Introduction
Enron is one of the largest bankruptcies in the American history. Enron Corporation was an American energy company based in Houston, Texas. Prior to its bankruptcy in the end of the year 2001, Enron employed approximately 22,000 people (McLean and Elkind, 2003) and it was known as one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with revenues was reported as US $111 billion in the year 2000. Fortune named Enron as "America's Most Innovative Company" for six years continuously (ABC News, 2006). At the end of 2001, it was claimed that its reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud.
Business Transformation is defined as an approach to “strategy development designed to transform the business by envisioning the future of the industry, determining the future value propositions to target, and develop migration plans designed to beat the competition to the future” (Digital Era, 2008). The core business model of Enron shifted from energy exploration and distribution to trading energy derivatives.
Enron’s business transformation started from the middle of 1990's (McLean and Elkind, 2003). Nevertheless, new target markets and new financial products bring higher level of risks to the company and created a higher level of competition. The company was forced to raise more funds from external financial sources in order to finance their new financial products that Enron innovated.
Lenders would like to assure that loans can be repaid. Banks and financial institutions who provided loans to Enron would usually determine the credit ratings based on the credit agency. These are based on the company's reported financial statements which are certified and approved by external auditors. Investors purchasing new shares of Enron will be receiving money when the stock price continues to rise, but that significantly depends on whether the company continuing to produce ever higher reported after tax accounting profits (World Sources Online, 2004). This implies that the business operation of Enron, success and failure of this corporation have been associated with various parties and there was a solid bond created between all.
- How did the government deregulation of the financial services industry contribute to the perpetration of this financial debacle?
Deregulation refers to the process of greatly reducing government regulation in order to allow freer markets to create a more efficient marketplace. After the financial industry was deregulated in the early 1980s, banks and corporations were given more opportunities in setting interest rates on deposits and loans. Consequences of the deregulations of financial services in the United States increased competition, heightening innovation, and mergers among weaker competitors (All Business, 2008).
Enron was formed in 1985. The nature of Enron’s business was as a company that transmitted natural gas to customers through its physical pipeline system. It built pipelines with long physical lifetimes, and used debt capital to raise money for the construction of the facilities. The federal government regulated interstate pipelines in which prices of energy were very comprehensive. Nevertheless, there was a trend in government and economic policy to deregulate the industry and let market forces succeed, which would also alter the risk and reward characteristics of the companies in this industry (McLean and Elkind, 2003).
Deregulation in financial services provided opportunities for companies in the United States to created new activities and invent new products in order to boost the competition in the market and the American economy. Enron subsequently concentrated on the development of financial products and commodities trading platforms, especially the business called “Enron Online”. This innovation of Enron encouraged the company to be a financial services and information technology based business enterprise.
The combination of unregulated state wholesale electricity markets and federal deregulation of commodity exchanges has minimized accountability and transparency from the energy sector, allowing corporations to manipulate price and supply of electricity and natural gas through the exercise of significant market power (McLean and Elkind, 2003). California’s energy crisis and Enron’s bankruptcy would not occur under a regulated system.
Conservatively, Enron’s business was only engaged in producing energy and transporting it to the end users. The management of Enron believed that an old-fashioned line of business would provide Enron with a limited business growth and less opportunities to lure investors (McLean and Elkind, 2003). Thus, Enron’s new focus on becoming a global marketer and trader of energy and other financial products was the new motive that would offer prospects of rapidly growing earnings and stock prices for the shareholders.
Nevertheless, the new business transformation of Enron required large amount of capital and tactics to operate. Enron faced risks from new business strategies, including the ability to acquire funds to finance new activities and financial services, the foreseeability of profits, and the complexity of implementing accounting systems to maintain the new businesses.
- What role did ENRON play in getting individual states and the US federal government to pursue energy “de-regulated” policies? For example, how did energy deregulation with its promises of lower-cost energy prices to consumers--affect California residents?
Deregulation of California’s energy market had created significant opportunities for energy traders, who desired to buy and sell large amount of the state’s electricity (McLean and Elkind, 2003). The rules set in deregulation were seen to be complicated and therefore, some traders could find loopholes in the rules and system operated in the state’s deregulation.
