When the Arthur Andersen LLP/Enron scandal surfaced in 2001, there was much confusion as to whom committed what crime and how many employees were actually involved. After the facts and criminal charges were final, the sequence of events makes sense; the union of two companies, the rise of the participating executives, and finally the end of the money ride. The leaders of both companies used dishonesty to make an abundant amount of money and gain power status (Thomas 2002). Christopher Bergland said it best when he wrote, “Karma is a boomerang and the long-term shame and anxiety of cheating will ultimately negate the short-term gains of victory,” . This definitely held true for the employees who were disgraced at the conclusion of the legal proceedings; they may have had more money than they needed, but they ultimately lost in the end.
The joining between Arthur Andersen LLP and Enron was a marriage too good to be true . The relationship started in 1986 when Enron hired the accounting firm Arthur Andersen LLP to perform “creative accounting,” allowing the energy company to appear more powerful on paper than it really was . Enron Corporation started investing massive amounts of money in “Special Purpose Entities” to generate huge amounts of revenues. Special Purpose Entities are creative ways for companies to more efficiently raise debt, but they also make it tougher for investors to decipher a company’s actual debt exposure . Company Backgrounds
Both companies were built on determination, dedication, and hard work. The founder, Arthur Andersen, who was orphaned at the age of 16, worked as a mailboy during the day and attended school at night. By the age of 23, he became the youngest CPA in Illinois. A mere five years later he started his own accounting firm . The same mind set Andersen possessed in his teen years carried over to his adult life.
He realized the key to his business succeeding was by “…promoting integrity and sound audits…” . Enron was founded on the same characteristics plus a few others: pride, arrogance, and greed. Kenneth Lay wanted to have the largest money making company he could and succeeded by pushing for deregulation of the power industry. In 1985, Mr. Lay took advantage of the government’s decision to let gas prices fluctuate/float with the currents of the market. By doing this, Enron grew from 10 billion to 65 billion in assets in 16 years . Lay had visions of what he wanted Enron to be and then sold them to his staff. Hitting it Big
In order for a new idea to be successful, a leader with self-assurance and confidence must be present. Mr. Lay found these qualities present in Jeffrey Skilling and hired him as a Chief Executive Officer. Skilling believed in the survival of the fittest. He had an opinion that money is the only incentive that motivated people and he created a competitive, ruthless, and cutthroat workplace. Skilling implemented the Performance Review Committee. Performance Review Committee, or PRC, is an employee evaluation system which graded workers from 1-5, 5 being the lowest and resulting in dismissal from the company. The Enron staff knew it better as “rank and yank” . One employee who was a trader was quoted saying, “…if I can get a $5 million bonus for stepping on someone’s toes, I’ll stomp on their throat…” .
Both companies worked hard to build a reputation. Andersen expected all of his staff to be honest and always to put the client’s needs in front of their own agenda unless it involved falsifying documentations. Early in the company’s beginning, Mr. Andersen was faced with a moral decision concerning fabricating records for a client. Andersen, with his integrity intact, refused .
The firm continued with the “think straight and talk straight” tradition after the death of Andersen and through the transition of promoted employee Leonard Spacek .With Spacek at the controls, the company continued to thrive while remaining committed to the regimented management style of the founder . Offices were opened throughout the United States, then ultimately around the world. At this point, the firm started consulting as well as offering audits. Under Spacek’s supervision, Arthur Andersen LLP became one the most prominent accounting firms labeling them as one of the “Big Five” . The company grew so immensely that Spacek had to turn down clients.
Enron had the same growth spurt as Andersen. In a few short years, the company became the seventh largest corporation. It was touted as being led by the best and the brightest . Ken Lay, Cliff Baxter, Jeff Skilling, and Lou Pi were men who thought they were unstoppable. These ruthless leaders took huge risks in order to make money. They were failing miserably, but Ken Lay reported otherwise to the public. He said in news conferences that Enron was thriving and prospering because of his staff’s willingness to take risks. With the growing of both firms, it was evident that structural changes were needed. Structural Changes at Andersen
The client load for Andersen was becoming too much for just one company. It was evident that balancing the commitment to auditing while adding a consulting practice was so much of a struggle that Arthur Andersen LLP decided to create another division within the company. In the mid-1980’s, the majority of Andersen’s revenues were being generated from the consulting fees, but were still being dispersed with the accounting side . This caused a strain between the two parties. The consultants felt since they were contributing more to the company their salaries should be increased.
The only solution was to change the current organizational structure and create two divisions. Andersen Consulting along with Arthur Andersen LLP became subunits of Andersen Worldwide Organization . Spacek, like his predecessor, was a leader who liked to be seen by his staff, was well informed of business dealings, and continued to encourage honesty. Being decentralized allowed the decision-making to be made by the divisions, branches, departments, or subsidiaries . Both parts of Andersen Worldwide Organization could operate however they chose and make their own decisions, including which clients they took on. Ultimately, it was the accounting division that took on Enron. How the Two Companies Fit
Enron officials knew that Andersen had made some questionable decisions in the past and were coming off of a quiet lawsuit that involved some “creative accounting” . Andersen fit the profile that Skilling knew he needed in order for his visions to work. With Andersen being divided up into two divisions, Spacek could not control what was happening in both sides of the firm. Lay, on the other hand, knew exactly what his executives were doing . Enron
hired the accounting firm to make the energy company to appear more powerful on paper than it really was . Enron Corporation started investing massive amounts of money in “Special Purpose Entities” to generate huge amounts of revenues.
