Business_Failure

Week 1 Individual Examining a Business Failure Angela Martin LDR 531 - Organizational Leadership University of Phoenix March 29, 2010 Timothy Williams, Facilitator Abstract In this paper the discussion will be how organizational behavior theories will predict or explain the failure of a company. We will discuss how one of the largest energy companies in the United States failed and how the company could have prevented this catastrophic failure. Enron fell from its glory days to bankruptcy because of bad organizational behavior. The fall would have never happened if all the players (internal and external) of the organization had played his or her parts ethically and appropriately. Players The main players of any organization are as follows: senior leadership, board of directors, internal auditors, and external auditors. The CEO alone does not run a company, but the senior leadership, board of directors are also part of all the decision making processes. The internal and external auditors exist for making sure that there is monitoring of the system. In case of Enron, all the players failed to do his or her part. All these players play an important part of any organization because it is impossible for one person to run an organization. The success of the organization lies in the collective efforts and smart decisions made by these important players. The downfall of the organization cannot be prevented even if one of the players is not executing their part ethically and sincerely (Levin, 2002). Failure of Key Players The internal auditors failed to investigate any mal-practice because they did not deem it necessary because of the company’s rising stock prices and projected growth. Board of directors of Enron also failed to intervene into the wrongdoing of the management, as per the senate subcommittee investigations (Levin, 2002) “Fiduciary Failure. The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. For the detriment of Enron shareholders, employees and business associates, over several years, the Board witnessed and ignored numerous indications of questionable practices by Enron management. ”Enron’s employees were also partly the blame even though they were impacted in the end (Gudinkunst, 2002). “Enron employees also facilitated the failure of their own company, and have suffered accordingly. Enron had an accounting staff of several hundred trained accountants and an inside legal staff of over 100 lawyers. The staff seemed to be operating in a way that supported the executive management team. There was very little incentive or willingness to question the methods being employed to boost reported profits and hide corporate debt. Employees were being paid good salaries, being provided with full benefits, and invested their pension contributions in rising company stock; rocking the boat about questionable activities would be a supreme act of courage with high risk penalties.” Arthur Anderson was another key player in the fall of Enron. They were consultants and auditors. As per the senate subcommittee investigations (Levin, 2002) “The Board also failed to ensure the independence of the company's auditor allowing Anderson to provide internal audit and consulting services while serving as Enron's outside auditor.” Outcome of the Great Fall The senate subcommittee made several recommendations to prevent further devastation of this magnitude. The outcome of Enron’s fiasco resulted in the birth of the new law The Sarbanes-Oxley Act of 2002. This law made sure that there is oversight, inspection, and regulation over companies and their accounting firms. Any publically listed company needs to follow this law irrelevant of their size. After a few years of this law being enacted, there are companies going private because of the complexity in implementing practices to fulfill the needs of this law. Here is a reference from an article from New York Times (Hulbert, 2005) “Sarbanes-Oxley is complex legislation, containing an assortment of features. One feature is stiff fines and penalties for reporting misleading financial data; the law requires that a company’s chief executive and chief financial officer personally certify the accuracy of its financial statements. Sarbanes-Oxley also made a number of changes to corporations’ governance structure; like requiring that the board’s audit committee be independent and that the outside auditor have no conflicts of interest.” Internal Auditing and Whistle Blower Protection Internal audit systems can be put in place that can prevent auditing or other unethical practices. Whistle Blower protection empowers employees to speak up and fight against unethical practices in an organization. The internal auditing process is important in making the management a transparent entity. This process leads to accurate financial results which, in turn empowers employees to works toward the desired goal. Benefits from Code of Ethics Code of ethics is guidelines implemented and maintained in any organization to guide the employees and other entities of the organization. Ethics is the key factor in business success. After all the scandals that one has seen in the last few years, it makes extremely important for all the stakeholders to take utmost importance in following the code of ethics. The important factor is also to revise the code of ethics based on constant feedback. Such implementation along with stringent audit polices would prevent problems in accounting and nurture ethical environment in any organization. Conclusion Enron failed because of unethical practices by the management team and all other players failing to act. Their downfall was also caused by the sleeping board of directors, who failed to act when the management was taking an incorrect path. The auditors of the company were more interested in their consulting role. Failures are inevitable in any business, but by putting in better organizational practices risks can be minimized. Leaders are supposed to lead the company with a clear ethical vision rather than using deceiving techniques to cheat investors, employees, and the public. References Gudinkunst. (2002). Enron- A study of failures, who, how, and why' The Faculty Network. Fall Issue. A Bryant University Publication. Retrieved March 17, 2010 from http://web.bryant.edu/~facdev/Web%20Sites/newsletter/fall02/agudikunst.htm Hulbert. (2005). The Law of Unintended Consequences' The New York Times. Retrieved March 17, 2010 from http://www.nytimes.com/2007/11/04/business/yourmoney/04stra.html'_r=1&scp=25&sq=Sarbanes-Oxley&st=cse Levin (2002). News release about Senate subcommittee report charging the Board of Directors with Contributing to Enron's Collapse: Retrieved March 17, 2010, from http://levin.senate.gov/newsroom/release.cfm'id=209609, Senator Carl Levin website new release section.