Enron hired lobbyists and spent a large amount of money in campaigns contributing to California politicians. Lay and Skilling gave opinions relating to the benefits of deregulation. Skilling emphasized that “California could save US $8.9 billion a year, you can triple the number of police in San Francisco, Oakland, and San Diego, and you could double the number of teachers” (McLean and Elkind, 2003, p. 265).
Enron, especially Ken Lay had an ability to build strong relationships with federal regulators and lawmakers to support policies that significantly reduced government oversight of their business operations. Interestingly, the table below shows that Enron has been building good relationships with the government for a long period of time. This may help the government gave Enron more trust and creditability. It is claimed that as Enron desired to put deregulation in to place, there was a high possibility that the government would not refuse.
However, after deregulation was put in place, Enron did not take into account the well-being of the California State and residents. Instead, Enron has done several things in which they could generate cash for its business and tried to keep the stock price high in the market. Deregulation in California allowed Enron to manipulate the market by starting the electricity price trading. It was noted that Enron’s trading business led to California's energy crisis by turning off power plants and using questionable trading strategies to drive up electricity prices. The state has pushed for repayment of $9 billion in electricity overcharges, $2 billion of which is attributable to Enron (Lifsher and Douglsas, 2006).
How did Enron actually do trading in California? Basically, Enron involved in speculation. Enron made profitable from speculating the energy prices during the California Energy Crisis. Once, the company gained US $485 million on a single day in December 2000. The speculation was one of Enron’s largest trading operations. However, Enron got on the wrong side of the market, especially in December 2000, when the company's trading operation lost almost US $1 billion over the course of three days and on December 12th, the gas prices unexpectedly plummeted in which Enron's traders lost $550 million (Barboza, 2002).
Enron aimed to make profit by speculating the energy prices. However, considering the practice that Enron took which was controlling the supply of electricity in California seemed to be an unethical behavior. Moreover, trading can generate cash for investors and corporations if only if the investor predicts the movement of prices correctly. However, if we look from the macro perspective, there is no one benefiting from speculation. Once, there are investors who make profits, there are also other investors who make losses.
- What is “mark-to-market” and how was it approved as an acceptable accounting practice? Why was it the cornerstone of the ENRON business plan?
Mark-to-market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments (Investopedia, 2008). Enron incorporated “mark-to-market” business concept for trading the energy in the mid 1990s and used it on an exceptional degree for Enron’s trading transactions.
According the rules of mark-to-market, when a company has outstanding energy-related or other derivative contracts on their balance sheets at the end of a particular quarter, they have to adjust them to fair market value, booking unrealized gains or losses to the income statement of the period. Interestingly, these rules in accounting are complicated for long-term futures contracts in commodities such as natural gas because there are usually no quoted prices given to base valuations. Companies having these types of derivative instruments are free to develop and use discretionary valuation models based on their own assumptions and methods (Anonymous, 2002).
It is complicated to reach the consensus regarding a fair value for some products which are unique in the market such as oil and gas futures. Contracts that are not traded on an exchange usually do not provide standardized benchmarks for accountants to get accurate quoted prices in their valuations. The establishment of prices relies on personal judgment and provides the potential for aggressive businesspeople. This is particularly true for the Enron trading culture (Anonymous, 2002). Once Skilling mentioned “We love risks”. This implies that as a leader in the corporation, Skilling tried to create Enron to be an organization in which people became aggressive and fearful at the same time. Those who have a legitimate reason to use mark-to-market accounting should not only use reasonable valuations but should also include a clear explanation for the basis of their pricing and other assumptions (Anonymous, 2002).
The Financial Accounting Standards Board’s (FASB) realized this issue and considered how to value and disclose energy-related contracts for several years. The conclusion was that the rules would apply to different companies on different approaches. FASB would instead require companies to disclose all of the assumptions and estimates underlying earnings. As for Enron, under continuous pressure to beat earnings estimates, it is possible that valuation estimates might have considerably overstated earnings. Furthermore, unrealized trading gains accounted for slightly more than half of the company’s $1.41 billion reported in net income before tax in the year 2000 and about one-third of its reported in net income before tax for the year 1999 (Slocum, 2001).
Enron’s business model was built entirely on the foundation that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant. Central to Enron’s strategy of turning electricity into a speculative commodity was removing the government oversight and monitoring of its trading practices and exploiting market deficiencies to allow it to manipulate prices and supply (Slocum, 2001).
