Looking Back at Enron

The Culture of Corruption

When Enron filed for Chapter 11 bankruptcy December 2, 2001, it was the largest company in the United States to ever file for bankruptcy. The Enron Corporation was a conglomerate corporation supplying electricity, natural gas, communications, and paper. The company employed approximately 20,000 people and was thought to have revenues of $100 billion (Healy & Krishna, 2010). The bankruptcy would reveal that the company has perpetrated a long term accounting fraud that hid its true financial condition. The fallout from the Enron scandal was extreme calling into question the accounting practices of other publically traded companies (Healy & Krishna, 2010). The scandal was an important reason for the creation of the Sarbanes–Oxley Act of 2002 which made CEO’s and accounting firms legally culpable for fraudulent and misleading financial reporting.

The Enron scandal was a complex dichotomy of poor accounting practices and unethical corporate culture which would eventually culminate into financial failure. The largest of the accounting practices included financial statements that did not accurately depict the operations and finances. As a result, shareholders and analysts were misled into thinking that the company was in better financial condition than it was in reality. One of the unethical practices involved in this scandal was the hiding of liabilities within limited liability companies that were owned by Enron (Healy & Krishna, 2010). This effectively kept large amounts of debt from the balance sheet and profit and loss.

The unusual accounting a financial reporting would first catch the eye of Wall Street reporter Bethany McLean who questioned Enron’s tremendous stock value of 55 times the company’s earnings (McLean, 2001). Questions would continue to rise concerning Enron’s accounting and would eventually lead to a SEC investigation. At this point, the truth would be revealed that Enron had inflated its stock value by misleading investors since 1996. Unable to continue operating as stock prices fell, Enron would implode in debt with no choice but bankruptcy (McLean, 2001).

What had gone so completely wrong at Enron became the symbol of corporate corruption. The company had a long history of cutting corners and hiding debt. The company adopted a bottom line thinking or profit at any cost method of operation. An Enron ex-employee stated,

“It was all about taking profits now and worrying about the details later. The Enron system was just ripe for corruption.”

As a result of this thinking, Enron’s corporate culture had become infected with unethical thinking and self-serving actions. Business ethics Professor Manuel Velasquez cited this corruption of culture as a problem that started in the ’90s when business was booming which made businesses ripe for corruption, cutting corners, and shortcuts. This type of environment is the likely reason for Enron executives taking an ends justify the means approach to operations (Velasquez, 2002).

This bottom-line thinking may explain how companies like Enron become so corrupted, but more importantly reveals the necessity of ethical practices and leadership. The Enron scandal is evidence that ethical corporate culture is not just a list of values given lip service but is a necessity for sustainable business practices. The Enron scandal also shows how corporate ethics are a top-down process that must be exemplified through leadership.

References

Healy, P. M., & Krishna, P. G. (2010). The fall of enron. Journal of Economic Perspectives, 17(2), 7.