After the failure of the energy giant Enron in January 2002, financial statements seem a lot less hard and objective than they once did. Enron caused widespread distress among equity shareholders, as a company with an equity market capitalization of over $70 billion became worthless in just over a year (Burton 2002). The failure of Enron is a result of ineffective leadership skills and a lack of managerial control over the company’s resources and activities (Robbins and Judge 2007). Lack of shared vision, strong ethical and cultural values of managerial staff are the main causes of the collapse and legal responsibilities. Enron’s collapse was also a disaster to many of its employees, who not only lost their jobs but saw the value of their 401k pension plans invested in Enron stock disappear.
Inquiries into Enron’s failure indicated that it resulted from major failures of corporate governance. Lack of communication between employees and managers leads to undesirable consequences for both the company and its staff. Certain senior Enron managers appeared to have made significant profits from secret deals made with the company. The board of directors appeared to have failed to control such behavior, just as it rubber-stamped the production of accounts that failed to reveal material factors such as significant off-balance-sheet debt. The Enron board also seemed to disregard reports from middle-ranking executives exposing doubtful practices. In February 2002 US Treasury Secretary Paul O’Neil announced planned changes in the laws and regulations it easier to punish corporate managers and leaders for misleading shareholders (Burton 2002).
These facts prove that Enron did not follow the main principles of organizational behavior based on trust, fair treatment of all employees, and ethics. Indeed, the Enron disaster focused attention on US accounting practices and highlighted the relationship between companies and the accounting organizations who as auditors were meant to confirm the accuracy of financial reporting. Burton Malkiel, Professor of Economics at Princeton is a long-time critic of financial markets.
In terms of Mintzberg’s theory, Enron disregarded the planning and control functions of the organization (Mintzberg 2003). The auditors to Enron were Arthur Andersen, one of the top five firms that dominate the global accounting market (SEC Says Corporate 2002). The fallout from Enron’s failure left Andersen facing legal challenges including a criminal charge from the US Department of Justice. About the same time, the SEC announced that it might hold the profits of company leaders who made profits by selling company stock while earnings were inflated. It noted that Enron leaders and managers had sold $1 billion in company shares before the share price collapsed on news that charges would decrease earnings by $585 million, and revelations of off-balance-sheet debt (Yukl, 2006).
The main problem of Enron was the lack of moral, ethical, and social responsibility values of the company’s executive team. The SEC also announced that it would assess the performance of the audit committee of any company whose financial reporting was investigated by the SEC (‘Socially Responsible Firm Publishes 2002). The failure of Enron led to damage to its reputation. In March 2002 Domini Social Investments (DSI) issued alternative voting guidelines that had been revised in the light of Enron (‘Socially Responsible Firm Publishes 2002). The new ethical guidelines stated that DSI would vote against the engagement of auditors who were not independent, while it would also vote against those organizations whose boards did not have a majority of non-executive directors. The case of Enron shows that violation of accounting principles and issues can lead to bankruptcy and legal responsibility of the company’s executive team. The Failure of Enron vividly portrays that a company should follow theories of organizational behavior and strict ethical norms established by the industry to meet the interests of shareholders and avoid financial collapse and legal claims.
References
Burton Malkiel, ‘(2002). The Lessons o Enron, Wall Street Journal.
Mintzberg, H., Lampel, J., Quinn, J. B., & Ghoshal, S. (2003). The strategy process: Concepts, contexts, cases (4th ed.). Upper Saddle River, NJ: Prentice Hall.
Robbins, S. P., & Judge, T. A. (2007). Organizational behavior (12th ed.). Upper Saddle River, NJ: Pearson Education.
SEC Says Corporate Audit Panels under Scrutiny in Agency Probes, (2002). Bloomberg newswire.
‘Socially Responsible Firm Publishes 7th Annual Proxy Voting Guidelines Tightening Auditor Independence Requirements in Wake of Enron Collapse’, (2002). Bloomberg newswire.
Yukl, G. (2006). Leadership in organizations (6th ed.). Upper Saddle River, NJ: Pearson Education.