The Fall of Enron: A Stakeholder Failure

Case Study: The Fall of Enron: A Stakeholder Failure

Case Study: The Fall of Enron: A Stakeholder Failure

Gupta Bhagirath, BUS604

Grand Canyon University

Abstract

Enron Corporation was one of the largest global energy, services and commodities company. Before it was filed bankruptcy under chapter 11, it sold natural gas and electricity, delivered energy and other commodities such as bandwidth internet connection, and provided risk management and financial services to the clients around the world.

Enron was based in Houston, Texas, and was founded in July 1985 (though company with Enron name emerged still in 1930 (Swatz, Watkins, 2003)) by the merger of InterNorth of Omaha in Nebraska, and Houston Natural Gas. Enron Company quickly developed from merely delivering energy to brokering energy futures contracts on deregulated energy markets. In 1994, the company started to sell electricity, and in 1995, it entered European energy market. By the middle 2001, Enron employed about 30,000 people globally (McLEan, Elkind,2003).

The case ‘The Fall of Enron: A Stakeholder Failure' presents story of how a Fortune 500 companies collapsed in 2001 and events surrounding it. ‘The Fall of Enron: A Stakeholder Failure' was a corporate scandal involving the American energy Enron Corporation based in Houston, Texas and the accounting, auditing, and consultancy firm Arthur Andersen, that was revealed in October 2001. The scandal eventually led to the bankruptcy of Enron, at that point, the largest in American history. Arthur Andersen, which at the time was one of the five largest accounting firms in the world, was dissolved (http://en.wikipedia.org/wiki/Enron_scandal).

The aim of this case study is to answer some questions which given in next pages.

1. How did the corporate culture of Enron contribute to its bankruptcy?

Enron's corporate culture, where they prefer to say them selves arrogant, prideful with carrying deep-seated belief that Enron's people could handle increasing risk without danger was the main reason of fall of Enron. Enron's corporate culture reportedly encouraged risky behavior, if not breaking the rules. Their "rank-and-yank" system created a fierce environment in which employees competed against rivals not only outside the company but also at the next desk. Delivering bad news could result in the "death" of the messenger, so problems in the trading operation, for example, were covered up rather than being communicated to management.

The downfall took many layers of "pushing the envelope" and a great deal of complacency on the part of employees who, at many levels in the organization, saw wrongdoing and ignored it. To some extent, the Enron failure was the result of a free-enterprise system that rewarded risk taking and a corporate culture that pushed complex financial decisions to the edge.

Unethical or illegal individual actions are sometimes symptoms of systemic problems, and Enron's systems of accountability, oversight, ethical disclosure and corporate priorities were seriously flawed.

Enron's corporate culture values risk taking, aggressive growth and entrepreneurial creativity. But their main interest was making money and not shareholders. Once the values of risk taking and creativity led to more and more aggressive partnership arrangements to maximize share value and, for example, hide debt, the company failed to check its "creativity" with an equal commitment to integrity. Enron created a myth of its own invulnerability by showing constant growth rate. They had risky partnerships and traders were constantly betting company assets in deals. But as the market starting falling, Enron stock also started falling and thus they needed more credit in trading deals. Finally the bubble burst, and Enron was crashed after some of its executives sold all their shares and declared bankruptcy of the company

2. Did Enron's bankers, auditors, and attorneys contribute to Enron's demise? If so,

What was their contribution?

Yes Bankers, Auditors and Attorney's everyone contributed to Enron's demise. 100 billion dollar company couldn't have fallen such a bad way. Enron had been using partnerships, also called special-purpose entities (SPEs). Bankers took stakes in off-balance-sheet partnership and helped Enron hide debt and its true financial condition. These off-balance-sheet financing approaches are the heart of losses