The collapse of Enron case study Q1.
The key stakeholders involved in, or affected by the collapse of Enron are: employees and retirees, thousands of them lost their jobs and the investment; the executives: Kenneth Lay, Jeffrey Skilling and Andrew Fastow they sold significant blocs of company stock, have conflicts of interests; government figures, Lay had close personal tie with the Bush family, Enron’s efforts influence policy making; regulatory authorities: Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC); their business partners: Arthur Anderson and Vison & Elkins; the competitor Dynergy; the two banks: Citi Bank and J.
P. Morgan Chase and the last two are the customers and investors. The stakeholders let the collapse of Enron through their carelessness and lack of oversight. Employees were afraid to question the company and their directors and business partners suffered form the same financial conflicts of interest. The government do not ensure the managers action are aligned with stakeholders interests, they have close and personal relationship between upper manager and Board of director and corporate governance agents and have high compensation for board member. The accounting methods used by management to manipulate Enron’s earnings.
The reward system let employees to make the accounting numbers look good. The deregulation causes the market become more volatile and risk, customers and producers are complaint. Regulators enforcement did not enough, Enron’s financial statements look like a black box. The business partners encourage Enron do some questionable activities. Because of the collapse, the two banks faced major write-downs on bad loans and before the collapse the management still lying to employees to who have invested in Enron’s stocks. Q2. The corporate strategy in Enron encourages the company use illegal and questionable ways to increase value.
Enron’s compensation and award system and the “rank and yank” system let the executives use questionable activities and the employees afraid to ask the question to avoid be fire. The illegal accounting procedures cause the company collapse. The lack of stakeholders oversight and the political influence giving Enron the competitive advantage (deregulation). Q3. For corporate managers in Enron, they should consider more ethical ways to achieving its objectives. They should lower the compensation to board members, increasing responsibility to the board member to oversight the company’s operations.
Choose the board member outside the company officers. Use the accounting procedure that intent of misrepresenting a company’s financial statement. The company should make the relatively policy to let employees understand the ethical violations are serious and make some punishment to illegal activities. Regulators such as the SEC should conducted backdoor investigations into how the company’s earnings were being made. The accounting and legal firm should have responsibility for their relationship between their clients. And the business policy should have regulator agency to monitors their behaviors.
