Case Assignment 2 can also be found in the Ferrell textbook. The case is Case 9,

Question

Case Assignment 2 can also be found in the Ferrell textbook. The case is Case 9, “Enron: Questionable Accounting Leads to Collapse.” The paper must have at least 3 Level 1 headings that correspond to the following case points:

How did the corporate culture of Enron contribute to its bankruptcy?

In what ways did Enron's bankers, auditors, and attorneys contribute to Enron's demise?

What role did the company's Chief Financial Officer play in creating the problems that led to Enron's financial problems?

Explanation / Answer

1st point

How did the corporate culture of Enron contribute to its bankruptcy?

The corporate culture of Enron contributed to its bankruptcy in many ways. For one, Enron’s corporate culture supported unethical behavior without question for as long as it resulted in monetary gain. Ferrell, Fraedrich& Ferrell (2013) indicated that, Enron’s corporate culture rewarded “innovation and punished employees deemed week” rather than promoting values of respect and integrity.

This was also, known as the “rank and yank” system that created a “fierce environment” where the “bottom 20 percent of employees were forced out” which lead many unethical decisions going unnoticed . And/or

The corporate Culture at Enron could have 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. It was describe as having a culture of arrogance that led people to believe that they could handle increasingly greater risk without encountering any danger. Its culture did little to promote the values of respect and integrity it instead rewarded ‘innovation’ and punished employees deemed week. The performance evaluation process for employees that was dubbed “rank and yank” utilized peer evaluations, and each of the company’s divisions was arbitrtly forced to fire the lowest ranking employees. This created cut-throat competition not only against Eron’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 Eron contributed separately to its eventual bankruptcy

2nd point

In what ways did Enron's bankers, auditors, and attorneys contribute to Enron's demise?

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 this might help fo more info

In what ways did Enron's bankers, auditors, and attorneys contribute to Enron's demise?

3rd point

The Chief Financial Officer of Enron was Andrew Fastow and was considered to be the mastermind behind Enron’s special purpose entities that were used to hide Enron’s debt from investors.

“Special purpose entities are shell firms created by a sponsor, but funded by independent equity investors and debt financing” (Healy, p. 10).

Enron, however, was using these special purpose entities to meet their financial reporting goals.

An example of Enron using special purpose entities to meet financial reporting goals is their use of the entity Chewco. Chewco was a special purpose entity that was controlled by executives at Enron.

Chewco raiseddebt that was guaranteed by Enron but was structured so that Enron would not have to consolidate Chewco or the joint venture into their financial statements.

This allowed Enron to acquire the interest of the partnership without recognizing any additional debts on their financial reporting (Healy, p.11).

This is just one example of how Andrew Fastow, CFO of Enron, would attempt to inflate Enron’s financial reporting and ultimately why he would be indicted on 98 counts by the U.S. Justice Department

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.