- What role did the US Securities Exchange Commission play in facilitating Enron business practices?
The Securities and Exchange Commission (SEC) enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports. As part of the annual reporting requirement, the company's top management must provide a narrative account in addition to the numbers called the "management discussion and analysis" which provides an overview of the previous year of operations and how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) online from which investors can access this and other information filed with the agency (SEC, 2008).
SEC, as a federal government oversight of publicly traded companies and the securities markets, was considered to provide an opportunity to Enron to be fraudulent. For instance, the State of California deregulated electric energy with a plan that established the rules for energy trading and pricing, but the process were sophisticated and the laws did not cover such complexity of the business; therefore, there was an room for energy producers and trading companies to make profits by finding loopholes in the legal system that SEC required (McLean and Elkind, 2003). It would be logical for SEC to pay more attention on the sophistication of how businesses could have been operated back at that time. However, SEC did not raise any issue regarding this.
The Securities and Exchange Commission is the key government agency in the United States, which regulates financial markets. Its role is to ensure that investors have accurate information about companies, and that companies do not try and deceive investors or manipulate the market for their shares. It requires companies what they must disclose to the public. SEC has a strong investigatory power and can penalize companies for violations or failing to co-operate (SEC, 2008).
Apparently, an investigation of Enron was conducted in October 2001 which contributed the company’s ultimate collapse. However, the SEC failed to notice irregularities in Enron’s accounts and failed to examine the company’s reports in detail since 1997. Moreover, SEC’s plan to ensure that the firms that audit company accounts cannot also bid for lucrative consulting work from the same company was blocked after opposition from accounting firms. The new head of the SEC, Harvey Pitt, was a lawyer whose clients included Arthur Andersen and other accounting firms (BBC News, 2002).
Considerably, it can be seen that due to strong ties that SEC had with Arthur Anderson and between Enron and Arthur Anderson, the bias of providing information to the public occurred. It was reasonable for SEC to have a strong belief in Arthur Anderson because they both are claimed to be independent parties in which investors and people in public can fully rely on. However, it seemed that every party was not aware that they have to be unbiased while performing their investigations.
- What conflicts of interest did deregulation foster that contributed to the escalating Enron fraud?
As mentioned earlier, deregulation encourages competition, innovation, and the development in the American financial sector. Enron understood the aim and benefits of deregulation. However, the company took a wrong direction of operating their business under deregulation. Enron created several forms of financial innovation; but they were significantly involved in the issue of conflict of interest, especially with their Special Purposes Entities (SPE), which led to the company’s fraud.
The diagram below shows the relationship between Enron and its SPE and the occurrence of conflict of interest and non-disclosure of financial information on financial statements of Enron.
To be precise, Enron used these derivatives and special purpose entities to manipulate its financial statements in three ways. Firstly, Enron put out of sight losses that it suffered from technology stocks. Secondly, it hid a large amount of debts incurred to finance unprofitable new businesses such as retail energy services for new clients. And thirdly, Enron inflated the value of other unsuccessful businesses such as the project of fiber-optic bandwidth (McLean and Elkind, 2003).
- Example: Enron hid technology stock losses.
Enron hid losses on its speculative investments in many technology-oriented companies such as Rhythms Net Connections, which was a start up telecommunication company and a subsidiary of Enron. During the Internet booming period, Rhythms Net Connections issued stock to public at a price of US $70 and therefore, Enron’s stake was immediately worth hundred millions dollars (Partnoy, 2002).
Secondly, Enron was involved in the transactions with a special purpose entity called Raptor, which was owned by another Enron special purpose entity, called LJM1. The procedure was that LJM1 exchanged its shares to obtain loans from Raptor. Subsequently Raptor issued securities to investors and held the cash proceeds from those investors. According to Partnoy (2002), Enron and Raptor associated with a price swap derivative. This means that Enron had a commitment to give Enron’s stock to Raptor when the value of Raptor’s assets went down. Furthermore, Enron was obligated to maintain Raptor’s value at US $1.2 billion, if the value of Enron’s stock decreased, Enron would need to give Raptor even more stock (Partnoy, 2002). This type of derivative provided risks to Enron from various aspects; Enron tended to be negatively impacted either value of Raptors’ assets declined or value of Enron’s assets declined.
