth of Enron increased. However, from the year 2001, it has
been reported by Enron that there has been a loss of $619 million, which is regarded as the first
quarterly loss in the four years (Markham, 2015). Even in the late November, the stock of the
company came down to less than $1, which lead to the loss of millions of dollars by the investors
(Cbc.ca, 2017). There are certain mistakes committed by the company and therefore, in this
context, it is important to investigate the problems took place in the company.

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Mistakes committed by Enron
`In a way, the company went bankrupt for the general reason that all firms go bankrupt.
The company made investment in projects that had proved to be risky and as a result, the firm
was not able to keep up with the obligations of debt of the company (Prebble, 2016). It has been
pointed out that Enron’s accounting abuse and policies disclosure such as accounting based on
market to market, the SPE’s utilization in order to hide debts and using not adequate capitalized
subsidiaries in order to decrease the earning volatility are the vital reasons (Cbc.ca, 2017;
Prebble, 2016). These are taken as an important cause of bankruptcy; these abuses are regarded
symptomatic of a bigger problem at Enron related to identity crisis.
The rapid expansion of Enron had run much ahead of the ability of Enron to fund it and
in order to address the problem that happened in the year 2000, the company secretly created a
complicated web of the off sheet of balance based on financing vehicles (Prebble, 2016). Its hard
driving culture provided by the schemes of incentives, which had promised and gave delivery to
the huge rewards to the outstanding performers in the compensation packages. The consequence
was that in order to achieve results, the assaulting policies of accounting in the early stage were
introduced (Cbc.ca, 2017). Specifically, the use of valuation market to market based on the
contracts which were produced in large earnings artificially, disguising for a few years lead to
the low profitability in the greater part of the business. This identifies that Enron was not
generating the proper flow of cash while spending extravagantly on the policy of expansion and
gradually it blew up dramatically and suddenly. The suspicions grew that the earnings of Enron
were manipulated and in the late Summer, in the year 2001, the company has emerged that its
Chief Finance Officer made himself rich privately at the expense of Enron (Cbc.ca, 2017).

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Responsibilities owned
` The leaders of Enron and their conflicting philosophies are responsible for the downfall
of Enron. Before the resignation of Richard Kinder in the year 1996, the two individuals having
different styles of leadership and management strategies and they were in the competition with
each other for the favor of Ken Lay as to become a second person in the company (Bakan, 2012).
The name of these two leaders is Rebecca Mark and Jeffrey Skilling. The conflict between
Skilling and Mark became prominent after the resignation given by Kinder in the year 1996
(Cbc.ca, 2017). Mark continued to make her position strong and advance her asset rich strategy
within the sphere of company, investing heavily in the projects of overseas like the Dhabol Plant
in the country India and the Azurix operations in Canada, Britain and Argentina. However, for
Mark, these projects failed to yield profits on a longer-term basis for the company (Bakan, 2012).
While Mark and her employees were utilizing millions of dollars at Enron which were worth of
compensatory advantages and benefits from developing these important deals, a few were aware
of how these failed projects affecting the company badly through the growing indebt (Cbc.ca,
2017).
Finally, it can be stated that the ideological conflict between Mark and Skilling along
with the resignation of Rich Kinder, whose obsession with the cash flow levels at Enron helped
the company in the black during the year 1990, as the primary reasons why Enron was
bankrupted (Dollman, 2013; Swamy, 2014). The high level managers at Enron in both the camps
of Mark and Skilling were taking advantages of the packages of huge compensation (Cbc.ca,
2017; Albeksh, 2016). The compensation structure at the company as a result gave birth to the
culture of narcissism that gave rewards to the individuals such as Andrew Fastow, the chief

