Analysis of mistakes made by the management/ CEO of Arthur Anderson LLP & Enron

Analysis of mistakes made by the management/ CEO of Arthur Anderson LLP & Enron

The decisions that Chief Executives undertake on behalf of their companies can have far-reaching implications. The recent corporate scandals and collapse have a basis on the policies pursued by the company executives. Indeed, rarely will the external environment have such far-reaching consequences as evidenced in the collapse of Andersen Company and Enron. Therefore, the decisions of the management have a big impact on the growth of the company. This paper will review the reasons behind the collapse of two companies; Andersen Company and Enron.

Enron was a leading energy and service company with revenues slightly over US $ 100 billion in 2000. The company had about 21, 000 employee by this time based in the company’s headquarters at Houston, Texas (Cunningham 31). Throughout the company’s existence, it relied heavily on borrowed cash to finance its day-to-day operations. As the company continued to experience growth, it started dealing with trade commodities. However, the company’s employees knew very little about these operations (Cunningham 31).  The company’s commodity banking expanded from natural gas to other goods and services including the internet, electricity and weather futures. As the company’s prospects continued on an upward trend, its fixed assets changed to intangibles like pipelines to commodities, which are derivatives.  As the company grew, budgetary and other important control mechanisms were abandoned. Accordingly, the company’s dealmakers changed the company from an operating empire to an investment fund (Cunningham 31). The company’s Chief Executive and employees were not prepared for this change in business strategy and could not as a result anticipate the potential risks in such transformation. For any investor to have confidence in a company’s reporting system, it is critical that the reporting company and the auditor to have strong internal controls. Available information shows that Anderson has difficult internal controls. The advice provided by the company was not considered by the on-site audit team. This shows that the company did not have strong internal control to ensure that audit information was followed.

The collapse of Enron not only affected the clients but also the employees who had been encouraged to invest their pension in the stocks of the company. After the release of the scandalous information, the stocks dipped and those who had invested in the company made great losses (Haug 212). The top management benefited greatly from shady deals that the company had undertaken.  Andersen got into a scandal when it was auditing the Enron Company and did not disclose the results from the financial statements that it had audited.  The releasing of the financial audit was in the hands of the two companies. Therefore, failure to release the results made both companies responsible. The company’s executives were not keen on proper record keeping, even after being warned by some top leaders within the company. Because of poor record keeping, the management created a loophole for the misappropriation of company funds and mishandling of auditing of financial accounts of the company.

The changing business model among the two companies had a significant effect on the failure of the companies. Within the two companies, their business models were changing. Enron was moving toward a new business model and organizational culture (Cunningham 44). Enron was changing from a tangible business model to one dominated by intangible assets of buying and selling commodities. This transformation created its own growth proved problematic to both investors and the company auditors.  For instance, the change of the business model for Enron was likely to increase volatility, which was complicated by the use of mark-to-market accounting. Moreover, the changing business model at Anderson, from a professional auditing business to one of commercialization of consultation was likely to affect the monitoring ability of the company auditors. Further, the changing business models and the changes in organizational culture as well as employees who were not equipped to manage changes played a significant part in the confusion that led to the collapse of the two companies (Cunningham 43).

Another aspect of organizational culture at Enron was rather discriminatory as it required that “20% of the employees be rated at below performance and encouraged to leave the company” (Jennings 239). Because of this policy, there were no employees who wanted to be carrier of bad news. Enron had unethical reporting procedures. For instance, losses from the Energy Services were moved to other sectors within the company so that the energy sector would look profitable and attractive to investors (Jennings 239).

Enron offered shares of its stock to several executives, SPEs, among others. Many of the shares issued by the company were in exchange of notes receivable (Fernando 15). This was in contravention of US GAAP, because the regulations do not permit the recording of a receivable in exchange for the issuance of notes receivable.  Enron overstated its assets and equities by more than $ 1 billion. However, Anderson overlooked this transaction, which Enron used to hoodwink investors (Bauer 4).

According to Bauer Enron started hiding debts by creating a company, Chewco, which bought out JEDI, which was partner in Enron. The company therefore continued to increase in debt over time.  In all these activities, the perpetrator was Kenneth Lay, the CEO at the time. He made it rather difficult to undertake any investigations into the financial undertaking of the company. The buying out of partner JEDI was discovered later. He hired and fired people who had already engaged in corrupt practices for the company. For example, Andrew Fastow, the chief financial officer of the company, who was replaced.  Kenneth Lay was propagating all these activities to suit his interests in the company.

