Enron corporations was one of the largest energy companies in the United States. In 2001, October a scandal was revealed showing that its reported financial position was being maintained by systematic, institutionalized, and ingeniously designed accounting fraud which was later to be known as the Enron scandal. The revelation of Enron’s scandal has raised questions on accounting practices and was a key factor in the making of the Sarbanes–Oxley Act of 2002
To completely analyze the activities of the Enron corporations use the following questions:
1. How could a different structure be used to avoid such activities?
Enron structure of management reflected weaknesses as the managers were bosses of themselves and had complete trust from the C.E.O Mr. Kenneth Lay who failed to oversee that all the company’s major operations were genuine, and hardly ever challenged his subordinates.
This among many was one of the main reasons for the collapse of Enron, since lack of supervision encouraged a corporate culture which was based on lies and deception. Kenneth Lay simply created a foundation for breeding deception at Enron, due to a structurally weak management.
It is the leader’s duty to provide the mission and vision for the group hence an excellent executive should have a dream and the skills to get the members of a company to work towards attaining that dream. But it is certainly not enough to simply have the dream. Had the Enron changed it structure such that the management was held accountable to all transaction and create a strong management which would oversee that all activities are done in a legal and ethical manner it could have deterred the collapsing of the company but the management should not be authoritarian, as it can impact negatively on the corporate culture. It may give rise to an authoritarian-hierarchical culture where the C.E.O. makes all the decisions alone behind closed doors.
2. Did the Enron’s officers acted within the scope of their authority?
Some may argue that they did act in the scope of their authority while on the flip side others may also argue that they didn’t act beyond the scope of their authority. Initially the work of the management was to supervise the company’s affairs and ensure that they were legal which they did before they were corrupted.
It clearly stands out that the management were aware of accounting malpractices as was later exposed that a large number of Enron’s profits and recorded assets were overstated or entirely nonexistence and fraudulent. Losses and debts were exempted from Enron’s books and put into “offshore” entities and other arcane and sophisticated financial transactions which involved Enron and related companies were used to take under performing and unprofitable entities off the books of the company.
This shows that the management concealed vital information from the share holder who are the owners of the company and hence acted beyond their power and should be held liable for any losses that the company made.
3. What was Enron’s corporate culture?
The corporate culture in Enron can be best exemplified as that of aggressive growth, entrepreneurial creativity and risk taking. These are very positive values but they were not equally balanced to corporate integrity and creation of customer value. The corporate culture in Enron was not well established since by the use of a single scorecard they were able to maximize price per share of common stock.
The corporate culture in Enron seemed to encourage a value – massive size – that’s not so much a value as it is a tactic meant to achieve a larger goal. This devotion to sheer size, when left unrestrained, made the company to use its size to intimidate and bully those who questioned its balance sheet practices and hence Enron became arrogant.
The values of creativity and taking risk led to more aggressive partnership strategies to maximize share value and hide debt. The company was futile in checking its “creativity” commitment to integrity.
4. What irregularities existed in the actions between sellers of securities and Enron?
There existed several irregularities between sellers of securities and Enron due to the fact that as the stock price hit a high value of 90 dollars Enron executives, who were in possession of inside information involving the hidden losses, started to dispose off their stock. Enron’s investors and the general public were encouraged to buy this stock based on the information they were being given by the executives that the stock would continue to improve until it reached a possible $130 to $140 range.
As executives continued to dispose their shares, the market price started to fall. Investors were encouraged to purchase stock or hold it if they already possessed Enron because the price would escalate in the future. As at October, the stock value had declines to $15. Some saw this as a great opportunity to buy Enron stock but their judgment proved to be misplaced.
5. Was Enron liable for the actions of its agents and employees?
Enron would be deemed liable for the actions of its employees if it had authorized its directors and management to act on its behalf but since the shareholders of Enron had not authorized the directors to act on their behalf concerning matters that lead to the collapse of the company the directors should be held personally liable for any damages or loss incurred.
As a result they were jailed due to the irregularities and attempting to match cash and profits hence giving misleading or false reports. For example Paula Rieker, former Enron executive has been charged with criminal insider trading.