The Smartest Guys in the Room

TheSmartest Guys in the Room

InstitutionAffiliation:

Enron:

Thefilm “Enron: ”, is a documented filmthat gives a report of the largest business scandals in the Americanhistory. The film accounts the fall of Enron Corporation and thecriminal trials of the top executives. In addition, the film featuresthe California electricity crisis and its connection with Enrontraders. The film features the former Enron Corporation executivesand employees, reporters, stock analysts, Gray Davis, the formergovernor of California, as well as the interviews with Elkind andMcLean. Unfortunately, Enron Corporation is faced by many challengeswith most executives contributing to its downfall. Some of thereasons to the downfall are failure of the top leadership, complicityof the investment banking community, and corporate culture thatsupported unethical behaviour. The downfall of Enron Corporation wasdue to several individuals and group of people. Firstly, the topofficials were greedy and were only concerned for their own interest.Secondly, Enron’s board of directors did not fulfil their fiduciaryduties toward the shareholders. Thirdly, most Enron employees wereaware of the executive wrongdoings, but no whistleblowers cameforward. Lastly, both the internal and external auditors did notcarry their duties effectively. However, this essay discusses howthese individual and group of people contributed to collapse of Enronand how their ethical lapses contributed to the downfall of thecorporation.

KennethLay, the former chairperson and the CEO of Enron Corporation hadwritten a 64-page of Enron Code of Ethics that reflected the policiesof the company. The company’s board of directors also approvedthese policies, which as a result, brought reputation to them. Inbrief, the ethics stated, “An employee should not behave in a waythat is destructive to the interest of the company either directly orindirectly.” Moreover, the ethic also stated that, “An employeemust not act in a manner that brings employee financial gain to himor herself alone.” He based these codes on values such asintegrity, respect, communication, and excellence. Then, he definedthe values as the following:

  1. Integrity: the company should work with customers and prospects openly, sincerely, and honestly. That is, whenever the company promise to do something, it must fulfil the promise.

  2. Respect: the company should treat all people equally, and every employee should treat the other colleague like he or she would like to be treated. The company will not tolerate disrespectful and abusive treatment, callousness, arrogance, and ruthlessness.

  3. Communication: the company is obligated to communicate and listen to its employees.

  4. Excellence: the company is satisfied when it does the best. Hence, it should rise bar for every person related to the company.

TheAudit Committee (Both Internal and External)

TheEnron audit committee did not play their role effectively. They onlymet a few time annually hence, they never had enough time to discusson the progress of the company and cover large amounts of materials.In addition, they lacked the technical expertise to enquire from theauditors on accounting issues related to the corporation specialentities. In addition, they would not question the management due tothe pressure they gave them. Further, it leaves a huge question onthe amount of salary, divided, stock options, and attendance feesthat the members of committee received.

FinancialAudit

Enronfinancial statements were complex and confusing for analyst andshareholders to understand. Additionally, it was unethical andcomplex business model that required the company to use accountinglimitation to modify balance sheet for favourable performances.Arthur Anderson, an external auditor also played a significant rolein the collapse of the corporation. In the end, Anderson wasconvicted for obstructing justice making more than twenty-ninethousand employees to lose their jobs. He was also accused forreckless standards of auditing due to conflict of standard. In 2000,Anderson earned twenty seven million dollars in consulting fees andtwenty five million dollars in audit fees. Normally, the stockanalyst used certified documents from the accounting firm to buy andsell Enron stock. Unfortunately, the company had a buy rating thatdrove the price high. John Oslen from Merrill Lynch analyst noticedthere was a problem and pressed the alarm. Sadly, he was fired afterhe questioned the company reporting practises, and in return, MerrillLynch occupied his job hence, two analyst jobs. He was paid fiftydollars each adding to one hundred dollars to silence any otheremployee who would raise a question about their company. Theseanalyst lacked integrity, and were driven by greed, which played aforemost role in materialising the fraud. They were interested toincrease their bank balances through stock option and cashcompensations.

EnronEmployees

Mostemployees in the company were aware of the wrongdoing but they optedto keep quiet. Most employees opted to keep quiet due to arrogance,compliance, greed, and the fear of losing job. Most employees wereencouraged by the top officials to work for their own self-interest.They did not use ethic to make decisions. After all, the company’sculture was ethically weak. Employees were not disciplined, and moneywas the only motivational factor. Further, the company ratedemployees depending on their ability to make money hence, thewhistleblowers were not encouraged. For instance, few employeesinformed Ken Lay about illicit trading but he discouraged them sayingthat it was part of making money.

TheBoard of Directors

Thereare increasing evidences that Enron board of directors that wascomposed of major and financially sophisticated members, was activelyinvolved in the critical decision that led to the collapse of thecorporation. The board fired Anderson after he learnt about theissues facing the company financial and accounting practises. This isclear evidence that directors played a significant part in overseeingthe Enron’s collapse without taking any action. The board consistedof Wendy L. Gramm and his wife, Senator Phil Gramm, John Wakeham,former British cabinet minister and a member of the British House ofLords and Norman Blake, The CEO of Comdisco. Further, the boardsuspended the Enron’s code of ethics and approved the partnershipEnron and chief financial officer. As a result, Enron accumulatedmany debts but the board kept secret in spite the fact that everyboard member was aware of it. Besides, the board also formed aspecial committee to investigate the cause of debts. Debatably, theboard included Herbert S. Winokur, the CEO of a private investmentfirm and a former member of the board aware of the potential riskthey were inducing to the company. As a result, it made a decision towaiver the Enron codes of ethics. The main aim of the waiver was toallow Andrew Fastow to serve as a general partner of the partnership.In addition, the board adopted a set of guidelines to protect thecompany’s interest.