Examining_a_Business_Failure__Enron

Examining a Business Failure: Enron Organizations are charged with the responsibility to function in an ethical fashion. And for the most part, organizations do just that. When an organization does not live up to this responsibility, it can become worldwide news. In the early 2000’s what might be the largest or most well know business failure occurred. Enron was exposed for their immoral practices and not only was the organization held responsible, but the individuals involved were also. There are specific organizational behavior theories that could have predicted Enron’s failure. And likewise, the leadership, management, and organizational structures contributed to the public failure of one of the largest companies in the world. Enron was an energy company that grew to be the middleman for energy companies that allowed them to exchange energy contracts. Their growth was very impressive and the business expanded into other facets including Internet services. As Enron grew, they needed to borrow more and more money. To keep the debt off of Enron’s books, they began to create spin out organizations that were used to hide over $600 million in losses that were truly created by Enron. Spin out companies constitutes an excellent vehicle for not only developing but also commercializing expensive and risky emerging technologies (Mintzberg, Lampel, & Quinn, 2003, p. 238). The primary partnership used was Chewco Investments. In 2000, Enron reported that they had tripled their profits over the prior year. By hiding their debt, Enron looked like a very successful company. Until October 22nd, 2001 when the Securities and Exchange Commission (SEC) announced they Enron was under investigation. There were different behaviors within the organization that could have predicted Enron’s failure. Thakur provided three stages to the demise of Enron. First, the company was leveraged through debt. Some of which was reported and some of which was not. The second was the fall of the stock price. This caused issues with their debts and resulted in credit downgrades. The third stage was the increased cost of borrowing due to the credit down grades that caused liquidity issues for Enron (The Chronology of the Fall). Throughout 2001, there were several instances that would have drawn red flags to the upcoming demise. Fortune Magazine ran several articles that questioned the company’s debt process and methods of generating income. In August 2001, Jeff Skilling placed his resignation from CEO. Then, in October 2001, Enron came out with losses over $600 million. Ironically, that is the same amount that was being sheltered under Chewco Investments. After filing for chapter 11 bankruptcy in December 2001, the U.S. Justice department began a criminal investigation. Their creative accounting practices provided by Arthur Anderson (AA) can also be included in the behavioral organization practices that lead to the fall of Enron. As their auditor, AA was an extension of the Enron organization. In October 2001, AA destroyed almost all of Enron’s books. Arthur Anderson had helped Enron to form the spin out organizations and hide their losses. All of these behaviors between Enron and Arthur Anderson were warning signs that could have predicted the fall of Enron. The unethical practice of Arthur Anderson in this situation played a large role in the inception of Sarbanes Oxley (SOX). SOX is was enforced in 2002 after the fall of Enron and Arthur Anderson’s practices being exposed. Sarbanes Oxley Act was implemented to regulate the financial practices for public companies. The Securities and Exchange Commission regulates compliance. The leadership, management, and organizational structures lead to the failure of Enron. Leaders are said to be influenced by ethics or emotions. In this case, emotions were predominant because the leadership was not acting ethically. According to Yukl, “Managers value stability, order, and efficiency, whereas leaders value flexibility, innovation, and adaptation” (2006, pg.5). In this situation, the leaders were the ones hiding losses from the public both at Enron and Arthur Anderson. The managers were the individuals that were implementing the steps to assist the leaders in their decisions. An example of this would be Andersen’s chief auditor for Enron, David Duncan, ordered the shredding of thousands of documents that might prove compromising” (Thakur, pg. 3). In this case, there were 34 criminal defendants, 18 of which plead guilty (The Houston Chronicle, 2007). Enron’s Chairman Kenneth Lay and CEO Jeffrey Skilling were two of the 18 found guilty of criminal charges due to their participation and leadership in the Enron scandal. Duncan also plead guilt to criminal charges. As leaders within their respective organizations, these men have shown blatant unethical behavior. Enron was exposed for their immoral practices and not only was the organization held responsible, but the individuals involved were too. There are specific organizational behavior theories that could have predicted Enron’s failure such as the debt that was hidden under other businesses or the changes in upper management with no clear reason being provided. In addition to the organizational behavior the leadership, management, and organizational structures contributed to the public failure of one of the largest companies in the world. Their accounting firm, Arthur Anderson, was not innocent in the scandal whatsoever. In the end, leaders and managers from both organizations paid the price for the mess that they had created. Not only were the organizations held responsible, but several individuals reaped the repercussions as well. This situation shows the immense impact that leaders and managers have on an organization. They can control whether an organization acts ethically or if the organization becomes greedy and does whatever necessary to be profitable and viewed positively in the public eye. Reference Mintzberg, H., Lampel, J., & Quinn, J. B. (2003). Retrieved from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx. Thakur, A. Retrieved from http://www.iimcal.ac.in/community/FinClub/dhan/dhan2/art23-en.pdf The Houston Chronicle. (2007). The Fall of Enron. Retrieved from http://www.chron.com/news/specials/enron/ Yukl, G. (2006). Leadership in Organizations. Retrieved from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx