Corporate culture defines communication between employees and leaders and approaches to problem-solving. A corporate culture based on ethical principles ensures open and honest interaction of all parties helps effectively respond to any changes in the internal and external environment. However, the corporate culture’s lack of ethical principles leaves room for misunderstandings, misunderstandings, and violations. This paper studies the case of Enron that faced bankruptcy and legal consequences due to its leaders’ unethical actions to demonstrate the significance of business ethics and corporate culture to a company’s success.
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The Influence of Enron’s Corporate Culture on the Company’s Failure
Various examples of company failures demonstrate that corporate culture and effective leadership are key elements for a company’s success. Enron is one such organization as its arrogant and aggressive corporate culture, and leaders’ apathetic and demanding attitudes towards their employees have led to fraudulent practices and bankruptcy. Too high requirements to employees and indifference to their concerns were one of the main problems of leaders, since it created competition within the company and forced employees to keep their concerns and questions. This “rank and yank” system forced employees to hide mistakes from managers and exaggerate the results to avoid dismissal (Ferrell et al., 2017). In addition, as Rashid (2020) notes, Enron’s leaders were proud of the company’s corporate cultural values that were only superficial, and increased risk-taking, as one of these values, caused losses. Thus, employees were in a position in which they were required to take risks, but if they failed, they could not reveal the problems to avoid the role of the person who brought the bad news. This policy was the primary cause of significant profit losses for the company.
In addition, the same logic was used to forge documents on the company’s profits. Enron has tried to reduce costs and exaggerate earnings in its financial records to demonstrate that the company has excellent investment prospects. In case of success, the company could have restored the normal balance by receiving money from investors and shareholders; however, an aggressive, arrogant, and risky corporate culture only made things worse and created huge debts. Thus, one can see that Enron’s corporate culture has led to losses in the company’s operations and created the conditions for fraud.
Contributions of Third Parties into Enron’s Fraud
Most often, financial fraud cannot be carried out by one person or even one company, and Enron’s case proves this statement. While company leaders are primarily responsible for financial record and expense concealing, auditors, attorneys, and bankers have also facilitated or failed to prevent fraudulent activities. Thus, attorneys at Vinson & Elkins, investment-banking firm Merrill Lynch, and auditor Arthur Andersen acted in Enron’s interests and allowed them to hide their income for a long time.
The first company involved in the fraud was Vinson & Elkins because its attorneys ignored the company’s financial operations problems even after the vice president reported them. In addition, lawyers have repeatedly given a letter of opinion without which the company could not have conducted many financial transactions and attract investors (Ferrell et al., 2017). Merrill Lynch firm was also implicated in the Enron scam by facilitating the sale of Nigerian barges. This sale allowed Enron to falsely display $ 12 million in earnings that didn’t really exist (Ferrell et al., 2017). Other banks that helped Enron in the fraud were Citigroup and JP Morgan. In both cases, banks financed off-the-books ventures, through which Enron generated non-existent profits in the reports, and also structured loans as complex transactions that were displayed as profits (Bean, 2018). This operation helps the company to remain financially attractive to investors and receive their money.
Andersen, the auditor, also contributed to its investment prospective. He created false reports on Enron’s financial situation and also destroyed important documents for investigation of the case by the court (Ferrell et al., 2017). In addition, as noted by Benke (2018), the company’s positive investment image was also fueled by business journalists who published enthusiastic articles about Enron’s success and took management advice from its leaders. Thus, all these agreements and machinations allowed Enron to hide the real financial situation for years until accumulated debts became critical.
Role of the Chief Financial Officer in Enron’s Financial Problems
Andrew Fastow, the Chief Financial Officer, plays a central role in the Enron case, since he was the one who used the off-the-books partnerships that led to the bankruptcy of the company. At the same time, Fastow did not act in the company’s interests, trying to rectify the situation and increasing real income, but in his own, since he earned $ 30 million from this fraud (Hosseini & Mahesh, 2016). Thus, Fastow violated professional ethics and the law and became one of the main culprits in the company’s bankruptcy and scandals.
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Fastow has power, and the company’s corporate culture has allowed him to commit illegal transactions for years and not meet the resistance of the company’s government. The accounting rules make it possible to exclude SPE (Special Purpose Entity) from financial statements if they are controlled by an independent party that owns at least 3% of this SPE (Hosseini & Mahesh, 2016). Fastow knew this rule and used off-the-books partnerships to convert loans to assets by using SPE. Thus, the financial statements did not show the company’s losses, and the loans were recorded as profit, which created a false image of the company’s success.
Moreover, since Fastow was hiding the company’s real financial condition, Enron’s stocks continued to rise. Some of these stocks were sold to use the money in future operations, and they were bought not only by third-party companies but also by Enron’s employees. Thus, many of the company’s employees invested their savings in Enron shares to secure their pension benefits (Hass, 2016). Fastow knew about this situation; however, he did not care about the interests of shareholders, employees, and other people associated with the company’s activities. Consequently, after the collapse of Enron, thousands of employees lost their jobs and their pension savings. Therefore, one might note that Fastow was one of the main culprits in the company’s bankruptcy, although other company leaders and third parties also contributed significantly to Enron’s fraudulent transactions.
Therefore, the Enron case demonstrates that business ethics, corporate culture, and laws are closely related and interconnected. The corporate culture is determined by the business ethics and principles of the company’s founders and leaders. This culture also influences the process of work and communication of employees, which helps to identify and solve the company’s internal problems. At the same time, the lack of these principles and business ethics allows employees and top managers to break the rules and use their power to manipulate the company’s financial position. However, as the example of Enron demonstrates, such manipulations most often lead to failure and bankruptcy.
Bean, E.J. (2018). Financial exposure: Carl Levin’s Senate investigations into finance and tax abuse. Springer.
Benke, G. (2018). Risk and ruin: Enron and the culture of American capitalism. University of Pennsylvania Press.
Ferrell O.C., Fraedrich J., & Ferrell, L. (2017). Business ethics: Ethical decision making & cases (11th ed.). Cengage Learning.
Hass, A. Y, Moloney, C., & Chambliss, W. J. (2016). Criminology: Connecting theory, research and practice (2nd ed.). Routledge.
Hosseini, S.B., & Mahesh, R. (2016). The lesson from Enron case – Moral and managerial responsibilities. Journal of Current Research, 8(8), 37451-37460.
Rashid, M.M. (2020). Case analysis: Enron; Ethics, social responsibility, and ethical accounting as inferior goods? Journal of Economics Library, 7(2), 98-105.