Business_Failure

Enron was an energy marketing corporation that suffered severely from a serious financial scandal, which involved Enron and its accounting firm. The scandal consisted of the discovery of highly irregular accounting procedures and practices which took place during the 1990s. These irregular accounting procedures and practices included the manipulation of stock prices as well as loans to shareholders. As a result, this caused Enron to abruptly file bankruptcy by December of 2001. Based on the sordid background of this particular scandal, there were some serious executive management and leadership issues that were also involved throughout the Enron scandal and beyond with the revelation of the scandal. The following information will identify the management and leadership failures which led to the Enron scandal, as well as how these failures could have been predicted well before its demise. In addition, it will also be revealed how proper organizational behavior of management and leadership could have greatly impacted the structure of Enron positively. Enron’s executive team was trying to create and promote an enterprise which would increase vast wealth amongst their shareholders. However, when it was revealed that Enron’s stock prices were less than desirable, certain aggressive accounting methods and measures were required in an attempt to shore it up and as quickly as possible. To make Enron’s shares appear more favorable, the executive team relied on an increased amount of new capital, but had to conceal the risks to the new investors in many underhanded ways such as with creating bogus companies. Once Enron began this new creative type of accounting operations, there became the need to continue increasing this type of deception with each new fiscal year. Enron wanted to make sure they kept moving forward at all costs without concern to how it may affect its investors. This is exactly where a controlled system of checks and balances were seriously needed. During this state of Enron, the governance of the corporation failed to exercise their duties of care properly. It was believed the Audit Committee of the Board should have been more critical of the auditors, consultants and their work. But because the prices and earnings of stocks were continuously rising, there was no need to investigate the internal accounting processes of Enron or the opinion letters of the accounting firm. The Board simply had a false sense of security thus was very happy with the success of Enron. This allowed the Board to become relaxed with overseeing management, while accepting information from the executive team at face value. Enron employees were also involved with the downfall of the organization and in turn suffered as well. The organization employed over 100 internal legal and accounting staff. All of the employees seemed to be operating with approval of the management team, which was supported by the executive team. Just as with leadership and management, the employees’ methods were never questioned due to the fact the employee incentives were high. The employees were getting paid big salaries to help hide corporate debt and boost reported profits. So in turn, the employees remained loyal, supportive and refused to rock the boat about the methods. Traditionally, corporate governance structures have been a private matter between shareholders, directors and/or and managers with some state law restrictions, but the Sarbanes-Oxley Act (SOX) has since implemented safeguards and structures governing the conduct of the corporation a matter of federal law. Even the adoption of a code of ethics, previously within the domain of management prerogatives, is now a requirement under SOX. Due to the Enron scandal, SOX will provide a method for balancing the power between the board of directors and top management of corporations. Although the SOX does not have the ability to diminish the existing discretions and prerogatives of management in conducting business, the plan can serve as a deterrent, however, it cannot prevent management fraud. So in order to prevent management fraud, the process has to be a vision shared by all involved. This includes shareholders, the boards, top level management, and employees. Under the law, top management has to certify the accuracy of the financial reports and make certain disclosures about the controls and procedures in place to avoid fraudulent financial reporting. Even a code of ethics for senior corporate financial officers is now a requirement of the law. Such methods include internal control, corporate governance, and code of ethics. Historically, internal control was basically focused on molding employees’ operations and actions to the requirements of management. However, under the new structure, employees will now have the control to prevent inappropriate overrides originally conducted by the managers even to the point of whistle blowing if necessary. By giving a strong measure of internal control back to the employees, will greatly enhance the integrity of the accounting records and prevent the manipulation and/or record destruction of transactions by management. The board’s job, under the new structure, would be to develop and maintain a structure that will ensure collaboration and cooperation between management and employees in pursuing the goals and objectives of the organization rather than just doing whatever management says to do. Management, under the new structure, would be assigned to shoulder the responsibility for the code of ethics to promote the importance of corporate morality and ethical standards. This will force management to act in a leadership role rather than just overseeing the internal control systems as usual. Continuous compliance by all levels of power would help rebalance corporate power, guarantee accurate account reporting, prevent management fraud, and encourage ethical corporate behavior. In summary, the Enron’s failure was not the result of just questionable activities by Enron's executive management team. The reason for failure and bankruptcy were based on contributors from both inside and outside the company. The downfall of Enron occurred due to the imbalance of power and structure of all levels. References Mintzberg, H., Lampel, J., Quinn, J. B., & Ghoshal, S. (2003). The strategy process: Concepts, contexts, cases (4th ed.). Upper Saddle River, NJ: Prentice Hall. Robbins, S. P., & Judge, T. A. (2007). Organizational behavior (12th ed.). Upper Saddle River, NJ: Pearson Education. Yukl, G. (2006). Leadership in organizations (6th ed.). Upper Saddle River, NJ: Pearson Education.