Discuss the Enron scandal, one among the largest bankruptcies which the world has witnessed in the year 2001 (Chernov and Sornette 2016). Elaborate on analysing the problems undergone by this company.
The Rise of Enron
Organisational or workplace ethics are very important part of employment and the organisations which follow certain number of business ethics have much better chances of surviving in this today’s competitive business environment (Michaelson et al. 2014). In today’s market, it is not enough for an organisation to have a goal of earning profits alone. They also need to have proper workplace ethics that are been followed by the workplace employees. The recent incidences of workplace scandals, irregularities and frauds in different organisations have resulted in ethics in the workplaces making a powerful comeback.
This paper has shed light on the Enron scandal, one among the largest bankruptcies which the world has witnessed in the year 2001 (Chernov and Sornette 2016). At first, it shall elaborate on analysing the problems undergone by this company. It shall analyse the rise of Enron along with the ethical practices of leaders in the company. Furthermore, it shall also highlight the reasons behind why such practices were considered by it and why they are unethical. Lastly, the paper will present a detailed recommendations and implementation proposals which could be used in order to avoid such corporate scandals appear again in the near future.
Enron was one of the largest sellers of natural gas and the most innovative company in North America. It began its life in the year 1985 as one of the interstate pipeline companies through the merger of the Omaha-based InterNorth and Houston Natural Gas company (McGuire 2014). It was created by Key Lay, the then chief executive officer of the Houston Natural Gas in the year 1986. The company which was emerged as a mere pipeline company was later changed by the vision of Jeff Skilling, a consultant of McKinsey. He had the idea of applying the models that were been used in the then industry of financial services to the deregulated gas industry (Walenta 2015). Skilling convinced this company to start up a Gas Bank by means of that the sellers and the buyers of the natural gas could execute with one other by making use Enron (an intermediary) whose contractual arrangements had given both the parties with certainty as well as reliability about the delivery and the pricing. The company recruited him in order to run their business and he then gradually built up a huge gas operation within very short period of time in the early nineties. At this time, the company extended its pipeline operation into extensive power supply business. At first, it extended in America and then on global scale, setting up large plants at the Teesside of the United Kingdom and shrinking to develop and build big plants in Mumbai, India. Within short period of time, it also gained dealership all around the world including China and South America (Hosseini and Mahesh 2016). This significant expansion of Enron had created an international reputation of the company. The main vision of Skilling was to change Enron into a big giant in the business market. The growth of this company was rapid and in the year 2000, its annual revenue crosses hundred billion dollars. It was also ranked as the 7th largest company in the Fortune 500 as well as the 6th largest energy companies in the world (Bronni, Velentzas and Papapanagos 2017). Also, its stock price reached to 90 US dollars. However, cracks started appearing in the year 2001.
The Fall of Enron
At Enron, there were some persons who used to perform ethically but there were many others, who did not. The employees like John Olson, Clayton Verdon and Margaret Ceconi are the three employees of Enron who chose the right or ethical things to do and they are the ones who have performed their duties ethically. On the other side, the main leaders at Enron including Kenneth Lay, Andrew Fastow and Jeffrey Skilling have performed several practices that are obviously unethical. The CEO, founder and the chairman of Enron, Kenneth Lay is the one who lacked integrity and was dishonest to the company (Gottschalk 2017). It was under his leadership that Enron got involved in fraud and this led the investors to lose billions of dollars. In the year 2001, the defenceless financial year for Enron, Kenneth Lay still announced to the investors and the employees that the upcoming growth of Enron has never been more possible and this advocated them to infuse in the stock of Enron further (Benke 2018). With the same, in the same year, he also sold a notable amount of his own stock shares. This announcement of his had increased the price of the company’s stock further and at the same time have also accelerated the bankruptcy of it. Finally, it was Lay who destroyed the companies that he himself had built. Secondly, Jeffrey Skilling in the year 2001 left Enron without disclosing the financial problems that it was facing (Wu and Olson 2015). He just said that he want to spend some more time with his family. Prior to his leave-taking, Skilling also did many things that are unethical. For instance, When Bethany McClean, one of the Fortune reporters asked him about the profit margin, Skilling directly refused to answer him about the same, although he was aware of the financial condition of the company.
