Enron Scandal: Financial Fraud and Organizational Behavior | Free Essay Example

Enron Scandal: Financial Fraud and Organizational Behavior

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Topic: Business & Economics
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Abstract

Statement of Purpose

The goal of this research paper is to identify the problems in the organizational behavior (OB) standards accepted at Enron, as well as to locate the connection between the financial fraud that led to the company’s untimely demise and the flaws in the company’s OB standards, suggesting the alternative solutions that Enron could have chosen.

Research Questions

Did the mishandling of organizational behavior based on an inconsistent set of ethical standards facilitate the fall of Enron, and did the company’s costs strategy, as well as the method of the attraction of new investors play a major role in the Enron scandal?

Significance of the Research

While the past cannot be changed and Enron’s failure cannot be helped any longer, an analysis of the problem in question and the definition of new tools for managing it may help other organizations, which face similar dilemmas in the competitive environment of the 21st century global economy.

Methods of Data Collection

The data will be collected with the help of a general research (i.e., the analysis of the existing reports, researches and case studies on the case of Enron, as well as the studies devoted to the areas that Enron should have addressed (OB, corporate social responsibility (CSR), corporate ethics, etc.)).

Analysis of Data

The data will be analyzed with the help of a matrix analysis. The specified approach will shed some light on the correlation between the factors that predetermined Enron’s failure.

Benchmarks

The process of data gathering will presumably take around two weeks. Information analysis and its further interpretation together with the development of the required matrixes will require three weeks. Finally, conclusions will be drawn and further recommendations will be provided.

Introduction

Widely considered the most infamous scandal of the century, the case of Enron can be viewed as not only a prime example of corruption in business, but also an important lesson for a range of other modern companies in terms of significance of corporate ethics and organizational behavior.

Some might consider Enron a prime example of incorrigible corruption within an entrepreneurship; however, a closer look at the case in point will reveal that the problem, in fact, could have been handled once the panic following the company’s lack of success had been addressed from the perspective of corporate ethics and a proper code of organizational behavior.

A brief overview of Enron’s scandal will show that the company attempted at returning into the industry and reclaiming its position as the top leader in the global market.

However, because of a range of wrong choices made in terms of investment, the company started facing financial challenges. In order to retain its investors, Enron’s managers falsified the outcomes of audits and made the organization look prosperous. Once the commercial bubble burst, the key shareholders were ripped of their legitimate financial reward (Albrecht, Albrecht, Albrecht & Zimbelman, 2008).

Problem Identification

It is assumed that Enron’s key problem concerned not the production related issues, but the corporate ethics – or, to be more exact, the lack thereof. Indeed, with so many people to support the concept of a financial fraud, the organization must have had much more basic flaws in its design rather than a miscalculation in its HRM policy.

The willingness of the company members to resort to a financial fraud in order to cover the likely downfall and retain the money that people invested into it shows that the company lacked not only a set of rigid moral principles, but also the efficient leadership approach, which would have instilled the above-mentioned principles into the organization’s framework.

Additionally, an alternative leadership approach could have contributed to a more detailed analysis of the situation and the identification of possible avenues, such as the development of a new brand product, for addressing the complicated financial situation. Particularly, these are rigid ethical principles, the corporate social responsibility (CSR) concept, a different leadership approach and a more adequate strategy for costs allocation that would have saved Enron from crisis and the resulting scandal.

Central OB Issue

As it has been stressed above, the lack of corporate social responsibility (CSR) among the staff and the company members was the key factor that led the organization into a dead end. Therefore, it is assumed that the incorporation of the principles of corporate social responsibility into the company’s framework would have helped solve the issue by promoting a more sensible approach towards costs allocation and the company’s financial strategy.

Sustainability

One must admit, though, that the complete absence of CSR, which could be observed in Enron, was not the only factor that determined the failure of the organization in the global market. As it has been stressed above, the lack of a cohesive leadership approach and a determined leader, who would have promoted the corresponding model for OB, should also be listed among the key problems within the organization.

