Enron Scandal: A Study in Corporate Fraud

Reputation is a company’s biggest asset so you would think that organisations would avoid engaging in any sort of business that would put its reputation in jeopardy. Nevertheless, many organisations find their credibility destroyed due to practices that are harmful and illegal, which could land a CEO’s in prison.

The Enron Scandal, which unrolled in October 2001, lead to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, a large audit and accountancy partnership firm.

The Organisation would create an asset, such as power plant, and immediately claim the projected profit on its books, even if the asset had not made a cent. If the projected revenue were less than actual revenue, the company would then transfer the asset to an off-the-books corporation (which Enron created) where the loss would go unreported. This created the attitude that the company did not need to make profits, because any debt could simply be written off without hurting the company’s value by using this mark-to-market method, which resulted in the company appearing to be more profitable then it actually was and high ranked executives profited on the share price.

Kenneth Lay formed Enron in 1985 after merging Houston Natural Gas

and InterNorth. In just 16 years, Enron soared to success to become one of Americas largest and most successful corporations. In it’s peak in August 23, 2000, share prices hit $90.00, only to collapse dramatically to $0.12 cents on January 11th, 2002 making Enron the largest bankruptcy reorganization in American history at the time. People still wander how such an affluent company with reported revenues of $101 billion in 2000 and approximately $140 billion during the first three quarters of 2001 was forced to declaring bankruptcy in December 2001 and disappear almost overnight. Failure from top leadership, a corporate culture that reinforced unethical behaviour, and the complicity of the investment banking community are said to all play a role in Enron’s folding.

A number of Enron’s executives faced criminal chargers, including fraud, money laundering, and insider trading.

Former treasure Ben Gilsan was charged with money laundering, fraud and conspiracy. He pleaded guilty in 2003 to one count of conspiracy to commit wire and securities fraud. He served a five-year sentence at a federal penitentiary in Beaumont, Tex and financial penalties of more then 1 million dollars. Gilsan famously described Enron as a “House of Cards”. Andrew Fastow pled guilty to one charge of conspiracy to commit wire fraud and one charge to of conspiracy to commit wire and securities fraud. He agreed to 10 years imprisonment and the forfeiture of 29.8

million.

Enron was described as having an “arrogant” corporate culture that lead employees to believe that they could handle increasingly greater risk without any danger. Sherron Watkins mentioned that “enron’s unspoken message was, ‘make the numbers, make the numbers, make the numbers – if you steal, if you cheat, just don’t get caught. If you do, be for a second chance, and you’ll get one.”

Enron’s corporate culture did little to promote the values of respect and integrity, this is due to the fact that the company’s emphasis on decentralization, it’s employee performance appraisals, and it’s compensation program. A small amount of people in the organisation saw the “big picture” of the company’s perspective as each division and unit was kept separate from one and other.

Jeff skilling applied a very harsh and intimidating annual Performance evaluation process for all Enron employees known as “rank and yank”. Each of the company’s divisions was forced to participate in peer evaluations. The idea was that the bottom 20% would be fired and the others would be rewarded extravagantly. Employees regularly ranked their peers considerably lower in order to improve their own positions in the company.

Enron’s “compensation plan seemed oriented toward enriching executives rather than generating profits for shareholders” (Fortune) it encouraged employees to break rules and inflate the value of contracts, even though no actual cash was generated. As such, Enron’s bonus program encouraged employees to use non-standard accounting principles and were rewarded for inflating valuations of deals on the organisations books. This became common throughout the company, just as much as the companies that were created merely to hide losses and avoid consequences of owning up.

Simply in Enron’s case, greed took the better of them. It all became about power and money, which lead to arrogance. It was an attitude represented by the banner in Enron’s lobby: “THE WORLD’S LEADING COMPANY”. Enron’s collapse affected the lives of thousands of employees, many pension funds and lead to the imprisonment of a few executives.