Unfortunately, during the Internet bubble burst shares of Rhythms Net Communications were worthless. Enron had to give more shares to Raptors which was approximately US $3.7 billion. However, these facts were not disclosed in Enron’s quarterly financial statements (Partnoy, 2002).
- The failure of internal risk control procedures at Enron at both the individual project level and the larger corporate financing/accounting levels
Firstly, Enron did not set a clear internal risk control procedures for the organization. Internal risk control is a set of monitoring procedures designed to ensure accurate financial disclosure. The system that Enron implemented to evaluate their employees “rank and yank”, for example, with this system every year, all employees were rated from 1 (best) to 5 (worst). The more money employee made for the company, the better rating they received (Sears and McDermott, 2003). This procedure was set and implemented by Skilling who was fond of saying that money was the only factor which motivated people. Skilling mandated that between 10 and 15 percent of the employees had to be rated as 5s. When employees were rated at 5, meaning they are fired (Sears and McDermott, 2003).
Actually, there are many other corporations that apply “Rank and Yank” system to their organizations. However, as for Enron, laying off employees at 10 to 15 percent annually means firing approximately 2,000 people. This would make the culture of the company to be aggressive and a number of employees were afraid of losing their jobs. The most important thing that McLean and Elkind (2003) mentioned was that no matter how outstanding employees performed at Enron, it did not matter as long as employees had good relationship with the management. A relationship should not be a measurement of work performance. This was a major weakness of internal control system in Enron, because the management did not clearly distinguish between personal relationship and professionalism.
An example regarding Special Purposes Entities could be drawn to show that Enron lacked of Internal Control Certification procedures. These are procedures designed to ensure accurate financial disclosure. The signing officers must certify that they are responsible for establishing and maintaining internal controls and have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared (SOX, 2008). Moreover, the internal control of Enron could not be reliable because Arthur Anderson took the roles of being both external and internal auditors for Enron.
- The failure of the “market” to limit the scope of the financial fraud as more investors were needed to “cover-up” the corporate losses
In the market, investors aim to make profits from their investment. Sometimes, they just focus on the movement of the stock price and quantitative figures rather than qualitative rationales of certain stocks that they are investment. In the past, while Enron’s stock was rocketed, many investors conceived that Enron was the most attractive stock to invest. The market kept providing information and encouragement to investors while ignoring to comprehend the businesses and other factors that Enron faced. No one would realize that such a great company with high stock price was involved in fraudulent activities.
According to Karmin (2002), investors in the markets created conditions that meant companies which appeared to be “winners” saw rapid stock price increases. Pressure on company management like Enron was intense to continue to be seen as a “winner” to continuously drive prices higher for their stockholders. Risk evaluation of stocks seemed to be secondary to investors relative to higher reported earnings per share.
The banks and security brokerage firms wanted to do business with Enron to generate profits. This was true because based on information concerning Enron’s SPE activities above, financial institutions benefited from the relationship, while they took steps to reduce the risks of dealing with a good credit rating client like Enron.
- The failure of other external “checks and balances”
Lenders
Based on the reputation, credit rating and positive figures on financial statements of Enron, it was attractive for lenders to deal with Enron. However, it was discovered that these financial institutions as lenders were involved in facilitating Enron’s scandal.
Internal Enron documents provided details how the banks created sham transactions to keep billions of dollars of debt off Enron’s balance sheet and create the illusion of increasing earnings and operating cash flow.
For example:
- Merrill Lynch purchased Nigerian barges from Enron on the last day of 1999 because Enron proposed a commitment to buy the barges back within six months, guaranteeing Merrill Lynch a profit of more than 20 percent. As a result of this fraud, Merrill Lynch ultimately paid $80 million to settle with the SEC.
- Barclays entered into several sham transactions with Enron, including creating a “special purpose entity” called Colonnade, a shell company to hide Enron’s debt, named after the street in London where the bank is headquartered.
- Credit Suisse First Boston engaged in “pre-pay” transactions with Enron, including serving as one of the stop-offs for a series of round-trip, risk-free commodities deals in which commodities were never actually transferred or delivered.
(Enron Fraud, 2008)
Bond rating agencies
According to SEC, the roles of rating agencies include assessing the creditworthiness of issuers on an ongoing basis, and the likelihood that debt will be repaid in a timely manner. They emphasized, however, that they do not conduct formal audits of rated companies or search for fraud, and that the nature of their analysis is largely dependent on the quality of information provided to them (SEC, 2008). It is fine to say that bond rating agencies did not make any mistakes related to giving credit rating to Enron back during the Enron’s era.
