The activities of the leadership of Enron and its Board of Directors is a virtual how to on how unethical decisions can and will eventually bring a company to the brink of collapse. The short term rewards of unethical activity can be quickly overcome by the destructive force of investigations and market swings. How greed and lack of oversight can cause the disruption of the livelihoods of employees not directly involved with the unethical behavior. We will examine the events leading up to the bankruptcy of Enron as well as the resulting legislation put into place because of the misdoings of Enron and other companies.
Before Enron became one of the top ten largest companies in the ...view middle of the document...
Since this creative practice made it possible for Enron to not have to recognize its total loses from bad business decisions, it would be looked upon more favorably on Wall Street. Since it was meeting and exceeding the expectations of earnings, the stock price began to increase. While it should be the absolute goal of a business to increase its profitability and the amount of revenue it earns, Enron did so at the expense of what would be commonly accepted in business practice.
While the use of these type of special purpose entities is common practice in the energy industry. These entities are supposed to be funded by outside investors. Enron utilized its own stocks and assets to finance the shell corporations. So in reality, Enron should have been recognizing the liabilities, rather than understating them. As time went on, the number of shell corporations grew into the hundreds for Enron to be able to maintain the expectations of Wall Street. When the Board of Directors was questioned or asked about information in their financial practices of the corporations, they claimed that the operations of the entities was proprietary and would not release the information.
You may ask “what about auditing”? You would have an excellent question and Enron would answer that the auditing was handled by Arthur Andersen. Andersen was, at one point, one of the top five auditing firms in the US. Enron’s accounts were handled by the firms Houston office. However, it was found that Enron accounted for 27% of Andersen’s Houston Offices Audit fees. This led many to believe that rather than being a good corporate citizen and performing the task that was required, Andersen was merely doing the job to receive their money. Trying not to upset the apple cart, if you will.
One of the key areas that Andersen should have been looking into was the handling of the special purpose entities. Since these companies were not funded by outside investors, as commonly done, Andersen should have noticed that these activities should have been reflected by Enron in their reporting. However, Andersen received pressure from Enron to overlook these items. To keep Andersen quiet, Enron utilized certain underhanded techniques to make sure Andersen minded their P’s and Q’s. One method was to bring in other audit firms to perform certain tasks originally performed by Andersen. This would give the appearance that Enron was working to replace Andersen. And seeing that the Houston office of Andersen received over a quarter of their fees from Enron, it seemed to be determined that it was in the best interests of the company to follow the marching orders.
So, what about the employees. During its heyday, Enron was one of the highest, if not the highest, paying companies in the nation in their industry. There methodology was to attract the top talent, you had to provide top pay. Not too much wrong with that. Sounds like a company that I would...