Enron is unquestionably the most well known ethical scandal of the business world. The only other scandal that even comes close is the Madoff Investment Scandal in 2008. Enron started out as a natural gas company but along the way added electricity along with pulp and paper to its list of commodities for sale. During it’s years of existence, Enron executives Kenneth Lay, Jeffery Skilling and Andrew Fastow falsified earnings reports, skimmed money, artificially inflated stock prices and defrauded the company, it’s employees and subsidies of MILLIONS of dollars. Enron finally collapsed after many of its’ executives were convicted of a litany of federal charges and even managed to take it’s auditing firm, Arthur Andersen, down with them. As a college student studying Political Science in the late 1990s, it was impossible to ignore the buzz surrounding Enron and what it had “accomplished” during its years in existence.
The culture of greed and ethical tight rope walking that prevailed within the organization in a way, provided future businesses with a clear “What Not To Do” handbook and lead to the passing of the Sarbanes-Oxley Act of 2002 which provided sweeping accounting reforms by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. All of this, however, could’ve been avoided if the people involved with Enron had actually followed the company’s motto of “Ask Why.” If one looks at the Enron scandal from the “Ask Why” standpoint, one can see that the reasons that Skilling, Lay and Fastow got away with as much as they did is because no one actually asked “Why;” not the traders, the accountants, the board, the banks, the stockholders, the auditors … no one. It wasn’t until 2001 when a reporter for Fortune Magazine named Bethany McLean confronted Skilling that Enron first had to explain itself. Before McLean, no one had the audacity to question the inner workings of the company because on paper, “America’s Most Innovative Company” was making billions.
Little did we know those billions were fake! Enron made it’s “billions” by using an accounting method known as mark-to-market. Mark-to-Market allowed Enron to book future profits of the stocks it was selling even though the company hadn’t received the cash yet. Skilling believed that you should be able to book profits for ideas when you have the idea, even if it hasn’t been proven to be viable. In doing so, you have no real figures for these future profits thus one can make up a number that you expect it to bring in. This opened the company up for grossly overestimating the actual amount of cash the company had available. The executives at Enron were hyper focused on stock prices and the way people viewed the company. Mark-to-Market accounting made the company look much more profitable than it actually was which artificially inflated the price of the company stocks. Stocks were such a big deal to Enron that when they acquired Portland General Electric, they invested the large portions of the 401K retirement plans of all the PGE employees in Enron stocks. As a result, when Enron went under, the 401Ks plummeted.
At the height of Enrons success, their stock was selling around $1000 per share but when they finally fell, it was at an all time low of $5 per share! Enron executives over the years would cash out their stocks when the price was right. Again, no one ever asked “why” the executives would be doing such a thing if they had such faith in the profitability of their company. Enron execs ultimately cashed in $116 million dollars in stocks. So, why did no one ask “Why”? What was it about the corporate culture of Enron that kept its employees from questioning the numbers and policies? Firstly, employees may have been scared to become party of the 15% of people who received a grade of 5 from the performance review system. Those 15% were fired every year. Secondly, they themselves were making money. Despite losing money on its ventures, Enron was continuing to pay bonuses to its employees, sometimes in the millions! Thirdly, they were blinded to what was actually going on. Much like the Milgram Experiment, the Enron employees believed that the management knew what was best and followed their lead. In the same way that good ethical policy should be instituted from the top down, so can bad ethical policy.
If there is no one from the upper management telling you that what you are doing is wrong, who is actually going to question things? Especially if questioning means you’ll be, fired, as was the case with analyst John Olson who was terminated when Fastow discovered that Olson had doubts about the numbers being accurate. But Enron itself wasn’t the only business hurt as part of this scandal. Enron’s auditing firm Arthur Andersen was convicted of obstruction of justice for destroying Enron-related audit documents when regulators first started looking into Enron’s finances. Merrill Lynch got wrapped up in the charges stemming from the fake sale to Enron of three barges off the coast of Nigeria, which was really a loan to the company.
J.P. Morgan Chase and Citigroup both faced charges of helping Enron manipulate its financial statements and mislead investors and even the Canadian Imperial Bank of Commerce, had to accept responsibility for crimes committed by its employees who knowingly helped Enron move assets off of the balance sheet so the energy company could inflate earnings. Eventually all of these companies settled their cases and paid large fines but Arthur Andersen has never quite been the same. Despite surrendering it’s license to practice as Certified Public Accountants in the United States AND having its charges overturned by the US Supreme Court, Arthur Andersen has never been able to overcome the stigma that haunts its name. As we learned in the text, reputation is nearly, if not more important than whether or not you can make a profit.
The ultimate lesson that Enron has taught us is that management should know what’s going on in their company and if they don’t then they aren’t being a good leader. Much like a parent can be charged with neglect when their 14-year-old child gets in trouble with the law, a CEO should be held responsible for not knowing what was happening within his/her own firm. They should constantly be asking “Why” so that no one person is able to run amuck and if their company comes under scrutiny for unethical practices, the CEO (or whomever is the equivalent) should absolutely be held accountable for the actions of the firm. The Enron Scandal does have a silver lining though … it has taught us to remember the basics: never put all your eggs in one basket, don’t count your chickens before the hatch and always ask why!