Moody's and Standard and Poor's credit ratings indicated that Enron was an "investment grade" credit risk until well into the year 2001. The massive restatement of financial statements in October, 2001, and further insights into the "off balance sheet" financing methods of Enron led to ratings downgrades to "junk" or high risk status. However, even the credit rating agencies, with their accounting and analytical expertise, failed to fully understand the condition of Enron and to was not aware of the potential failure to the investing public and financial institutions (Beales, 2006).
Accounting firms
Arthur Anderson as the accounting firm for Enron has to be brought up to discuss as an example. Arthur Anderson had a strong relationship with Enron. Arthur Andersen generated revenue from Enron over US $50 million in the year 2000 (McLean and Elkind, 2003).
Anderson provided audit service as well as advisory service to Enron. The accounting firm suggested Enron regarding the keeping of records, helping with the development o the sophisticated accounting techniques and providing information about speculative trading practices (Bixby, 2003).
As an accounting firm which has been dealing with Enron for almost a decade, Arthur Anderson understood irregularities of the financial and accounting transactions of Enron. However, the audit team did not disclose any irregularities and kept issue financial statements with unqualified audit opinion.
Based on this fact, people may cast doubt whether anyone raised the issue up or not. The answer was yes. However, Arthur Anderson at Houston office ignored all questions regarding suspicion of Enron’s accounting transactions and kept working for Enron. Arthur Anderson was convicted of obstruction of justice in 2002 for destroying documents related to the financial audit of Enron, resulting in the Enron scandal (Bixby, 2003).
The failure of Enron and the failure of Arthur Anderson surely linked. Based on a strong bond and relationship that they had and how they have helped each other by ignoring the fact that Enron committed into fraud. The bottom line of this was both parties (Enron and Arthur Anderson) were holding an objective that they would like to generate revenue as much as they could. They might or might not think about consequences of their action because both of them played significant roles in the society and they were capable, perhaps, they may have thought that there is no way for them to fail.
Business press
In the United States, investors largely absorb information through business press such as television, newspapers, radios, magazines and articles from the Internet. During the period that Enron’s stock price went up to approximately US $90, the responsibilities of business press were to deliver information to investors and the media indirectly influenced people to understand that the best option to invest in the market was to invest in Enron’s stock. However, the concern to people in American society would be that how well people made the judgments towards the information from the media. Back at the period of Enron’s era, it was difficult for investors to digest information that they have gotten through business press because many factors seemed to support the business operation of Enron and those factors made people believe that Enron was one of the most attractive companies to for the investment.
- Sarbanes-Oxley Act of 2002
- Important requirements of Sarbanes-Oxley Act
The United States Congress passed the Sarbanes-Oxley Act (SOX) in the year 2002. The main objective of SOX is to prevent misconducts related to corporate finance and reporting. The most important requirement of SOX is to establish a series of procedures to ensure that publicly traded corporations pursue adequate financial controls. These controls have to be evidently recorded through corporations’ documentation and proven to be accurate (Montana, 2007).
- What fraudulent activities do you believe are less likely to occur in major public corporations today?
Since the Sarbanes-Oxley Act has been passed in 2002, audit committees are expected to maintain a line of defense against management fraud by monitoring the financial reporting function and internal controls of an organization. A strong, independent audit committee has increasingly become an indispensable part of an organization's governance (Harrast and Mason-Olsen, 2007).
Sarbanes-Oxley Act is a foundation of creating other laws and regulations to reduce fraud in corporations. Following the passage of the Sarbanes-Oxley Act of 2002, many state legislatures implemented similar oversight and accountability laws at the state level that were directed at accountants not subject to the federal legislation. The Pennsylvania legislature, for example, also passed a recent law aimed to reduce fraud. This law targets individuals who deceive their accountants, and violation can lead to significant fines and imprisonment (McGuire, 2005).
Sarbanes-Oxley Act helps corporations in the procedures of assessing internal control risks. According to PricewaterhouseCoopers Trendsetter barometer survey of nearly 350 fast-growth CEOs, one in four of the fastest growing agreed that adopting SOX can help create better companies which can be more attractive to public and private investors, merger & acquisition prospects, customers and other stakeholders. In many private companies, internal controls remain informal. However, inadequate control systems leave companies vulnerable to a broad spectrum of risks (Ratcliffe, Blank, Eskew and Fonda, 2007).
