ENRON

Enron: A Company's Demise

Adrienne H. Walker

Professor Smith

December 12, 2009

Enron For An Advanced Managerial Accounting Class

Introduction

Enron Corporation, created in 1985, was once a thriving gas pipeline company. Enron had their hands in many different aspects of the oil business. They transported natural gas to customers throughout the United States, and generated, transmitted and distributed electricity to parts of the United States. In addition, they marketed natural gas and other wares to countries around the world. (Ferrell, Fraedrich & Ferrell, 2009).

The 1990's were a very lucrative decade for Enron Corporation. The company, led by Chairman Kenneth Lay, chief executive officer (CEO) Jeffrey Skilling and chief financial officer (CFO) Andrew Fastow, saw huge financial growth with a worth of $150 billion. The largest growth was between 1998 and 2000, which saw a growth in revenue from $31 billion to $100 million. It was the seventh-largest company in the Fortune 500. (Ferrell et al, 2009).

In the third quarter of 2001, there was no reason to believe the empire was in any financial trouble. However, a review of the financial statements by a bankruptcy examiner would later reveal a discrepancy between reported net income and cash flow. (Ferrell et al, 2009). What happened to this thriving corporation to turn it from a lucrative business to the biggest scandal the current generation has seen?

Before examining the scandal itself, it is important to understand the corporate culture at Enron. Often described as “arrogant” and “prideful”, the firm only employed the most knowledgeable, hard-working and imaginative employees. They recruited the highest scoring students from top universities to ensure the candidate pool consisted of the brightest people available. The company encouraged risk because they believed their people could handle the risk without danger. (Ferrell et al, 2009).

Organization Culture of Enron

The culture encouraged risky behavior by all employees while not expressly asking them to break the rules. This can be seen by the focus that was placed on how much money the executives sharing in the stock option plan could make individually. It has been noted that the compensation packages seem far less concerned with generation profits for shareholders than with elevating employee wealth. (Ferrell et al, 2009).

Another contributing factor to the risky behavior at Enron is the “rank-and-yank” system. Every six months, the employees ranking in the bottom 20 percent were forced out of the company. This kind of pressure inevitably led to people being incredibly competitive not only with other companies but within the same company. Employees were scared to deliver any unfavorable news for fear of being terminated even when not directly responsible for the problem. This fear led to covering the issues rather than dealing with them. (Ferrell et al, 2009).

The failure of Enron had many contributing factors. The system of rewarding risky behavior and punishing employees that did not measure up, along with a corporate culture that played fast and loose with generally accepted accounting practices were two main components. “Many failures by multiple stakeholders” created a perfect environment for the collapse of ...