A brief overview of the leadership strategy adopted in the company at the time indicates that Enron’s leader preferred a charismatic style. Although often viewed as adequate, the specified approach fell flat as a self-sustained strategy in Enron, as the company did not have the ethical code that would have prevented the company managers from abusing their powers and resorting to a financial fraud.

More importantly, the leadership style chosen by the head of Enron tricked the company members into believing the leader’s choices and, therefore, violating the existing business ethics.

The above-mentioned aspect of the company’s leadership, in fact, brings one to the key factor that promoted corporate fraud within the organization. Because of his very strong presence as a leader, the head of Enron created the philosophy of corporate cultism in the organization, therefore, tricking its employees and managers into making the wrong and ethically flawed choice.

Players

Among the key players, which took part in the case in point, the company’s managers and its leader need to be listed.

Stakeholder groups

The people, who were affected by the choice made by Enron in any possible way, included the company’s leaders, its managers, the staff, the customers and the investors. The fraud, which occurred in the organization and triggered its demise, affected each of the stakeholders listed above was affected deeply.

Values and behavior

On the surface, the values adopted in Enron seemed rather solid. According to the company’s code of ethics, the organization promoted core values, as well as “various ethical policies that all employees were expected to follow” (A tale of two cultures: Why culture trumps core values in building ethical organizations, 2011, par. 5).

However, a close examination of the company’s environment showed that the corporate culture, in fact, represented the exact opposite of the ethical principles that it promoted: “Instead of reinforcing the code of ethics and the list of virtuous core values, the actions of leadership established a culture with values of greed and pride” (A tale of two cultures: Why culture trumps core values in building ethical organizations, 2011, par. 28).

Culture and structure

The culture adopted at Enron did not contribute to the promotion of ethical principles. A rigid hierarchy within the company, in its turn, cannot be viewed as a positive aspect, as it did not contribute to establishing principles of honesty and integrity in the least.

Enron’s Code of Ethics stated that the organization was based on the principles of transparency and morality: “we are responsible for conducting the business affairs of the Company in accordance with all applicable laws and in a moral and honest manner” (From Enron’s code of ethics, n. d., p. 1). However, the actual implementation of the financial transactions did not follow the prescribed strategies in the slightest.

Design process

As far as the internal design processes of the organization are concerned, the incorporation of new principles may enhance the former impressively. A closer look at Enron’s design processes prior to the development of the infamous issue shows that the company’s project management, as well as business support, left much to be desired.

The specified issues could be attributed to poor communication between the staff members; once the information transfer started, the data transmitted was misinterpreted at some point, which led to further confusions and the misrepresentation of the actual situation that the company had to deal with.

In a retrospect, the lack of cohesive communication could be viewed as one of the key factors contributing to the emergence of the instances of fraudulence (Albrecht et al., 2008). If all company members were informed properly concerning the opportunities an threats faced by the organization, the leaders and managers of Enron would have sought other avenues of managing the crisis apart from deserting the sinking ship that Enron seemed to them at the time (Albrecht et al., 2008).

Reward system

Ironically enough, it was the reward system deployed into the company’s framework that served as one of the key factors in Enron’s rapid downfall. According to the existing records, the reward system within the organization could be defined as extravagant.

Though providing incentives for the staff is considered crucial for enhancing motivation rates, an extravagant approach devalues the significance of a reward, turning the process of staff encouragement into a chase for easy money: “Rising stock prices and extravagant rewards made it easier for followers as well as leaders to overlook shortcomings in the company’s ethics and business model” (Johnson, 2003, p. 49).

Economic and Policy Instruments Used by the Government

According to the existing records, the government adopted a market based environmental policy in order to carry out financial audits of the company (Johnson, 2003). The failure of the instruments in question was predetermined by the lack of focus on the problems that the organization might have had outside of economic ones.

While the latter were put under an elaborate disguise, recognizing the obvious flaws in the company’s OB was quite a possibility. The market based environmental policy, in its turn, did not allow for identifying the OB related issues.

Three Solutions for the Issue or Problem

As it has been stressed above, Enron was suffering from a severe lack of proper ethical standards and, therefore, inconsistent organizational behavior. Reconsidering the approach adopted by the company towards the check of financial audits, therefore, can hardly be viewed as an option, since it does not solve the key problem of the organization.

