Case Study

The Rise and Fall of Enron

I. Viewpoint:

Kenneth Lay
Jeffrey Skilling
Andrew Fastow
Auditors from Arthur Andersen LLP

II. Time Context:

2001

III. Statement of the problem:

The main problem here is the abuse in power and privileges, the lack
of transparency, and the incapability to shoulder responsibilities for
ethical failures of the top officials at Enron.
A minor problem which resulted from the statement above is; the
unhealthy and unethical competition between co-workers.

IV. Objective:

To identify the organizational flaws of the company and address those

problems properly by providing logical assumptions as solutions.

V. Areas of Consideration:

Skilling instituted the PRC, which became known as the harshest

employee-ranking system in the country.
The lack of transparency using the mark-to-market accounting.
In order to satisfy Moodys and Standard & Poors credit rating
agencies, Enron had to make sure the companys leverage ratios were
within acceptable ranges.
For a company such as Enron, under continuous pressure to beat
earnings estimates, it is possible that valuation estimates might have
considerably overstated earnings.
Deals, especially in the finance division, were done at a rapid pace
without much regard to whether they aligned with the strategic goals
of the company or whether they complied with the companys risk
management policies.
Enrons foundations were developing cracks and Skillings house of
paper built on the stilts of trust had begun to crumble.
Enron, like many other companies, used special purpose entities
(SPEs) to access capital or hedge risk.
As one knowledgeable Enron employee put it: Good deal vs. bad deal?
Didnt matter.

VI. Alternative Courses of Action:

Solution

Develop a healthy
corporate culture in
the company.

Careful selection of
accounting approach
and financial
structures to use.

Advantages
Disadvantages
Instead of covering up Since the managers in
for their losses to
the company have
protect their
been used to the
reputation, the top
system, sudden
officials will try to
change in their
do something to
principles might
make it correct.
overwhelm and
confuse them.
Annihilation of mark- May result to some
to-market
losses of investors
accounting and
due to the current
SPEs.
decreasing financial
A more transparent
reports of the
and efficient report
company.
May
decrease the
in financial affairs.
May lead to build the
credibility of the
foundation of trust
company.
between the
company and its
investors.

Workers will work

cleanly because
they respect each
Build an ethical
others rights
climate in the work
Workers work more
place founded by
efficiently when
trust, cooperation and
they coordinate
coordination.
with one another
instead of when
they compete with
each other.

Like some managers,

some workers may
be incapable to
catch up with the
sudden change in
the environment.
Less individual
incentives would be
given.

VII. Conclusion / Recommendation

Conclusion
Enron has many internal and external problems that is causing its
downfall. The following problems are; the mark-to-market method, the
competitive working environment and the use of special purpose
entities. Not to forget is the importance of the people behind this; Lay,
Skilling, and Fastow. Enron culture was heavily influenced by
competition and since the employees were motivated by fat bonuses
and scared of getting laid off if they did not perform well, and in effect
resulted to an unhealthy competition between the co-workers. The
colleagues would rather stab each other in the back than help one
another to close a deal. Our objective was to identify the organizational
flaws of the company and address those problems properly by
providing logical assumptions as solutions.
Recommendations

Develop a healthy corporate culture in the company by providing top

level managers with proper training of modern and innovative
managing and implementing them in the work place.
Careful selection of accounting approach and financial structures to
use.
Build an ethical climate in the work place founded by trust, cooperation
and coordination.
Accountants and Auditors should present a financial statement
disclosed with true profits and losses.

VIII. Plan of action

Project Period Goal:
A new and improved system and working environment for Enron.
Long-term Impact or Outcome:
The debts of Enron will be paid and their credibility as an efficient trading and electricity
company will recuperate.

Objectives
To develop a
healthy
corporate
culture in the
company

Measure
of Success

2
0

4
0

80

To innovate
the accounting
approach and
financial
structures to
use.

2
0

10
0

4
0

80

Build an
ethical climate
in the work
place

2
0

60

10
0

4
0

80

60

60

10
0

Activities
(limit 4 activities per
objective)
Q1 Make managers
attend modern
managing seminars
Q2 Make managers
develop an
organizational chart
Q3 Conduct quarterly
outings and seminars
Q4 Publicly commit to
being an ethical
organization.
Q1 Have accountants
and auditors research
about improved and
ethical accounting and
financial structures
Q2 Conduct the proper
presentation of
financial statement
disclosed with true
profits and losses.
Q3 Separate auditing
from consulting
functions.
Q1 Make
leaders/managers
communicate and
interact with the
workers
Q2 Build a robust ethics
infrastructure that is
self-sustaining.
Q3 Have examinations
of your ethical climate
and put safeguards in
place.

Q Q Q Q
1 2 3 4

Completion Date

Q4 Establish an Ethics
Committee to
constantly keep the
organization focus.