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Financial officer, for the creation of illegal schemes like Chewco to eclipse the mounting debt of
Enron and ironically provided generous support for doing so (Cbc.ca, 2017).
Learning Outcomes
The scandal in Enron is the important corporate destruction in the USA since the failure
of many loan banks and savings during the year 1980. The scandal demonstrates the need for the
important reforms in the corporate governance and accounting in the country, it has also given
lesson in terms of taking into account the ethical cultural equity generally (Siskos, 2014). The
importance of the corporate ethics is regarded as a serious business. It is important to think the
culture of the company and workings seriously. It has taught the people that it is significant to
have the corporate ethics, which is regarded as a serious business, and it is significant to them in
the writing format (Cbc.ca, 2017; Siskos, 2014). Enron is not regarded as a story of capitalism of
the uncovered greed at the mind of the dishonest world of business and it must be properly
guarded against any institutions and a vigilant populace (Choudhary, 2012). However, this is
regarded as the lesson of fear. The deeper lesson that the scandal imparted is the hope. This is the
lesson, which is not only for stakeholders and employees, but also for the business (Cbc.ca,
2017; Albeksh, 2016). The Enron scandal not only describes about the danger involved while
trusting the business, it is also about the business, which is necessary of being considered as
trustworthy. Business always looks forward for the actual success and the actual returns, which
includes the financial ones. Enron is not a victory for greed, but the firm is the failure of
intelligence particularly, it is a failure to consider the critical role of trust in the success of the
business (Shine, 2014).

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The business must believe that a relationship must exist where one partner always keens
to take advantages and the other one is proved unsustainable. However, in the context of Enron,
the trust was not there. The true success in the capitalist system is based on trust (Cbc.ca, 2017).
Therefore, against this background, it is important to justify that the scandal of Enron focuses on
the fact that trust is important to consider in the business, absence of this, would led to the
deterioration in the business (Siskos, 2014).
Recommendations
After analyzing thoroughly the case of Enron, the most important
recommendation that can be given to the firm is to welcome a strong code of conduct. Through
the implementation of the strict policy of conduct little room is left for the firm actions which
might jeopardize the firm, both ethically and legally. In addition to this, it is equally important to
frame out a series of balances and checks from both third parties and in houses (Cbc.ca, 2017).
Taking into consideration these important safeguards, they allow the management to be
transparent, having concise understanding and the way the business is carrying forward its
operations.
The firm must have accurate and clear understanding regarding the practices of
accounting. The use of Enron’s market to market accounting system, which has allowed them to
report their earnings supported by potential profit from the transactions of business, regardless if
the firm collected the payments (Cbc.ca, 2017). If the company is having capability of having
clearer understanding of the perfect system of accounting, the firm can establish a mind of
transparency in their reports, which would further build trust for the investors in the public.

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The CEO of the firms must carry a strong character with them so that they can handle the
entire business. They must not negatively affect the development of the business. The presence
of a strong ethically bounded leader, who can think about the future of business and its
development is necessary for the success of the company.

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References
Albeksh, H. M. A. (2016). The Crisis of the Ethics of Audit Profession: Collapse of Enron
Company and the Lessons Learned. Library Journal, 3, e3205.
Arbogast, S. V. (2013). Resisting corporate corruption: Cases in practical ethics from Enron
through the financial crisis. John Wiley & Sons.
Bakan, J. (2012). The corporation: The pathological pursuit of profit and power. Hachette UK.
Cbc.ca. (2017). The rise and fall of Enron: a brief history. CBC News. Retrieved 6 November
2017, from http://www.cbc.ca/news/business/the-rise-and-fall-of-enron-a-brief-history-1.591559
Choudhary, A. (2012). Mission" Trust". Academy of Strategic Management Journal, 11(1), 101.
Dollman, A. (2013). Narcissism in the Workplace and its Effects on an Organization. DSM-5,
American Psychiatric Association, 696-670.
Markham, J. W. (2015). A financial history of modern US corporate scandals: From Enron to
reform. Routledge.
Prebble, L. (2016). Enron. Bloomsbury Publishing.
Shine, Y. (2014). Business Ethics: The Good the Bad and the Enron. TOURO ACCOUNTING &
BUSINESS JOURNAL, 50.
Siskos, D. V. (2014). Detecting financial reporting fraud-Lesson learned by Enron Corp. SMC
University Working Paper, 4-16.

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SWAMY, M. K. (2014). CASE STUDIES OF CORPORATE--RELATED FINANCIAL
INSTITUTIONS PROMOTING SELFISH INTERESTS THROUGH MONEY
LAUNDERING AND ASSOCIATED UNETHICAL-BASED BUSINESS
PRACTICES. Journal of Financial Management & Analysis, 27(2).