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Enron Scandal

May 1st 2011
Lisa M. Mattis
LEG100, Business Law
Attorney Charlene Bean
Enron Scandal

In 1990, Enron was the company known for technological innovation and helped with the economic boom of the 90s. Enron consisted of two companies, Huston Natural Gas and Inter North, pipeline companies. The Huston, Texas based company, Enron was formed. Enron got in to the business of trading electricity and gas as a type of middleman for other companies for energy commodities. Before its bankruptcy in 2001, Enron employed nearly 22,000 people and was one of the worlds leading electricity and natural gas utility companies, which declared revenues of almost $101 billion in 2000. Fortune magazine named Enron America??™s Most Innovative Company for six years consecutively (S. Biggs, L. Biggs Helms, 2007).

At the end of 2001, the news hit the public that Enron reported their finances had been sustained by routine and creative planned accounting fraud, which is known today as the Enron scandal. Enron now is a symbol of headstrong corporate fraud and corruption. This scandal also brought many questions of how accounting practices should be recorded throughout the U.S. and was part of the reason Sarbanes-Oxley Act of 2002 was created. Enron filed for bankruptcy protection in the Southern District of New York in late 2001 (S. Biggs, L. Biggs Helms, 2007).

Describe how Enron could have been structured differently to avoid such activities.
Enron??™s leaders had the work ethic of only fighting for themselves and if others got hurt it was no big deal hurting. Enron had that it??™s a dog-eat-dog mentality. This type of mentality would, in the end, be the demise of Enron. Enron focused on short-term gains. The accounting strategies of Enron were corrupted by no small terms. Enron was full of corrupted people throughout several departments with growing their personal finances their ultimate goal. They projected many years of financial growth when it didn??™t exist and hid finances of millions when it was suitable.
To avoid these acts, Enron would need to revamp their views on the importance of their financial recordings and the senior executives would feel the importance of seeking action for long term success of the company instead of the quick buck. I believe that Enron was absolutely aware of their poor judgment. If Enron was serious about avoiding illegal acts, they would have make statements that were truthful of material fact, and would have not omitted material facts necessary to make the statements that were made.
They needed to focus on the culture of their business. They should have paid attention to the values and how well they had been adopted by the board, leadership, and all levels of employees. Enron needed to incorporate a Code of Ethics, and make sure that these ethics are practiced every day. These codes provide guidance for hard and ethical decisions that may have to be made. Enron??™s senior management should have held themselves to the highest standards which causes that same action to trickle down throughout the company. Executives with high standards of honesty and trustworthiness would not tolerate practices such as the ones in the Enron Scandal. Enron could have done many other things that would have shown Enron cared about their ethical standards such as hiring auditors periodically to do an external audit of the accounting statements.

Discuss whether Enron??™s officers acted within the scope of their authority.

Enron??™s officers definitely did not act within the scope of authority. Four days prior to Enron revealing a $618 million loss in the third quarter, employees who conducted audits for Arthur Andersen, received surprising instruction to destroy all audit data, except the basic worked papers. The auditors obeyed the lawyers request for weeks. As a result, many entities of the company and others outside the company did not have the documents to fight for benefits lost because of Enron??™s practices. With these shredded papers, these entities would have had proof of Enron??™s motives and intentions (D. Kadlec, 2002).
Enron executive and Arthur Andersen made sure that the employees destroyed as many documents of evidence that they could get away with. They used their authority to scare employees into what ended up being the biggest scandal in U.S. history; imagine if these documents were not shredded what the Enron Scandal would have been. The shredding of evidence is just one way that Enron did not act within the scope of authority. It all comes back to the act of dishonesty and unethical behavior, to benefits over the shareholders and members, they were then out of the scope of their authority.

Describe the corporate culture at Enron.

