Organisational Analysis Essay on Enron's Financial Problems

Published: 2021-07-21 09:44:01
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Carnegie Mellon University
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Case study
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Enrons corporate culture had a significant contribution to its bankruptcy. For starters, the culture can be described as one of arrogance as it supported the belief that the employees could take increasingly greater risks as long as those risks resulted in profits. As such, the corporate culture supported unethical behavior without reprimand as long as such behavior resulted in monetary gains. Furthermore, the compensation plan at Enron was primarily focused on generating more profits and wealth for the shareholders than increasing the overall value of the organization thus leading to a highly aggressive culture. Such aggressiveness was also as a result of the performance evaluation process at Enron. Performance evaluation was carried out by fellow employees where the employees ranked each other with the lowest ranking employee in each division being fired. The performance evaluation process consequently created a cut throat competitive environment which further promoted the use of unethical behavior by the employees. This environment also led to less communication between the different divisions and operations because of the fear of getting fired.

Did Enrons bankers, auditors, and attorneys contribute to Enrons demise? If so how

The bankers, auditors and the attorneys of Enron were not impartial in regards to Enrons business operations thus they all contributed to Enrons demise. Merrill Lynch, Enrons primary banker, contributed to the companys demise in that they facilitated the sale of Nigerian Burges, which was partially financed by Enron. Enron was to buy out Merrill Lynch investment in six months despite the fact that a document existed that indicated the transaction was fraudulent. Furthermore, Merrill Lynch replaced a research analyst that delivered results undesirable to the top executives. Rather, the banker replaced the analyst with one who upgraded Enrons stock rating. This replacement was as a result of Merrill lynch succumbing to Enrons threats of being excluded from a future stock offering.

Enrons auditors, Arthur Andersen LLP, also contributed to the demise of the company in that they did not ensure the accuracy of Enrons internal bookkeeping and financial statements. The auditing firm did not ensure the proper application of accounting procedures as the firm was a major partner of Enron. As such, there existed a conflict of interests. In addition to not providing accurate and impartial certifications of accuracy, the auditing firm also did not demand explanations on some of Enrons partnerships before certifying the companys financial statements.

The lawyers played a role in the demise of Enron in that they supported the legality of the companys special purpose partnerships. In addition, Vinson and Elkin, Enrons lawyers, were involved in the structuring of some of Enrons special purpose partnerships. As later revealed in the course of the scandal, these special purpose partnerships played a major role in the demise of Enron.

What role did the companys chief financial officer play in creating the problems that led to Enrons financial problems?

The company employed questionable accounting procedures so as to prevent losses from appearing on the financial statements. The chief financial officer, in this regard, made use of special purpose entities and unconsolidated partnerships to distort Enrons financial position. Special purpose entities provided Enron the ability to raise money without having to report the debt in the companys balance sheets. Enrons CFO was responsible for operating these partnerships which he had designed to purchase Enrons poorly performing stocks. Although the partnerships were recorded as related third parties, they were not consolidated thus debts got off its balance sheet and Enron did not have to present to its stockholders the real numbers while at the same time boosting itself. By taking advantage of the special purpose entities main purpose, the CFO at Enron was able to hide one billion in Enron debt. The CFOs manipulation of the balance sheets, hiding of losses and kicking off of inflated revenues was a major contributor to the collapse and bankruptcy of Enron.

Works Cited

Ferrell, Odies C and John Fraedrich. "Case 9 Enron: Questionable Accounting Leads to Collapse." Ferrell, Odies C and John Fraedrich. Business Ethics: Ethical Decision Making & Cases. Boston: Cengage Learning, 2016. 496-505.

 

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