Moreover, considering the Exhibit below, it is believed that an Effective Audit Committee in which it could apply SOX in to their audit procedures would help corporations enhance the internal control mechanism in order to prevent fraud and misconducts.
Evidently, four years after Sarbanes-Oxley was passed, several high profile former corporate leaders were sent to jail for fraud (Anonymous, 2007):
§ Jeffrey K. Skilling, the former chief executive of Enron, was sentenced to 24 years in prison for his role in the fraud and conspiracy at the company.
§ Sanjay Kumar, former chief executive of Computer Associates, received a 12-year prison sentence after pleading guilty to fraud and obstruction of justice for participating in a $2.2 billion accounting fraud at his company.
§ David C. Wittig, former chief executive of Westar Energy, a Kansas utility, got an 18-year sentence for looting millions from the company.
§ Stuart Wolff, founder and chief executive of Homestore, an online real estate listings concern, was found guilty of insider trading, lying and conspiring, and received a 15-year sentence.
These examples and explanations above show that SOX has become a vital tool in business world in order to prevent fraudulent activities.
- What fraudulent activities do you believe are more likely to occur in major public corporations today?
The most important aspect to determine the effectiveness of Sarbanes-Oxley Act is how people in the organization react to unethical or irregular issues that they have encountered. According to National Business Ethics Survey (2007), it appears that almost 2,000 employees of public and private companies found that even though workers see ethical misconduct at work, they tend not to report it. These misconducts include conflicts of interest, abusive behavior, and lying. The result of the survey also reported that more than 50 percent of employees surveyed had personally observed violations of company ethics standards, policy, or the law over the past year. And more than two of five who acknowledged misconduct did not report it through any company channel (National Business Ethics Survey, 2007). This casts doubt whether Sarbanes-Oxley Act of 2002 would be really effective in terms of fraud and misconduct reduction or not.
One criticism towards Sarbanes-Oxley Act of the year 2002 is that the Act is overbroad and vague. There are gaps left by Congress which have not been filled by any other regulatory bodies. In addition, regulations regarding internal controls of the corporations adopted by the Securities and Exchange Commission contained of vague requirements but heavy compliance process rather than substantive guidance on exactly what was to be done (Montana, 2007).
An independent audit committee plays a central role in ensuring the credibility of financial reporting and reducing the possibility of management fraud. The responsibilities and requirements placed on audit committees have been strengthened over time, especially with the passage of SOX in 2002. Unfortunately, there are still a number of barriers to the effective functioning of audit committees, including an overreliance on a financial expert, poor-quality information for the committee, and a significant compliance burden (Harrast and Manson-Olsen, 2007).
Conclusion
In conclusion, the collapse of Enron is another significant phase in the American business history. The failure of Enron was an alarm which alerted many parties: government, private sector, regulators and investors to start thinking more carefully about the business operation of large organizations. The most famous question that people usually ask is “Why did Enron fail?” It is simpler to observe the triangle diagram below in order to comprehend the reasons contributed to the failure of Enron.
Firstly, the management controls at Enron were weak. There were no clear, systematic and reliable procedures regarding financial and accounting transactions. Without a proper system, it gave chances for people in the company to be fraudulent and be inaccurate. Secondly, leadership was another problematic issue for Enron. The management of Enron focused on money as only factor to motivate employees. They created performance appraisal system to be harsh and based on relationship building. This created fear and aggressiveness in the workplace. Moreover, the culture of Enron shaped people’s attitudes to be risk takers. Doing business is not gambling; the management and the corporation need to understand the consequences of actions that they have been taking. Enron brought in people who had gambling in the blood to work for them. People who risked the company’s money and other employees’ career could not logically drive an organization to be successful.
Enron did not fail only because of fraud, but also because of people who operated the business. They knew that they were smart; they could make the company to be successful. However, they did not realize that sometimes their actions and decisions have negatively impacted the corporation and its people. It was not wrong for Enron to be ambitious, but it was wrong that the Enron’s management was too greedy and they did everything both rational and irrational to satisfy themselves, but perhaps not the company.
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