Its founder Anderson who strictly carried out business faithfully founded Anderson Company. At times many companies wanted backdoor ways to increase their profitability, but Anderson Company stood its ground of honesty and faithfulness. The founder had developed a motto that was ‘think straight talk straight’.  The company had built a great reputation, which made it one of the trusted companies in America. The management that took over, as in the case of Enron scandal, did not maintain the honesty and truthfulness in its operations as dictates by its founder.

According to Fernando Andersen destroyed crucial evidence regarding the accounts of Enron Company.  Some of the evidences were shredded while other information that consisted of emails was done away with to prevent any trace of the financial information (Fernando 16). This made it difficult to ascertain what amount had been misappropriated. Andersen allegation of destroying crucial financial information or Enron in one of its offices was not true since the destruction of emails and other financial information was carried out in other offices including offices in London which headquarters Anderson. Thus, executives in this case are not exempted in the destruction of the documents and, thus, obstruction of justice.  They mistakenly allowed the destruction of relevant documents under their care.

Engaging in huge venture like Enron where it was paid a lot of money was another instance that led to the downfall of Andersen (Fernando 16).  In ethical considerations, Andersen Company did not do its part as an honest auditor of financial accounts on Enron. In hiding information and not bringing it o the light of the public, it acted against the ethics regarding auditing. Therefore, it colluded with Enron in hiding important information from the public and stock exchange committee. The management organization for the destruction of the accounts which would have been a collusion between it and Enron to conceal important information that would have led to prosecution of both companies. This would not have been done without the knowledge of the company chief executives at the time.

In conclusion, the failure of Enron can be attributed to several factors. The growth of the company portended challenges for the company. In addition, the complexity and lack of proper controls played a big part in the company’s downfall.  Enron dealt in treacherous ways, as massive greed and collusion continued to dominate its operations. The collapse of Enron was gradual at the same time subtle, but was hidden from the public, the relevant authorities and the investors. The management propagated it, chiefly by Kenneth Lay who was the chief executive officer of the company and who had been involved in the inception of the company. Most of the dubious deals and undertakings done by Kenneth Lay were done to amass wealth for family and friends while endangering the stocks of the company and the investments that people had put in the company. The company colluded with many players including politicians to seek tax exemptions

The auditing of the financial statements of the company and release of information regarding the accounts of the company was questionable (Davis 208). Before filing for bankruptcy, the company had long accumulated debt, which should have been brought to the fore by the company auditors and external auditors. Andersen, which had a good reputation in its undertakings, had developed a thirst for more money; the management of Anderson was involved in the shredding of documents that were linked to the Enron scandal. It had been its auditor since its inception.  Therefore, the company was party to the financial misappropriation of financial accounts. Therefore, the embezzlement and misappropriation of stocks and money from the company was to be blamed solely on the management of Enron and partly to the Anderson Company, which delayed crucial financial information from reaching the public. The destruction of information was illegal and the company had to answer for those charges, which the Supreme Court had sought to investigate.

Works Cited

Bauer, Andreas. The Enron Scandal and the Sarbanes-Oxley-Act, London: London: GRIN Verlag, 2009. Print.

Cunningham, M. Gary. Enron and Arthur Anerson: The Case of the Crooked E and the Fallen A. Global Perspectives on Accounting Education, 3: 27-48. Print.

Davis, B. James. The Teapot Dome Scandal: Corruption rocks 1920s America. Minneapolis, Minn: Compass Point Books, 2008. Print.

Doryan, M. Aysen.  Financial Crisis Management and the Pursuit of Power: American Pre-Eminence and the Credit Crunch. London: Ashgate Publishing, 2011. Print.

Fernando, A. C. Business Ethics and Corporate Governance. New Delhi: Pearson Education India, 2009. Print.

Haig, M. (2005). Brand failures: The truth about the 100 biggest branding mistakes of all time. London: Kogan page, 2005. Print.

Jennings, Marrianne. (2011). Business Ethics: Case Studies and Selected Readings, London: Cengage Leraning, 2011. Print.

Russell, Jane. Enron scandal. S.l.: Book On Demand Ltd, 2013. Print.

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