The top executives of Enron had created fake subsidiaries which looked like partnerships to sell out the assets as well as to report false earnings. Also, they had also made use of offshore entities to evade the taxes, inflate the profits earned and to hide the loss. Moreover, risky ventures were also pursed so as to gain the profits. Such deceptions had resulted in an all-time high stock prices in the year 2000 (Cuninghame 2017). It is to note that the executives at Enron were not only the ones who were involves in the unethical practices. Several employees of the company were also involved in this case. In California, Enron diverted the power from the state and this has resulted in black-outs all through the state (Connell 2017). Moreover, in the accounting companies, the accountants made use of practices where they anticipated future revenue and they counted them as real earnings on the reports. Furthermore, the employees were given pressure to out-perform one another in the context of sales every time. Towards the end of the fiscal year, the company fired and replaced about 15 to 20% of its employees which had the lowest performance (Connell 2017). Those who used to question these practices were been fired, withdrawn or were reassigned from the company.
Ethical Analysis of Enron
If I were in those position to change the organisation, I shall be asking myself these three questions- Is it balanced? Is it legal? And how does it makes me feel? Being one of the employees of Enron, I would have thought of the answers for these questions. Firstly, as per my business intuitions, I feel that the company might commit fraud. It is illegal to help the company in hiding the fraud. Secondly, if I seek for disclosing about this matter in front of the public, I might lose my job and only I would be suffering but if I hide this information, more people would suffer, especially the investors and the stakeholders of the company (Enron). Hence, I would have tried to disclose the information in front of the public and would try my best to prevent the fraud from taking place, although it might risk my job. This is because I personally believe that hiding the facts that I know and letting the people suffer due to those facts would make me feel guilty the entire life. However, in order to avoid another similar scandal, below are the list of three suggestions:
- As it was the culture of the company that had brought in negative results, therefore, the companies must think carefully regarding their corporate culture. This would influence the decision of the employers and the employees when they face any kind of ethical dilemmas.
- The companies should a robust ethics infrastructures and should follow it. Just having some ethical codes is not enough. Enron too had a very well developed code of ethics but still, many ethical behaviours continues to take place within the organisation. Hence, the companies should develop a code of ethics as well as should communicate about it with all the employees and make sure that they follow it.
- With the same, the companies should also learn the theories and models related to business ethics as they are the ethical basis in every situations. All the executives of the business should possess proper knowledge about the business ethics.
Hence, from the above analysis of Enron, it is clear that the fall of this company was because of the weakness of human beings. The executives at Enron were very smart but unfortunately they used their smartness to destroy the fortune that they had built over 16 years of hard times. Apparently, they also hurt many investors and stakeholders as well. The major cause of the fall of Enron or this disaster was that there was a lack of idea about business ethics among the employees. Hence, when they undergone dilemmas, they opt for choosing the wrong ways.
Benke, G., 2018. Risk and Ruin: Enron and the Culture of American Capitalism. University of Pennsylvania Press.
Broni, G., Velentzas, J. and Papapanagos, H., 2017. Marketing Ethics and Communication Strategy in the Case of Enron Fraud. In Advances in Applied Economic Research (pp. 269-278). Springer, Cham.
Chernov, D., and 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.
Connell, M. 2017. The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002.
Connell, M., 2017. The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002.
Cuninghame, C., 2017. The confessions of Andrew Fastow. Australian Restructuring Insolvency & Turnaround Association Journal, 29(4), p.4.
Gottschalk, P., 2017. White-Collar Criminals. In CEOs and White-Collar Crime (pp. 53-84). Palgrave Macmillan, Cham.
Hosseini, S.B. and Mahesh, R., 2016. The Lesson From Enron Case. Journal of Current Research, 8(08), pp.37451-37460.
McGuire, G. 2014. Natural Gas Market Structure, Contracts and Pricing in Trinidad and Tobago. From Oil to Gas and Beyond: A Review of the Trinidad and Tobago Model and Analysis of Future Challenges, 112.
Michaelson, C., Pratt, M.G., Grant, A.M. and Dunn, C.P., 2014. Meaningful work: Connecting business ethics and organization studies. Journal of Business Ethics, 121(1), pp.77-90.
Walenta, J., 2015. Corporate personhood and the corporate body: the case of former energy giant Enron on trial for fraud. Environment and Planning D: Society and Space, 33(3), pp.545-559.
Wu, D.D. and Olson, D.L., 2015. Enron. In Enterprise Risk Management in Finance (pp. 11-14). Palgrave Macmillan, London.
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