Special Purpose Entities are creative ways for companies to more efficiently raise debt, but they also make it tougher for investors to decipher a company’s actual debt exposure . They were also using mark-to-market to book potential future profits regardless of actual money. Profits were whatever Enron said they were based on hypothetical future value or HFV. Mike Muckleroy, a former Enron executive, warned Mr. Lay of the risks associated with betting on the oil market, but Lay did not change any policies or procedures. In fact, he approved of the current behaviors. Lay sent out a memo to his executives saying to keep up the good work. As long as money was being made, he chose to ignore the dishonesty. The money ride came to a sudden halt in 2001.
For approximately sixteen years, Arthur Andersen LLP would audit Enron’s financial statements. Not only would the accounting firm provide external audit services, but also handle the internal auditing processes as well. As Enron’s revenues dramatically increased year after year, the paperwork and audit information had to match accordingly. Enron needed Arthur Andersen’s employees to make the visual parallel happen and compensated them millions of dollars for their services. At one time, Arthur Andersen LLP had approximately one hundred people assigned distinctively to Enron. There had become such a significant amount of work that accounting offices were designated for the accounting employees and staff was transferred to Enron’s headquarters in Houston. Eventually, the responsibility of Enron’s Chicago and London locations were added to their caseloads making Enron one of Arthur Andersen LLP’s largest clients worldwide . Pump-n-Dump
Top leaders in both firms were making an obscene amount of money. An anonymous tip was given to authorities about former President of Enron, Louis Borget. It was said he had taken over three million dollars of corporate funds and put it into his own account, and that was just the beginning. Enron reported a loss in the third quarter earnings at the same time as a reduction of stockholder equity. Former CEO Jeff Skiing, current CEO Kenneth Lay, and other executives started to sell large amounts of Enron stock as prices dropped from $90 to less than a dollar; this practice was called “pump-n-dump” . This scheme allowed top executives to push the stock prices up then cash in their multimillion dollar options.
Lou Pi was the leader for Enron Energy Services at the time and after he sold his stock using this method, he made profited $250 million . Selling of this much stock gained attention of the U.S. Securities and Exchange Commission which led to an investigation. It was apparent that a divorce, a trial, and probably prison time was in the near future for Arthur Andersen LLP and Enron leaders who were involved. No matter what the outcome of the trial was going to be, the once impeccable Arthur Andersen and powerhouse Enron were doomed companies because the damage had already been done. Crumbling Companies
Andersen’s company, once led by an honest, visible leader who was filled with integrity by making ethical choices was now being led by greedy, selfish executives who saw dollar signs instead of morals. Andersen’s reputation was ruined and finding clients was going to be next to impossible because of the publicity the scandal received. David Duncan who was responsible for the Enron audit, was fired by Arthur Andersen LLP for mass destruction of Enron documents and Enron relieved Arthur Andersen LLP of all accounting and auditing duties . Even though Arthur Andersen pled not guilty to the charges brought against them, the final decision of the courts was Arthur Andersen LLP was found guilty of obstruction of justice and received five years probation, had to pay a $500,000 fine, lost their license in the state of Texas, and ceased their auditing services. Resulting in a devastating loss of clientele and over 7,000 workers had to find new jobs .
More people were affected by Enron’s outcome than that of Arthur Andersen’s. After the investigation, Enron filed bankruptcy, over 20,000 people lost jobs, many officials served a prison sentence, and shareholders lost tens of billions of dollars . As officials dug deeper into the scam, recovered documents and many of the testimonies revealed many banks were guilty as well. Bank employees detailed how the banks engineered fake transactions to keep billions of dollars of debt off Enron’s balance sheet and create the illusion of increasing earnings and operating cash flow . As a result, stricter accounting laws regarding audits were later passed by the SEC .
In this situation, having a leader who exhibits good judgment, morals, ethical conduct, and integrity can strengthen an alliance within a work place. When Arthur Andersen and Leonard Spacek were the supervisors, Arthur Andersen LLP was a major company with a flawless reputation that was completely shattered by a few employees who did not exemplify such characteristics as the former leaders. Arthur Andersen LLP split into two separate divisions, which I think was the correct move because the company was growing and the current staff could not handle the clientele load. In order for the split to work, though, both units needed supervisors like what the company was founded on; managers who could be trusted and held accountable. If I was a partner in Andersen and realized what was being committed, I would have tried to put an end to it.
Maybe if someone had the gumption to stand up for what was right, many jobs could have been saved and investor’s money would not have been lost. Enron, on the other hand, was dishonest from the beginning and it was only a matter of time before the leaders were caught of wrong doings. Enron, in my opinion, was being led by the inspiring leaders with excellent leadership skills and work ethics; they just did not have the morals to go with it. Mr. Borget was the first to get caught; Ken Lay was aware of Borget’s actions, but ignored it because he was not incriminated or even suspected yet, but as history reveals, his time was coming .
Finally several years later, Lay and his associates received their forthcoming. In the 2001 trial, Ken Lay was charged with 11 criminal acts. Jeff Skilling was sentenced to prison and to this day still claims he did nothing wrong, Cliff Baxter committed suicide before he was to appear in court, and Lou Pi lost 6 million in an insurance policy from the corporation, but never saw any jail time .
Had Andersen Worldwide Organization declined on Enron’s business proposal, the accounting firm may have continued to grow and possibly dominate the number’s world. From my point of view, this scandal was a lose-lose situation to everybody involved, from entry level positions all the way up to Chief Executive Officers. Enron became a major power-house in sixteen years and only took 24 days to collapse and go bankrupt . A devastating ending to both firms; several criminal charges were filed against numerous employees, hearings were held, and the companies which were built on ambition and drive were destroyed and are no longer are in existence. In this case, nobody won.
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