Business Failure: Enron Company

Introduction

Enron was a major player in energy and was considered one of the most successful companies before its collapse. Failure of this company implication not only to employees and stakeholders but had a high negative impact on the country’s economy. Public scrutiny of the company’s failure through litigation revealed how the organization’s culture contributed to the failure. Scrutiny to the scandal has not only affected the individuals involved but also organization culture and behavior across the globe. This paper examines factors that could have led to the failure. It mainly focuses on organizational structure and culture that could have led to the collapse of one of the world’s top energy companies. The roles of major contributors to the failure are evaluated and linked to organizational structure.

Enron failure

Enron was perceived as one of the most successful companies in the country. The company’s shares were doing well in the stock market. The company’s share value has consistent growth making them very competitive in the stock market. The company was thought to be having a genuine growth until the company’s shares suddenly crumbled leading to the revelation of the scandal.

The company’s share prices in the stock market dropped from about $90 to less than $1between the year 2000 and 2001leading to its collapse (Litan, 2002). The scandal that led to the failure of Enron did not take place in a matter of days or months but was an ongoing process that had its roots in the company’s foundation.

Enron was formed through the merger of InterNorth and Houston Natural Gas by Kenneth Lay. Jeffrey Skilling, a former consultant with the company, was brought into the company as Chief Executive Officer in 1990. Skilling was focused on bringing success to the company but instead of using straightforward means resulted in unethical practice. Skilling was given the freedom to hire an executive that would work with him in ensuring the company’s success. The executives, along with Skilling exploited loopholes in financial reporting to create an impression that the company was in constant growth (Benston, 2003). The executives collaborated to cover up billions of dollars lost through high-risk business ventures. They used false figures to create an impression of value addition to investors. Share prices in the stock market indicated that the company had a healthy financial state despite great losses.

Enron’s top management was highly responsible for the failure. The executive was obsessed with creating an enterprise that would ensure constant value addition to stakeholders. They were determined to create an impression that the company was doing well despite the reality being contrary. Obsession with success motivated the executives to make high business risks and fast money-making ventures. This was done without the knowledge of the company’s board of directors. When the ventures failed, the executives conspired to cover up rather than admit the failures (Benston, 2003). The executives, led by Skilling and his Chief Financial Officer Andrew Fastow, conspire to manipulate the company’s financial and accounting figures to show that the company was profitable and support an increase in stock values. After making the first manipulation of figures, the executive had to continue with this unethical practice as the company’s revenue and profitability dropped year after year.

Enron’s failure resulted from a failure in organizational structure and culture. The company’s top executives led by Lay, Skilling, and Fastow compromised on the company’s values in trying to create an impression of consistent growth. Change of the company’s strategy from dealing entirely in energy to allow other business ventures created the need for fast growth. The executives, thus, misused their influence to have the company’s records manipulated to facilitate good performance in the stock market. By doing this, they allowed an unethical organizational culture to be developed. The executive did not care about the implication of the practice, only caring about creating an impression of success and retaining their positions. When the risk ventures failed to produce the desired result, the executives resulted in aggressive accounting to cover up. The unethical culture was passed down to the company’s employees who collaborated in the cover-up. There was a conflict of interest between the executives and the company’s stakeholders. The executive was only concerned with maintaining their positions, public acclaim, and personal wealth. Thus, they could do anything to keep the company moving even if it involved compromising the company’s values (Litan, 2002).

The executive was not the only one responsible for Enron’s failure; the company’s board of directors, audit committee, audit firm, and the employees were also responsible. The board of directors failed in their roles by failing to provide good leadership. Instead of providing leadership on business ventures, the board of directors was easily deceived by the accounting figures. The Audit Committee had a major role in the company’s failure. Instead, of monitoring the auditing, the committee was easily deceived by the figures showing profitability making them not to question (Benston, 2003). The auditing firm, Arthur Andersen, on the other hand, succumbed to pressure from executives to overlook discrepancies in the books of accounting leading to such a big scandal. Despite the company having many trained accountants and lawyers, these employees could be able to reveal the scandal. The employees seemed to collaborate with the executives in the scandal. High salaries and benefits provided to the employees, and the opportunity to invest their pension in the company could have prevented them from raising alarm over the scandal.

Conclusion

Organizational structure and culture have a high contribution to an organization’s success or failure. Organizational structure determines how well various individuals work in an organization. The structure determines how employees behave and relate with each other. Some important factors in organizational structure and culture include communication, motivation, power, and leadership. Enron’s organizational structure and culture were the foundation of the financial reporting scandal and subsequent failure of the company. Skilling, the company CEO used his position to appoint his friends to a leadership position. These individuals were loyal to Skilling rather than to the company making them collaborate in unethical practice. The company’s reward and motivation system had a high demand on performance. The executive and employees were offered very competitive salaries that they had to support my performance. This can explain the reason why they manipulated accounting figures. Although the company’s values supported high integrity, the culture in the company was contrary.

Reference List

  1. Litan, R., (2002). The Enron Failure and the State of Corporate Disclosure.
  2. Benston, G. (2003). Following the money: the Enron failure and the state of corporate disclosure. New York: Brookings Institution Press.

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NerdyRoo. (2021, December 26). Business Failure: Enron Company. Retrieved from https://nerdyroo.com/business-failure-enron-company/

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NerdyRoo. 2021. "Business Failure: Enron Company." December 26, 2021. https://nerdyroo.com/business-failure-enron-company/.

References

NerdyRoo. (2021) 'Business Failure: Enron Company'. 26 December.

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