Running Head: ENRON SCANDAL 0

Enron Sandal

Southern New Hampshire University

OL-500 Human Behavior Organization

October 19, 2014

Domingo Negron

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Enron Sandal

Abstract

The research paper discusses the organizational issue in relation to Enron Scandal. The

paper has identified that ineffective leadership was the cause of the collapse of Enron

Corporation. It has also proposed and discussed three solutions to the organizational problem that

faced Enron Corporation.

Introduction

The chosen topic is Enron Scandal. The scandal involved one of the biggest bankruptcy

cases in the United States (Li, 2010). It also involved the disbanding of Arthur Anderson

auditing firm. Enron Corporation was a company that dealt in energy. It was based in Houston

city of United States. Arthur Anderson firm was one of the largest auditing firms in the world.

The failure of Enron Corporation is attributed to the incompetence of Arthur Anderson auditing

firm in relation to being straightforward about the health of the company (Li, 2010). Around

2001, the state found that the financial condition of the company did not reflect the truth

regarding the health. The financial condition was sustained using accounting frauds. In the real

sense, the company had incurred losses that amounted to 586 million dollars (Li, 2010). The

status of Enron Corporation implicated Arthur Anderson firm negatively. The firm lost a large

number of their customers due to credibility and dishonesty issues. The focus of this paper is to

establish how Enron Scandal relates to organizational behavior. It also seeks to provide four

areas for research in the paper that will follow.

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Organizational behavior focuses on discussing how people behave in organizations in

relation to the influence that result from individuals, groups and structures. The relationship

between Enron scandal and organizational behaviors lies in how the behaviors of employees

contributed to the collapse of the company. Such aspects include ethical leadership, group

cohesion, motivation structure, company’s image and management control.

The organizational behavior is the product of the decisions made by the individuals who

have been authorized by the company’s constitution to make and implement decisions. The

decisions influence the ethics of a company. When the leaders of the organization encourage

ethical behavior through actions, the rest of the group becomes ethical automatically (Gebler,

2006). The executives are responsible for establishing factors that guide behavior in the

organization. Such factors include values, attitudes and norms among others (Gebler, 2006).

They are also responsible for linking all the stakeholders of the company. The stakeholders

include employees, shareholders, suppliers and customers. The leaders of Enron Corporation

such as Jeffrey Skilling and Kenneth Lay used to ask employees to follow their lead.

Enron Corporation failed due to lack of leadership’s commitment towards maintaining

ethical standards in the company. The lack of ethical leadership resulted in the collapse of the

organization’s work philosophy and arrangement. The insistent on conformity by the executives

of Enron Corporation forced employees to adopt to the standard of behavior displayed in the

leadership. There were early signs of the unethical conducts at Enron, which were perpetuated by

the executives of the same. For instance, the board of directors failed to notice when the

executives used the unconsolidated companies for financial reasons. The decision of the board of

directors permitted the omission of 27million dollars from the records (Li, 2010). The error is

one of the factors that led to the collapse of Enron Corporation. The executive’s non-adherence

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to the code of ethics was evident to employees at Enron Corporation. Employees did not report

such cases due to the influence of behavioral cues around them.

Groupthink is an element of organizational behavior study.Groupthink may be thought of

in terms of affiliating and being loyal to a particular group (Wilcox, 2010). Loyalty implies being

in cohesion or good terms with other members. The need for group cohesion leads to irrationality

in decision-making processes of the members (Wilcox, 2010). The irrationality result from desire

to minimize conflicts in the group. The consequences of groupthink include discounting

information regarding irregularities in the company. It also interferes with an individual’s ability

to develop independent perceptions regarding issues. Such circumstances compel members to

avoid external factors that may influence their perceptions in a different direction (Wilcox,

2010). Groupthink led to the collapse of Enron Corporation. Employees were reluctant to reveal

the unethical conducts in the company due to the influence of group cohesion. They kept the

information to themselves until the time when the company collapsed. Most of them decided to

come forward only when they realized that the collapse was going to affect their benefits and

cause them unemployment.

