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The Collapse of Enron Essay Sample

The Collapse of Enron Pages
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1. Who were the stakeholders involved in, or affected by, the collapse of Enron? All stakeholders were, obviously, affected by the collapse of Enron. However, several of them were critical, especially those being considered as market stakeholders such as suppliers, creditors, employees, and stockholders. These mentioned stakeholders seem to be Enron’s most recognizable as the essential contributors to its organization. They dared of giving up an available alternative in order to take a risk with Enron in hoping of some benefits in return. But once its bankruptcy has happened, these mentioned stakeholders were in a severe case. For instance, its employees would lose their job and became unemployed, this, in turn, could eventually effect on Enron’s non-market stakeholders in term of unemployment rate. Its creditors and suppliers would also experience a huge depressed from their balance sheets. In the case of creditors, a large sum of money would be gone, both principle and interest that they could have gained. This same situation would also happen to Enron’s stockholders, all their investments would not return any single bits as dividends. However, Enron was an energy industry, due to its bankruptcy; a better environment could be seen, this positively affected the local communities.

2. Considering all aspects of the case, what factor or factors do you believe most contributed to the collapse of Enron? The collapse had many causes. Enron made failed investments in fiber-optic networks, a power plant in India, and water distribution in the U.K. Top executives in the company are accused of unethical behavior. The SEC is investigating shady deals in which they allegedly enriched themselves, and formed partnerships designed to hide $500 million in losses. These are serious problems, but corporations have survived worse, and Enron could have been fixed with new management committed to reform. The fatal blow was the collapse in the price of energy and the sudden end of the California energy crisis, which drained cash and ruined Enron’s credit. Enron was mainly a trading company, a business that depends on good credit and customer confidence.

3. What steps should be taken now by corporate managers, stakeholders, and policy makers to prevent a similar event from occurring in the future? Corporate managers should develop their moral leadership skills. Moral leadership seems primarily a conscious task in which the leader needs to consider the emerging situations and decide on a response that best caters toward overall moral development. Unconscious strategies – such as Lay’s dispositions to behavior originating from his religious values – may hold back the leader from such conscious thinking. Consequently, systems thinking may become replaced with behavior that does not necessarily promote coherence in overall moral values. Therefore, in order for leaders to develop their moral leadership they need to learn to identify mental models that are holding them back from systems thinking. For example for Lay it would have been necessary to realize how his local interest in the well-being of his followers was creating chaos overall. In this respect, it seems important for leaders to actively develop strategies that identify values and experience that keep them from committing to systemic objectives. There are also several steps the government should take to prevent future scandals: Bar auditor conflicts.

The big auditing firms already have promised major changes in the way they do business. Most will no longer act as internal and external auditors for the same firm. Two of the three major accounting firms that still act as consultants will no longer sell many of those services to the same companies they audit. Putting distance between accountants and the companies they audit should increase public confidence in the auditors’ judgments. Those restrictions should be imposed by the government and monitored by the U.S. Securities and Exchange Commission. Former SEC chairman Arthur Levitt attempted to enact such reforms but was rebuffed by the industry’s strong lobbying efforts in Washington. Increase disclosure.

The public needs more information about the financial relationships of executives and board members of publicly traded companies. Do executives have investments in corporate subsidiaries? Do board members have outside jobs with groups financed by the company? Are financial ties allowed to exist between board members, executives and employees? One problem found by the Enron board was that many in a position to blow the whistle were apparently compromised by their own sweetheart deals. Tighten ethics rules.

Disclosure aside, companies need to build higher walls between their boards and senior management. In Enron’s case, the board’s own investigative panel faulted directors for not doing their job. While some information was kept from the board, the controls over management “were not adequate, and they were not adequately implemented,” the board’s investigative panel found. Even the best organizational checks mean nothing if board members lack the skills, time or independence to do their job. As Arthur Andersen, Enron’s former auditor, showed, accountants cannot be left as the final backstop. Set new standards.

The accounting industry’s practice of self-policing should be ceded to the SEC. The public interest in the integrity of the markets is clear. Enron also exposed a fundamental weakness in accounting standards; one idea proposed by reformers is a process whereby auditors could alert the investing public to companies that push the accounting envelope. Tougher conduct codes also should apply to stock analysts and investment brokers. The administration and Congress also are considering a range of ways to protect small investors whose portfolios are dominated by an individual stock. That could have blunted the losses of Enron employees who had company stock in their retirement plan. Another idea is to create a fund to reimburse shareholders who fall victim to corporate duplicity. Also, more regulation certainly is needed of the energy futures trading business. Sure, kicking around Ken Lay and other former Enron executives may satisfy the blood lust back at home, but where was the concern in Congress for these reforms when Enron was flush a year or two ago? The public doesn’t need politicians to add to the heat. Instead, it needs a clear, detailed and workable plan for preventing this from happening again.

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