ENRON

Background
Enron started as Northern Natural Gas Company, in Omaha, Nebraska with major business
activity for natural gas production, transmission and marketing as well as for natural gas
liquids, and was an innovator in the plastics industry. When Kenneth Lay took over the
leadership of InterNorth, he changed its name to Enron, and moved the headquarters to
Houston.
Enron Corporation business activity was energy, commodities, and services company based
in Houston, Texas.
Enron wealth was largely to due to marketing power, and its high stock price. Enron was
awarded "America's Most Innovative Company" for six consecutive years, from 1996 to 2001
by the magazine Fortune as well as on Fortune's "100 Best Companies to Work for in
America" list during 2000. Enron was acclaimed for its long-term pensions, benefits for its
workers and efficient management.
Corporate Fraud
In the mid-1980s, oil prices fell precipitously causing buyers of natural gas to switch to the
lower prices of oil. Gas producers, led by Enron, lobbied vigorously for deregulation. Gas
prices began to fluctuate causing anxiety to the buyers. Enron using this opportunity started
marketing futures contracts -- guaranteeing a price for delivery of gas in the future. Using the
same concept, Enron lobbied for deregulation of electricity and succeeded. The electricity
markets were deregulated over the next several years, creating a similar opportunity for
Enron to trade futures in electric power.
Critics say that deregulation of the energy business is part of the reason for Enron to fall.
Both Chairman and CEO Kenneth Lay were part of the task force committee on energy
policy with Vice President Dick Cheney as Chairman and the top management were said to
be on familiar terms with President.
In 1990, Andrew Fastow was hired for his understanding with the prospering deregulated
energy market that Skilling seeking to exploit. In 1993, Fastow began setting up various
limited liability special purpose entities (a common business practice in the energy sector); to
transfer liability ensuring it would not appear in the accounts. This method is used to
maintain a robust and generally increasing stock price and by keeping its critical investment
grade credit ratings.
In late 2000, Enron employees with inside information sold their shares in the market causing
the share price to drop by half from $90 to $42 in half 2001. Even Enron's CEO, Kenneth Lay
sold more than $70m worth of shares throughout the period although he will assure the
market that the company was still doing well via press statement.
The investigation revealed that Enron have made a dozen "partnerships" through its chief
financial officer Andrew Fastow with companies it created to hide huge debts and heavy
losses from its trading businesses. In the meantime, its auditor; Arthur Anderson neglected to
recognize the company's problems. At worst, investigators now say, the auditor was complicit
in perpetrating one of the biggest frauds in corporate history.

Only in October 2001, Arthur Andersen announced that some of those partnerships' debts and
losses should have been included on Enron's financial statements. Adding them back, along
with other charges, forced the company to report losses of more than $1 billion.
To cover for its shortfalls, Enron drew down a $3 billion line of credit -- pretty much all it
had left. Ratings agencies downgraded the company's debt, automatically triggering steppedup payment schedules on outstanding credit
Enron's stocks and bonds went into freefall. Its debt was downgraded once again, to junk
status. In desperation, Enron entered talks to be taken over by its rival Dynegy, but that
company accused Enron of deceitful bargaining, and pulled out of negotiations after a few
weeks. Enron was left with no choice:
On Dec. 2, 2001, it filed for bankruptcy protection. Meanwhile, the SEC expanded its
investigation to determine whether Enron or its auditor were guilty of accounting fraud. More
than 4,000 people were laid off at Enron's Houston headquarters and thousands of investors,
including employees -- lost billions of dollars as Enron's shares shrank to penny-stock levels.
Throughout January 2002, it was in the news that Enron executives reported to their top
administration officials, and allegations that company officials willfully ignored internal
warnings about the accounting irregularities as they gained millions of dollars from selling
shares.
CONCLUSION
A companys moral culture is tied directly to the ethical integrity and quality of the
companys leadership. When a company lacks committed ethical leadership, as did Enron,
ethical standards will not be maintained. Because Enron lacked ethical leadership, it
experienced a breakdown in its corporate structure and culture (Gini, 2004). Eventually, the
entire company collapsed as a result. Enron created a culture obsessed with the bottom line
and not with ethical behavior. The company culture demanded conformity and penalized
dissent. Consequently, employees adopted and complied with the culture demanded by the
companys leaders (Tourish, n.d.; Gini, 2004). Once leadership has crossed the line to
unethical behavior, unethical acts can become accepted, daily activities, and employees have
many reasons for remaining quiet (Ignorance Isnt Bliss, 2007). For Enrons employees to do
more than participate in grapevine conversations about the companys unethical practices
would be a breach of the heavy-handed cultural norms of the company (Werther, 2003).
Enron has been described as having a culture of arrogance that led people to believe that they
could handle increasingly greater risk without encountering any danger. According to Sherron
Watkins, Enrons unspoken message was, Make the numbers, make the numbers, make the
numbersif you steal, if you cheat, just dont get caught. If you do, beg for a second chance,
and youll get one. Enrons corporate culture did little to promote the values of respect and
integrity. These values were undermined through the companys emphasis on
decentralization, its employee performance appraisals, and its compensation program.
First, current laws and SEC regulations allow firms like Arthur Andersen to provide
consulting services to a company and then turn around and provide the audited report about
the financial results of these consulting activities. This is an obvious conflict of interest that is
built into our legal structure.

Second, a private company like Enron currently hires and pays its own auditors. This again is
a conflict of interest built into our legal system because the auditor has an incentive not to
issue an unfavorable report on the company that is paying him or her.
Third, most large companies like Enron are allowed to manage their own employee pension
funds. Again, this is a conflict of interest built into our legal system because the company has
an incentive to use these funds in ways that advantage the company even when they may
disadvantage employees.
And fourth, most companies like Enron have codes of ethics that prohibit managers and
executives from being involved in another business entity that does business with their own
company. But these codes of ethics are voluntary and can be set aside by the board of
directors. Our legal structure today largely allows managers to enter these arrangements,
which constitute a conflict of interest. The managers and executives, of course, have a
fiduciary duty to act in the best interest of the company and its shareholders, But the law
leaves considerable discretion to managers and executives to exercise their own business
judgment about what is in the best interests of the company.
The collapse of Enron not only have implications for business and industry, but for politics
and policy as well; Enron was among the biggest donors to U.S. political campaigns over the
past decade.
Andrew Fastow, Jeff Skilling, and Ken Lay are among the most notable top-level executives
implicated in the collapse of Enrons house of cards. Andrew Fastow, former Enron chief
financial officer (CFO), faced 98 counts of money laundering, fraud, and conspiracy in
connection with the improper partnerships he ran, which included a Brazilian power plant
project and a Nigerian power plant project that was aided by Merrill Lynch, an investment
banking firm. Fastow pled guilty to one charge of conspiracy to commit wire fraud and one
charge of conspiracy to commit wire and securities fraud. He agreed to a prison term of 10
years and the forfeiture of $29.8 million. Jeff Skilling was indicted on 35 counts of wire
fraud, securities fraud, conspiracy, making false statements on financial reports, and insider
trading. Ken Lay was indicted on 11 criminal counts of fraud and and making misleading
statements. Both Skilling and Lay pled not guilty and are awaiting trial.
As they examine the allegations of malfeasance and a possible cover-up by Enron and
Andersen, Congress and investigating regulatory agencies also will be looking into the
whether government policies are at least in part to blame for the Enron debacle. "Something
went dreadfully wrong here," said Sen. Joseph Lieberman (D-Conn.), who heads the Senate
Governmental Affairs Committee. "And we've got to ask the question -- why?"