Culture is based on individuals being responsible of their actions. Enron committed countless unethical and illegal acts as individuals and Enron did not have any systems of accountability for their employee??™s action. Enron senior management had become focused on becoming rich no matter of the consequences. Greediness became the corporate culture of Enron and this was the downfall of Enron. Without a strong corporate structure based on integrity and ethic, companies will fall.
Enron showed its true colors when the company set aside, a ridiculous, $1.5 million on a Christmas party. Celebrations were only cancelled a few weeks before the company headed to bankruptcy court, in November before the party was scheduled (N. Banerjee, D. Barboza, A. Warren, 2002). Flashiness and glitz is what Enron showed to be important to them rather than any corporate culture. All this could have been prevented, but Enron unsuccessfully established a sustainable corporate culture that focusing on customer service, loyalty to their stakeholders and most important integrity.

Discuss two alleged irregularities in the actions between sellers of securities and Enron.

??? Enron was in need to get rid of some electricity generating windmill farms to maintain financial benefits to be applicable of energy regulations. To be a legitimate sale to a third party, Enron would give up control of these farms. This was not the case; to maintain control of the farms, Fastow (CFO of Enron) selected people to act as candidates to invest in the entities, RADR, purchaser of the farms. The funds for the purchase went from a personal loan of Fastow to Kopper to the candidates to invest in the purchase. This generated millions of unlawful profits. Then later on, Enron repurchased the farms and generated extra gains of $1.8 million.
??? Enron and the California Public Employees Retirement System (CalPERS) were joint venture partners in an off-balance-sheet (an asset or debt not on the companys balance sheet) investment vehicle called Joint Energy Development Limited Partnership (JEDI).
When CalPERS needed to cash out the deal in JEDI before venturing into new and larger dealings with Enron, Fastow formed a SPE named Chewco which bought CalPER??™s interest in JEDI. This was a way to continue the off-balance-sheet entity with JEDI for Enron. To avoid discloser issues, Fastow would select Kopper to become the general partner of Chewco. Fastow was really in control of Chewco and Kopper was paid off with kickbacks. On top of all this, Chewco was dishonestly kept off balance sheets because they were not abiding by the rules of SPE??™s by not having legitimate third party equity.
(U.S Securities and Exchange Commission, 2002)

Discuss whether or not Enron was liable for the actions of its agents and employees.

Enron??™s management should have been held accountable for the actions of its agents and employees. While reading many different articles on the Enron scandal, it seems to me that Enron??™s management was not doing any complaining or taking any action towards stopping any illegal activity. In contrast, the management of Enron and many entities created by or with Enron, seemed to support any action that put dollars in their pocket. It is the management??™s responsibility to ensure that all employees are on the up and up with their actions. I would believe that many of the senior executives gave direct orders to their employees to commit illegal acts like the shredding of documents. These actions would be on Enron and the person who requested the illegal action. The employee and agents have to be careful in this situation though because the courts may determine that there were actions the employees could have taken to try to eliminate the illegal action. The courts may feel that they can include many of these employees and agents within the lawsuit against the company. The law known as the Whistleblower Act would protect the employees of any type of retaliation against them for reporting any official wrongdoing. This law is in place for issues such as employees being asked to shed important financial documents.

References:

S. Biggs, L. Biggs Helms (2007), The practice of American public policymaking, Published, M.E. Sharpe, Inc, New York 10504
Bagley, C. E., & Savage, D. W. (2010). Managers and the legal environment: Strategies for the 21st century:
D. Kadlec, 2002, Enron: Whos Accountable Time Magazine Website: http://www.time.com/time/business/article/0,8599,193520,00.html
N. Banerjee, D. Barboza, A. Warren, 2002, ENRONS MANY STRANDS: CORPORATE CULTURE; At Enron, Lavish Excess Often Came Before Success The New York Times Website: http://www.nytimes.com/2002/02/26/business/enron-s-many-strands-corporate-culture-enron-lavish-excess-often-came-before.html

U.S Securities and Exchange Commission, 2002, SEC Change Fastow, Former Enron CFO, with Fraud Website: http://www.sec.gov/news/press/2002-143.htm

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