Question 1: How did the Corporate Culture at Enron contribute to its bankruptcy?

The corporate Culture at Enron could have contributed to its bankruptcy in many ways. Its
corporate culture supported unethical behavior without question for as long as the behavior
resulted in monetary gain for the company. It was describe as having a culture of arrogance
that led people to believe that they could handle increasingly greater risk without encountering
any danger.

Its culture did little to promote the values of respect and integrity it instead rewarded
‘innovation’ and punished employees deemed week. The performance evaluation process for
employees that was dubbed “rank and yank” utilized peer evaluations, and each of the
company’s divisions was arbitrtly forced to fire the lowest ranking employees. This created cut-
throat competition not only against Eron’s external competitors but also within the
organization. It pitched employees against each other. The internal rivalry created in turn
contributed to less communication between operations for fears of being fired. The “survival
for the fittest” atmosphere reached the point where illegal activity was deemed necessary to
stay on top of the game.

Enron’s compensation plans also seemed less concerned with generating profits for
shareholders than with enriching officer wealth. Its culture encouraged flaunting the rules and
even breaking them.

Each Enron division and business unit was kept separate from the others and as a result very
few people in the organization had the big picture perspective of the company’s operations.

All these aspects of the corporate culture at Eron contributed separately to its eventual
bankruptcy.

1
Question 2: Did Enron’s Bankers, auditors and attorneys contribute to Enron’s demise? If so,
what was their contribution?

Yes the bankers, auditors and attorneys contributed to Enron’s demise. This is because they
took sides with Enron’s management instead of acting impartial and professionally.

They contributed in Enron’s demise in the following ways:-

Banker – Merrill Lynch

It facilitated Enron to sell Nigerian Barges therefore making Enron record about $12 million in
earnings and thereby meet its earnings goals at the end of 1999. This was a sham.

It facilitated Enron in fraudulently manipulating its income statements by entering into a deal
whereby Enron would buy Merrill Lynch in 6 months time with a guaranteed 15% rate of return.

Merrill Lynch replaced a research analyst after his coverage of Enron which displeased Enron’s
executives. This coverage would have saved Enron from demise if Merrill Lynch would have
prevailed upon Enron to implement it.

Merrill Lynch gave in to threats by Enron that it would be excluded from a coming $750 million
stock offering and instead, the replacement analyst is reported to have upgraded his report on
Enron’s stock rating. This was unethical and unprofessional.

Auditors – Arthur Andersen LLP

They were responsible for ensuring accuracy of Enron’s financial statements and internal
bookkeeping. Potential investors used Andersen’s reports to judge Enron’s financial soundness
and future potential before they decided whether to invest. Current investors used those
reports to decide if their funds should remain invested there. As such, the investors expected
that Andersen’s certifications of accuracy and application of proper accounting procedures
would be independent and without any conflicts of interest. However, this was not the case and
the investors were deceived by relying on the reports of Andersen.

On the other hand, Andersen was a major business partner of Enron and some executives of
Andersen accepted jobs from Enron. This was a conflict of interest. Additionally, in March 2002,
Andersen was found guilty of obstructing justice by destroying Enron related auditing
documents.

Moreover, Andersen failed to ask Enron to explain its complex partnerships before certifying
Enron’s financial statements.
2
This was purely unethical and unprofessional. Andersen were playing a very important role of
ensuring that the financial statements and book keeping is accurate and should they have
played their role well as professionals, then Enron should not have collapsed.

Attorneys – Vinson & Elkins

They helped to structure some of Enron’s special purpose partnerships. The firm supported the
legality of these deals. They were a great facilitator of these deals through transaction opinion
letters. As seen from the article, these deals are the ones that contributed to the demise of
Enron.

Question 3: What role did the chief financial Officer play in creating the problems that led to
Enron’s financial problems?

In order to prevent the losses from appearing on its financial statements, Enron used
questionable accounting practices. To misrepresent its true financial condition, Andrew Fastow,
the Enron’s CFO, took his role by involving unconsolidated partnerships and special purpose
entities - ”SPE’s”, which would later become known as the LJM partnership. Taking advantage
from the SPEs’s main purpose, which provided the companies with a mechanism to raise money
for various needs without having to report the debt in their balance sheets, Enron’s CFO
directly ran these partnerships and designed them to purchase the underperforming assets
(such as Enron's poorly performing stocks and stakes). Although being recorded as related third
parties, these partnerships were never consolidated so that debt could be getting off its balance
sheet and the company itself could boost and have not had to show the real numbers to
stockholders. Andrew Fastow was using SPE’s to conceal some $1 billion in Enron debt. Overall,
according to Enron, Fastow made about $30 million from LJM by using these partnerships to get
kickbacks which were disguised as gifts from family members who invested in them and
enriching himself. His manipulation of the off-balance-sheet partnerships to take on debts, hide
losses and kick off inflated revenues while banning employees' stock sales was one of the
reasons triggered the collapse of the company and its bankruptcy.

3
Question 4: The role of corporate and personal ethics in a case scenario like this?

Corporate Issues

The Corporate culture: Corporate culture refers to the prevailing implicit values, attitudes and
ways of doing things in a company. It often reflects the personality, philosophy and the ethnic-
cultural background of the founder or the leader.

