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Case 9 Enron: Questionable Accounting Leads to Collapse Questions and answers Question 1: How did the Corporate Culture of Enron contribute to its bankruptcy? The corporate Culture at Enron has contributed to its bankruptcy in many ways. Its corporate culture supported unethical behavior without question for as long as the behavior resulted in monetary gain for the company. Enron had a culture of arrogance that led people to believe that they could handle increasingly greater risk without encountering any danger. Enron’s culture encouraged risky behavior. Its culture did little to promote the values of respect and integrity, it instead rewarded ‘innovation’ and punished employees deemed week. A system was developed in which the employees were ranked every six months. As a result employees could not deliver bad news because that could result in the death of the messenger, so the problems in the trading operations were hidden instead of being communicated to the management. The performance evaluation process for employees that was dubbed “rank and yank” utilized peer evaluations, and each of the company’s divisions was arbitrarily forced to fire the lowest ranking employees. This created cut-throat competition not only against Enron’s external competitors but also within the organization. It pitched employees against each other. The internal rivalry created in turn contributed to less communication between operations for fears of being fired. The “survival for the fittest” atmosphere reached the point where illegal activity was deemed necessary to stay on top of the game. Enron’s compensation plans also seemed less concerned with generating profits for shareholders than with enriching officer wealth. Its culture encouraged flaunting the rules and even breaking them. Each Enron division and business unit was kept separate from the others and as a result very few people in the organization had the big picture perspective of the company’s operations. All these aspects of the corporate culture at Enron contributed separately to its eventual bankruptcy.

Question 2: Did Enron’s Bankers, auditors and attorneys contribute to Enron’s demise? If so, how? Yes, the bankers, auditors and attorneys contributed to Enron’s demise. This is because they took sides with Enron’s management instead of acting impartial and professionally. They contributed in Enron’s demise in the following ways:-

Banker – Merrill Lynch

It facilitated Enron to sell Nigerian Barges therefore making Enron record about $12 million in earnings and thereby meet its earnings goals at the end of 1999. This was a sham. It facilitated Enron in fraudulently manipulating its income statements by entering into a deal whereby Enron would buy Merrill Lynch in 6 months’ time with a guaranteed 15% rate of return. Merrill Lynch replaced a research analyst after his coverage of Enron which displeased Enron’s executives. This coverage would have saved Enron from demise if Merrill Lynch would have prevailed upon Enron to implement it. Merrill Lynch gave in to threats by Enron that it would be excluded from a coming $750 million stock offering and instead, the replacement analyst is reported to have upgraded his report on Enron’s stock rating. This was unethical and unprofessional.

Auditors – Arthur Andersen LLP They were responsible for ensuring accuracy of Enron’s financial statements and internal bookkeeping. Potential investors used Andersen’s reports to judge Enron’s financial soundness and future potential before they decided whether to invest. Current investors used those reports to decide if their funds should remain invested there. As such, the investors expected that Andersen’s certifications of accuracy and application of proper accounting procedures would be independent and without any conflicts of interest. However, this was not the case and the investors were deceived by relying on the reports of Andersen. On the other hand, Andersen was a major business partner of Enron and some executives of Andersen accepted jobs from Enron. This was a conflict of interest. Additionally, in March 2002, Andersen was found guilty of obstructing justice by destroying Enron related auditing documents. Moreover, Andersen failed to ask Enron to explain its complex partnerships before certifying Enron’s financial statements. This was purely unethical and unprofessional. Andersen were playing a very important role of ensuring that the financial statements and book keeping is accurate and should they have played their role well as professionals, then Enron should not have collapsed.

Attorneys – Vinson & Elkins They helped to structure some of Enron’s special purpose partnerships. The firm supported the legality of these deals. They were a great facilitator of these deals through transaction opinion letters. As seen from the article, these deals are the ones that contributed to the demise of Enron.

Question 3: What role did the chief financial Officer play in creating the problems that led to Enron’s financial problems? In order to prevent the losses from appearing on its financial statements and to misrepresent its true financial condition, Andrew Fastow, the Enron’s CFO, took his role by involving unconsolidated partnerships and special purpose entities - ”SPE’s”. Andrew Fastow was indicated on 98 counts for his alleged efforts to inflate Enron’s profits. The charges included fraud, money laundering, conspiracy, and one count of obstruction of justice. Fastow was the brain behind partnerships used to conceal some $ 1 billion in Enron debt and that this debt led directly to Enron bankruptcy. Fatow defrauded Enron and its shareholders through offbalance sheet partnerships that made Enron appeared to be more profitable than it actually was. Fatow made about $ 30 million both by using these partnerships to get kickbacks that

were disguised as gifts from family members and by taking income himself that should have gone to other entities....