It should be noted, though, that a radical change in the organizational behavior principles, which is suggested as the key tool for managing the situation at Enron, cannot be viewed as a means in itself, either; instead, the solution provided below must be integrated into the new and improved principle of roles and responsibilities distribution and delegation based on the key tenets of the CSR approach.

A transformative leadership style helps the staff adapt to the new environment and the new requirements, therefore, making the transfer to an entirely new approach easier (Johnson, 2003).

Relevance of Solutions to the Context of the OB Issue

The solutions suggested above, i.e., the reconsideration of the company’s priorities and a better focus on enhancing the production processes, can be viewed as related closely to the change in the OB principles within the organization.

The analysis of the problem and the choice of the solution that will benefit all the stakeholders involved, therefore, are related directly to the OB principles adopted in the organization. Unless the existing OB patterns involve the possibility for complete clarity of the organization’s financial transactions, the problem similar to the one faces by Enron can hardly be resolved.

Additionally, the reconsideration of the corporate ethics principles, which was outlined above as one of the crucial steps towards improving the firm’s score, is connected to the OB concept. The staff needs to be not only motivated, but also ethical enough to avoid any choices that can be viewed as ethically dubious.

Even the reconsideration of the production process, which was mentioned above among the basic steps towards improving the situation, should be viewed from the perspective of OB.

As long as the staff members have a rigid set of OB principles and corporate ethics standards, the process of transferring to a slightly different principle of production and the design of a new brand product becomes a possibility, as the staff satisfaction rates allow for making an effort and designing a product that will attract potential customers and investors (Ertiza, Zakaria, Sutopo, Widiyanto & Supriyanto, 2014).

Defending the Solutions

Concepts and theories

There is no need to stress that the principle of the CSR is supported extensively by several key theories of organizational behavior, the Global Management Theory being the most important one. Indeed, while the rest of the approaches towards understanding the nature of OB also shed a lot of light on the significance of establishing a rigid set of principles and corporate norms, it is the Global Management Theory that renders the issue of corporate ethics and the phenomenon of CSR (Weichrich & Cannice, 2010).

Since the latter was the key flaw of the Enron Company’s design, the Global Management Theory should be viewed as the essential tool in creating a framework for OB redesign and the management of human resources in the workplace setting (Ertiza et al., 2014).

In addition to the theory in question, the principle of CSR (corporate social responsibility) should have been incorporated into the organization’s framework so that the staff could have adopted a more responsible approach towards carrying out the key financial transactions.

CSR is traditionally defined as a “business system that enables the production and distribution of wealth for the betterment of its stakeholders through the implementation and integration of ethical systems and sustainable management practices” (Smith, 2011, p. 2) and can be viewed as a crucial quality of any member of a company.

Specific Examples/Scenarios

For instance, the adoption of the CSR principles and the redesign of the staff’s OB patterns would have created the environment for a transparent audit and reduced the chances for the company members to resort to a financial fraud. More importantly, the company’s leader would have identified other possibilities for retaining the company’s profits, such as the reinvention of the brand product.

Specifically, the concept of eCycling (Osuagwu & Ikerionwu, 2010) could have been viewed as an option by the organization, seeing that information technologies started reaching their peak of development at the time (Castelis, 2011).

Recommending Strategies for Success

As it has been stressed above, the inconsistent OB standards, which, in their turn, were predisposed by the lack of a cohesive set of ethical principles within the company, can be considered the primary problem. Therefore, when it comes to determining the strategy for success for an organization facing similar issues, one may suggest that the company in question should redefine its OB principles. Specifically, one must put a much stronger emphasis on the promotion of CSR principles among the staff.

Thus, possible instances of corporate fraud in general and financial fraud in particular may be prevented. More impressively, by redesigning the framework of the corporate OB and basing the latter on CSR, one will be capable of eliminating the thread of a financial fraud within the organization entirely.