The levels of motivation determine the behaviors of employees in an organization. It

affects the decision-making processes. The responsibilities of an effective manager involve

identifying the needs of employees and exploit the same in rewarding them. The strategy aims at

increasing the commitment of employees towards achieving the goals of the organization. The

motivation structure at Enron Corporation subjected it to unethical behavior. The taskforce of the

company comprised of individuals whose behaviors were highly influenced by money and

position (Li, 2010). The executives of the company misused motivation to achieve unreasonable

goals. It created a culture that encouraged employees to do everything possible to meet the goals

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of the company. Most employees started disregarding the law and the company policies in the

quest to succeed. The semi-annual review used to render most employees as uncompetitive. The

exercise resulted in the loss of employment of some employees. Everyone started to employ

dubious means just to succeed and avoid dismissal from the company (Li, 2010).

A good image for the company is essential in attracting competitive workforce, investors

and customers. Investors are the alternative sources of capital for expanding the scope of the

company into other lines of businesses. They also offer financial securities to the company in

cases of severe losses in the company. Just like investors, customers also want to associate with

successful companies. The association offers a sense of recognition and class. Such are the

reasons that led Enron Corporation to commit accounting frauds. Through the help of Arthur

Anderson firm, Enron Corporation was able to falsify financial statements (Li, 2010). The aim of

the dubious exercise was to remain relevant in the market. In the years preceding 2001, Enron

Corporation was the seventh largest companies in the world (Li, 2010).

Bad business decisions from the executives of the company led the company to

bankruptcy. Another factor that led to bankruptcy involved misuse of company finances. The

creativity of Arthur Anderson firm covered Enron's 586 million dollar losses from the

assessment of the state and various investors (Li, 2010). The company appeared successful

instead. As a result, many people bought several shares. They also made investments in the

company. If Arthur Anderson had revealed the true financial status Enron, it would have lost

credibility. The loss in credibility would have discouraged people from investing in the

company. The decision to cover the truth was not successful because it led to the collapse of the

two companies.

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The management control refers to the strategies that aim at establishing practices that

help in achieving strategic goals of the company. The strategies include effective budgeting,

appraisals on performance and standard operating procedures among others. They aim at setting

a risk-free environment operating a business. The strict adherence to the strategies helped Enron

Corporation become successful in the period preceding 2001 (Chandra, 2003). The failure to

adhere to the management control tools at Enron was facilitated by unethical leadership. The

gaps in the management control system gave way to dubious practices in the company (Chandra,

2003).

The Enron Corporation case study reveals a contradiction between group cohesion and

the need to maintain an ethical culture in the organization (Li, 2010). The employees chose to

remain loyal to their groups through hiding information despite knowing that the executives of

Enron were engaging in unethical practices. As a result of this, people made investments on the

basis of wrong financial statements of the company. The financial statements were doctored

intentionally through the collaborative effort of Enron executives and Arthur Anderson auditing

firm (Li, 2010. This question is relevant because it focuses predicting the behavior of employees

in critical circumstances such as the case of Enron. It also focuses on understanding the exact

reasons why the employees chose to discount information regarding the unethical behaviors of

the executives of Enron Corporation. Sometimes groupthink can be a barrier towards achieving

the goals of the organization (Wilcox, 2010)

According to Maslow’s hierarchy of needs, the ability to afford basic needs is more

urgent compared to the need to establish cohesion with group members at work place. The

following research should focus on investigating how employees perceive group cohesion in

terms of survival. The advantages of group cohesion in the perspective of employees determine

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the factors that encourage employees to remain loyal to group cohesion even in critical

circumstances. The research should also investigate the level of commitment of employees to

maintaining ethical cultures in various organizations. It is a general assumption that employees

understand the role of ethical culture in enhancing the wellbeing of the respective organization.

