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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 cultures 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 companys success.
The Influence of Enrons Corporate Culture on the Companys Failure
Various examples of company failures demonstrate that corporate culture and effective leadership are key elements for a companys 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, Enrons leaders were proud of the companys 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 companys 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 Enrons corporate culture has led to losses in the companys operations and created the conditions for fraud.
Contributions of Third Parties into Enrons Fraud
Most often, financial fraud cannot be carried out by one person or even one company, and Enrons 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 Enrons 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 companys 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 didnt 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 Enrons 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 companys positive investment image was also fueled by business journalists who published enthusiastic articles about Enrons 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 Enrons 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 companys 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 companys bankruptcy and scandals.
Fastow has power, and the companys corporate culture has allowed him to commit illegal transactions for years and not meet the resistance of the companys 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 companys losses, and the loans were recorded as profit, which created a false image of the companys success.
Moreover, since Fastow was hiding the companys real financial condition, Enrons 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 Enrons employees. Thus, many of the companys 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 companys 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 companys bankruptcy, although other company leaders and third parties also contributed significantly to Enrons fraudulent transactions.
Conclusion
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 companys founders and leaders. This culture also influences the process of work and communication of employees, which helps to identify and solve the companys 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 companys financial position. However, as the example of Enron demonstrates, such manipulations most often lead to failure and bankruptcy.
References
Bean, E.J. (2018). Financial exposure: Carl Levins 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.
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