Implementation Strategy

The implementation strategy should encompass the decisions made on the basis of the SWOT analysis of the company and the principles for the OB model to be accepted. Seeing that changes may be made to the existing program in the course of its implementation, an evidence-based approach (Rapp et al., 2008) should be viewed as a possibility. The specified method will help make essential choices based on the needs of the company rather than on the selfish intentions of the company’s managers.

Conclusion

Summary

The case of Enron remains one of the most infamous instances of corporate fraud. On the surface, the factors that caused the problem are obvious; it was the managers’ greediness and a complete absence of corporate ethics that caused the managers to abuse their powers and triggered a global scandal. However, a closer look at the subject matter will show that the issue could have been helped if it had not been for a complete disregard of the OB principles established within the company.

The adoption of more rigid OB principles, in its turn, would have promoted corporate ethics and prevented the possibility of using fraud as a means of escaping a financial collapse. More importantly, the provision of a different set of OB principles within the organization could have helped Enron develop strong corporate values, thus, introducing the staff to the concept of CSR.

It should be born in mind, though, that convincing the staff to adopt the OB patterns mentioned above and accept new ethical standards based on transparency and business honesty is only possible once an appropriate model of OB is provided and incentives for complying with the new rules are integrated into the company’s reward system.

Therefore, an entirely new leadership strategy (transformative leadership) based on both supervision and motivation needs to be introduced. Thus, the premises for reducing the instances of corporate fraud to nil will be created. The issue in question will be approached from the perspective of the Global Management Theory (Chen, Qui, Zhou & Zong, 2014).

Proposal Elements and Implementation Strategies

Although the research in question is going to address the issue related to the company that is no longer in existence, the practical outcomes of the research in question are going to be quite impressive. Not only will the study outline the ways, in which CSR can be utilized for addressing the instance of business crises, but also will provide a detailed instruction regarding the means of preventing the instances of a financial fraud within an organization by enhancing the significance of CSR and deploying the principles of the above-mentioned concept into the operations of an organization.

The implementation strategies to be adopted in the study align well with the key elements thereof. Particularly, the fact that the issue of CSR will be addressed extensively shows that the strategies for study implementation will address the issues that Enron faced and that a range of modern companies may have to handle at some point of their development deserves to be mentioned. The analysis to be undertaken will help design the strategy that will provide the means for companies to retain both their profits and ethical integrity.

Reference List

A tale of two cultures: Why culture trumps core values in building ethical organizations. (2011). The Journal of Values Based Leadership, 4(1), par. 1–51. Web.

Albrecht, W. S., Albrecht, C. C., Albrecht, C. O. & Zimbelman, M. (2008). Fraud examination. Stamford, CT: Cengage Learning.

Castelis, M. (2011). The rise of the network society. New York, NY: Wiley-Blackwell.

Chen, X., Qui, C., Zhou, Y. & Zong, F. (2014). Overseas investment of Chinese enterprises: Discovery and discussion based on site research. Web.

Ertiza, A., Zakaria, R., Sutopo, W., Widiyanto, A. & Supriyanto, E. (2014). Formulation strategy for promoting investment of Technopolis: A case study. Proceedings of the International MultiConference of Engineers and Computer Scientists, 2(10), 1549–1554.

From Enron’s code of ethics. Web.

Johnson, C. (2003). Enron’s ethical collapse: Lessons for leadership educators. Journal of Leadership Education, 2(1), 45–56.

Osuagwu, O. E. & Ikerionwu, C. (2010). E-cyling e-waste: The way forward for Nigeria IT and electro-mechanical industry. International Journal of Academic Research, 2(1), 142–149.

Rapp, C. A., Etzel-Wise, D., Marty, D., Coffman, M., Carlson, L., Ashe, D., …. & Whitley, R. (2008). Evidence-based practice implementation strategies: Results of a qualitative study. Community Mental Health Journal, 44(3), 213–224.

Smith, R. E. (2011). Defining corporate social responsibility: A systems approach for socially responsible capitalism. Philadelphia, PA: University of Pennsylvania.

Weichrich, H. & Cannice, M. V. (2010). Management. New Delhi, India: Tata McGraw-Hill Education.