A healthy organization implies financial stability. A financially stable organization offers

attractive wages to employees. It also offers security in employment. If employees understand

how ethical cultures affect their employment and financial statuses, why do they choose group

cohesion over protecting the wellbeing of the company? In general, the investigation should

focus on determining the level of influence of groupthink on employees. It should also focus on

determining the level of influence of company’s wellbeing.

Enron scandal involved manipulation of financial statements to preserve the company’s

image in the market (Bauer, 2009). The aim of the manipulation was to trick individuals into

investing in a company that had incurred huge losses. The trick worked because several people

made investments in the company’s stock exchange and other areas of trade (Bauer, 2009). The

company suffered a number of lawsuits in court regarding frauds. The executives of the two

companies managed to trick investors despite the existence of the government policies regarding

business operations. The financial accounting policies in the United States require all companies

to provide accurate financial information to help investors and stakeholders to make informed

decisions (Bauer, 2009). The policy indicates the intention of the government of America to

establish fairness in the business field. Enron scandal is just one of the cases of frauds in the

history of America.

The research question is important because it reveals the extent of security that the

government offers to investors against acts of fraud (Albrecht et al. 2010). The government's

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involvement in operations of private business is essential because it facilitates the growth of the

economy. The involvement is also important because the private business sector creates

employment opportunities for the citizens of the country. Lastly, the private sector is one of the

major sources of government revenues (Albrecht et al. 2010). The government collects taxes

from private companies to facilitate the operations of the government. The research question is

also important because it provides information upon which various states can use to establish

approaches that will protect the welfare of employees (Albrecht et al. 2010).

The following research should determine how the government is involved in corporate

governance. It should reveal the strategies that the government uses to ensure accurate reporting

of the financial statuses of companies. The research should also determine the effectiveness of

the government's policies in preventing fraud. The study should focus on revealing the gaps that

exist in the government's strategies. Lastly, the study should address the current approaches that

the government uses to offer effective corporative governance.

A collaborative effort of the Enron Corporations and Arthur Anderson auditing firm to

manipulate financial data caused a scandal at Enron Corporation (Bauer, 2009). Agreeing to

manipulate the financial data of Enron was a risky step for the auditing firm. One can only argue

that the auditing firm must have benefited from the scheme to have agreed to participate. The

main role of external auditors includes verifying that the financial statements provided by

various companies are accurate (Bragg, 2011). The financial statements should reflect the exact

financial statuses of the companies. If the auditing companies do not approve of any processes or

outcomes of the exercises of internal auditors then, they are expected to notify regulating bodies

with evidences of the same (Bragg, 2011). The governments of various countries rely on the

services of the auditing firms in the assessment of the private companies. The auditing firms are

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parties to the agreement that contains the code of ethics. The code of ethics is inscribed in the

business policies of various states (Bragg, 2011).

The research question is important because it provides a deeper insight into the integrity

issue of companies. Investors can use the information from the investigation to make informed

decisions on whether to use the existing financial information. Investors may decide to conduct

an independent analysis of the financial records of prospective organizations. The result of the

investigation can also provide information that various states can use to develop effective

corporate governance strategies.

The investigation should determine how government’s policies prevent bribery of

auditing firms. External auditing firms are sourced and paid by the company whose financial

records are to be investigated (Bragg, 2011). The complexity of the situation lies in the process

of contracting the services of external auditors. The company under assessment can easily pay

the related auditing firm extra amount of money to manipulate their financial statements. The

company may also provide false statements to evade paying the required amount of tax to the

government. The investigation should also reveal the gaps that exist in the government’s policies

that regulate bribery of external auditing firms. The gaps indicate the areas that require

reinforcement.