Enron featured multifaceted and conflicting mores, which included:

i. A very competitive working environment: where workers were evaluated based on

their performance. Each year, the worst 10% -2 0% would be fired, while the top
performances would be rewarded lavishly.

ii. A culture of deception: where Enron used unjustifiable calculation methods to entice
investor to hold the company shares. In assessing the value of its assets (i.e. contracts),
traders were pressured to use an unrealistically low discount rate and an overvalued
future cash flows. This enabled the company to record a huge surge in profit creating
an illusion to investors, enticing them to buy the company’s shares. Among them were
the company’s workers, who invested their entire retirements and life savings into the
shares.

Enron used a deceiving mechanism to cash in the share value so as to obtain a source of
cheap capital from creditors, therefore the company was highly geared in debt, and two
years after its formation (1987), 75% of its stock value was debt. Further expansion of
the company required more debt-raising. This would cause deterioration in the credit
rating. As the risk of default increases, the creditors (banks) would charge them a higher
interest rate. To get around the problem, Enron set up series of “Special Purpose
Entities” (SPE’s) which were invisible from Enron’s balance sheet. Enron shares were
then transferred to these entities and then used as collaterals to obtain cheap capital.
The capital obtained was then channeled to the parent company in exchange for its
debt, failing investment projects, and realizing the overvalued contracts.

4
iii. A culture of greed and injustice: The set up of the SPE’s enabled the company to cash in
on the share value. However, a large part of the money obtained was not used to
distribute fairly among the shareholders, but went to reward the top managers who
engaged in the deceptive and illegal practices gave themselves high rewards.

Personal Issues

i. Deception and dishonesty: The Company managed to conceal its massive debts through
questionable accounting. On knowing the accounting scandals of the company and the
possibility of the collapse of the company, the CEO (LAY) publicly re-assured the future
prospects of the company, but secretly he off-loaded his possession of the Enron share
in the market. In doing so, he took advantage of the privileged information that was no
available to the general public, and hence was guilty of insider trading.

ii. Hypocritical and Irresponsible: Skilling claimed his (President and Chief Operating
Officer. Served as CEO from Feb. – Aug.2001), abrupt resignation was motivated by
"personal reasons" and not Enron's impending doom. He left without a pay-off, saying
he wanted to spend more time with his children and participate in more charity work.
But immediately after his departure he sold millions of dollars' worth of company stock.
He claimed not to have any knowledge of the complex web of financial arrangements
that became Enron's downfall.

iii. Integrity and harshness: Fastow (Chief Financial Officer) was allegedly responsible for
creating a web of off-balance sheet partnership with external companies that allowed
him to hide Enron’s very large losses. He was also found by an internal Enron
investigation to have secretly made $30m from managing one of the partnerships. He
is said to have refused to answer questions at a December meeting with Securities and
Exchange Commission officials. He tried to fire Sherron Watkins and to seize her
computer when he learned of her attempt to alert superiors of impending trouble.

5
Ethical problems with Enron’s culture

Virtue Theory: An action is morally right if in carrying out the action the agent exercises,
exhibits, or develops a morally virtuous character, and it is morally wrong to the extent that by
carrying out the action the agent exercises, exhibits, or develops a morally vicious character.

There were positive aspects to Enron’s corporate culture, in focusing on stock-price

performance, net present value (NPV) and financial innovation, managers were able
immediately to apply the skills they had honed in graduate school. Enron encouraged and
rewarded innovation. However, the overwhelming drive for short-term personal
wealth accumulation was the negative ethic. Managers were encouraged to pursue this goal
with, if necessary, guile and deceit.
Enron claimed to generate profits and revenue from deals with SPE”S that were actually limited
partnerships that Enron controlled. Enron was claiming billions in profit when it was actually
losing money. Enron was using these partnerships to sell to itself these contracts back and forth
recording revenue each time to hide losses and debt that it suffered by not reporting them on
its financial statements. It was shuffling much of its debt obligations into offshore partnerships.

Lessons from the Enron Case

1. You make money by providing real goods and services i.e. real value for money

2. Financial cleverness is no substitute for a good corporate strategy

3. Executives who are paid too much can think they are above the rules and can be
tempted to cut ethical corners to preserve their wealth and perquisites

4. Government regulations and rules need to be updated not relaxed and eliminated.

5. Conflict of interest: Enron claimed to generate profits and revenue from deals with
SPE”S that were actually limited partnerships that Enron controlled.

6
6. Creation of false confidence i.e. Enron covered up the debt under the separate
accounting financial statements of the SPE’s that showed growth of business: growth of
asset value: rise in Enron’s share price: rise to shareholders’ income. So long as the
share price does not fall, the growth of business can be tremendous, but such cover-up
sows the seed of hidden disaster as the asset value of business depends primarily on the
investors.
7. Collusion: the auditing firm was a partner, internal and external auditor failing to
provide complete disclosure, and unfair financial reporting.
8. Transparency in reporting is not an objective

7
References

1. The Responsibility and Accountability of CEOs: The Last Interview with Ken Lay Journal
of Business Ethics _ Springer 2010 DOI 10.1007/s10551-010-0675-y O. C. Ferrell Linda
Ferrell
2. The critical role of ethics: recent history has shown that when individual ethics are
compromised, corporate ethics fail and financial disaster is not far behind by Marianne
M. Jennings http://findarticles.com/p/articles/mi_m4153/is_6_60/ai_111737942

3. Enron And Arthur Andersen: The Case Of The Crooked E And The Fallen A Gary M.
Cunningham and Jean E. Harris Global Perspectives on Accounting Education Volume 3,
2006, 27-48