Unethical Business Practices

Unethical Business Practices at Enron LDR/531 Organizational Leadership August 11, 2011 Unethical Business Practices at Enron Enron Corporation came into existance in 1985 as the result of a merger between InterNorth and Houston Natural Gas. This merger produced the longest natural-gas pipeline network in the United States. Under the leadership of Chief Executive Officer Jeffery Skilling, Enron changed from a gas-pipeline business into a natural-gas and electricity company during the 1990s. By the year 2000 it was the seventh largest United States corporation and by December 2001 it suffered the largest bankruptcy and stock collapse in the history of the United States. Enron used careless and misleading accounting practices to hide its financial problems. The use of unethical financial methods was used to benefit executive staff members and conceal financial losses. According to Sims and Brinkmann (2003), “Enron created “special purpose vehicles” (SPVs), pseudo-partnerships that allowed the company to sell assets and “create” earnings that artificially enhanced its bottom line” (p. 245). They also used overstated and inflated income projections from trading contracts after signing them. When Arthur Anderson, an outside auditing firm, accurately accounted for a partnership deal in 2001, large quarterly losses resulted. Those losses and ensuing profit and debt restatements caused Enron’s stock price to drop, triggering the unraveling of the partnership and resulting in a sudden and remarkable financial collapse that led to bankruptcy in Dec. , 2001. Sixty-two percent of the company pension plan consisted Enron stock and the pension plans of nearly 20,000 Enron employees were destroyed (“Enron Corporation,” 2009). Because of unethical business practices of Enron’s management team, more than 30 people were charged with various crimes while more than 20 people, including top management officials were eventually convicted of or pleaded guilty to fraud, conspiracy, and other crimes (“Enron Corporation,” 2009). The downfall also destroyed Enron’s outside auditing firm, Arthur Andersen, who was accused of obstructing justice after destroying documents involving to the case in late 2001. Several financial institutions, including Citigroup and J. P. Morgan, paid millions of dollars in fines and penalties for their parts in financing and setting up the independent partnerships that contributed to Enron’s collapse. Organizational Behavior (OB) applies the knowledge gained about individuals, groups, and the effect of structure on behavior to make organizations work more effectively. The first step in understanding OB lies in understanding individual behavior. Normally, employees come into organizations with definite integral characteristics that will manipulate their behavior at work. Personality characteristics, values and attitudes are some of the more obvious characteristics. Jeffery Skilling’s personal characteristics and ethical perspective were clearly known throughout the business world prior to being hired at Enron. Deeper investigation into his personal values and ethics may have prevented the downfall of Enron. According to Free, Macintosh, and Stein (2007) “His leadership style had emerged over a number of years. As early as high school Jeff Skilling held a reputation as not only a scholar, but one with a penchant for somewhat dangerous activities, a characteristic that resurfaced later at Enron” (p. 5). Group level variables signify that the behavior of individuals in groups is different from their behavior when they are alone. They are influenced by what the group considers acceptable standards of behavior. Enron’s cultural environment under the leadership of Jeffery Skilling put employees under extreme pressure to conform to standards mandated by the corporate culture. If individuals were encouraged to think independently and if whistleblowers were taken seriously, perhaps Enron’s downfall could have been avoided. Organization systems level variables add formal structure to individual and group behavior. An organization’s internal culture and human resources policies and practices all have an impact on the formal organization. Enron had sophisticated management controls in place at the time of its collapse. The three core parts of its management control system were the risk assessment and control group, performance review system and, its code of ethics (Free, Macintosh, & Stein, 2007). Although management controls were in place, corporate leadership fostered a culture that ignored them. If management controls were adhered to, the collapse of Enron may not have happened. The failure of Enron demonstrates that once employees align themselves with a particular corporate culture and committ to the organizational routines and guidance of leaders, they are liable to lose their original sense of identity and reason away unethical actions. Once a new value system takes hold, a vulnerability to manipulation by leaders can occur. Top management leadership plays an important role in establishing corporate culture. Differences of opinion should be encouraged and individual contributions should be the norm to circumvent cultural group conformance. At the very least, personal and professional integrity should be the norm and not allowed to be compromised. References (2009). Enron Corporation. Columbia Electronic Encyclopedia, 6th Edition, 1. Bartlett, C. , Ferrell, O. , & Oliverio, M. (2002). Enron 101. BizEd, 40. Free, C. , Macintosh, N. , & Stein, M. (2007). MANAGEMENT CONTROLS: THE ORGANIZATIONAL FRAUD TRIANGLE OF LEADERSHIP, CULTURE AND CONTROL IN ENRON. Ivey Business Journal, 71(6), 1. Sims, R. , & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes). Journal of Business Ethics, 45(3), 243-256.

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