The leadership at Enron Corporation permitted the practice of unethical behaviors in the

organization. Firstly, the executives and the managers of the company portrayed examples of

unethical behavior. Jeffrey Skilling used to encourage employees to emulate his examples. The

disregard of the company’s policies by the executives encouraged employees to adopt similar

behavior. For instance, the employees of the company decided to enhance group cohesion rather

than reporting the mistakes done by the management of the company (Chandra, 2003). Secondly,

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the motivation structure at Enron Corporation encouraged employees to use dubious methods to

achieve results that interested the company (Chandra, 2003). Enron Corporations failed due to

the collapse of ethical culture. From the analysis of the scandal, it is apparent that leadership is a

central factor upon which other factors revolve.

The research question is important because it helps board of directors and stakeholders to

develop policies that will establish leadership around purpose (Gebler, 2006). It is important to

monitor and control the actions of the executives of the company because they can impact on the

outcomes of operations of the company (Gebler, 2006). The research should review the existing

policies that focus on guiding leadership of companies towards establishing an ethical culture in

the organization. It should also establish how leadership influences the behavior patterns in the

organization. Lastly, it should determine the main importance of establishing an ethical culture in

the organization.

Enron scandal is an important case for studying the importance of effective leadership in

the business. Leadership influences all aspects of business operations in companies. Such aspects

include motivation, purpose and ethical culture in the organization. The entire system of Enron

Corporation collapsed because employees disregarded the ethical culture of the organization. The

mistake started from the management. It also helps in understanding the behavior of employees

in circumstances such as the one that involved Enron. Employees are more likely to stick to

group cohesion rather than report the unethical behaviors in the organization. The behavior of

employees in such a situation provides a basis for developing a research question.

Enron scandal case study is it contributes to the list of white collar crimes. It illustrates

how executives commit white collar crimes in various organizations. The justice department can

use the findings of the case to solve similar cases in the future. The insight provides the

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information that is necessary for developing and establishing effective work policies that would

discourage the occurrence of the same. Various organizations can seal the existing loopholes

after reviewing their work policies and culture. The case reveals the ineffectiveness of the

government’s strategy in detecting acts of fraud in various organizations. The government may

use the information to reinforce their corporate governance strategies. The case helps various

investors to act carefully when selecting companies for investment purposes.

Enron scandal involved manipulation of financial statements to trick investors into

investing in the company that had debts already. The relationship between the case and

organizational behavior lies in the behavior of employees that contributed to the collapse of the

company. The paper discussed the aspects of the company that is related to the elements of

organizational behavior to establish a relationship between the case and organizational behavior.

The aspects include ethical leadership, groupthink, motivation structure, company's image and

management control.

The paper also includes four research questions that are in relation to the Enron scandal.

The first question seeks to determine how employees prioritize between group cohesion and the

need to enhance the company's wellbeing. The second question focuses on determining the

effectiveness of government's involvement in preventing fraud in companies. The third question

seeks to determine the independence in relation to roles of external auditors. The last question

focuses on discussing how company policies direct leadership towards establishing an ethical

culture at work.

I hope to develop a deeper knowledge in organizational behavior by researching the

topic. Particularly, I hope to understand why employees behave in a contradictory manner in

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situations such as the one that involved Enron and Arthur Anderson. The topic will help me to

develop effective leadership skills. Enron scandal is a case of poor leadership in the company.

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References

Albrecht, W. S., Stice, E. K., &Stice, J. D. (2011). Financial accounting. Mason, OH:

South-Western/Cengage Learning.

Bauer, A. (2009). The Enron scandal and the Sarbanes-Oxley-Act. Munchen: GRIN

Verlag.

Bragg, S. (2011). The new CFO financial leadership manual, third edition (3rd ed.).

Hoboken, N.J.: John Wiley & Sons.

Chandra, G. (2003). The enron implosion and its lessons. Journal of Management

Research, 3(2), 98-111.

Gebler, D. (2006). CREATING AN ETHICAL CULTURE. Strategic Finance, 87(11),

28-34.

Li, Y. (2010). The case analysis of the scandal of enron. International Journal of

Business and Management, 5(10), 37-41.

Wilcox, C. (2010). Groupthink: An impediment to success. Bloomington, IN: Xlibris

Corp.