c S




  Examining a Business Failure

c 6  a failure that occurred at a large organization such as Tyco International Ltd.®,
Chrysler LLC®, Daewoo Motor America®, WorldCom, or Enron.
c   a paper of no more than 1,050 words, describing how specific organizational
behavior theories could have predicted or explained the company¶s failure.
c 3  and contrast contributions of leadership, management, and organizational
structures to the failure.
c ñ  your paper consistent with APA guidelines.

Enron Corporation was one of the world¶s leading electricity companies that suffered from a
financial scandal, which involved Enron and its accounting firm. The scandal consisted of the
discovery of irregular accounting procedures, which took place during the 1990s. This caused
Enron to file bankruptcy in December of 2001 (Thomas, 2002). The purpose of this paper is to
describe how organizational behavior theories could have predicted or explained Enron failure.
Furthermore, the paper will compare and contrast contributions of leadership, management, and
organizational structure of Enron that lead to its failure.

Organizational behavior is defined as ³a field of study that investigates the impact that
individuals, groups, and structure have on behavior within the organizations for the purpose of
applying such knowledge toward improving an organizations effectiveness; specifically
organizational behavior focuses on how to improve productivity; reduce absenteeism, turnover
and deviant workplace behavior; and increase organizational citizenship behavior and job
satisfaction´ (Robbins & Judge, 2007). The main players of any organization are senior
leadership, board of directors, internal auditors and external auditors. The CEO alone does not
run a company, but the senior leadership, board of directors are also part of all the decision
making process. The auditors exist for making sure that there is monitoring of the system. In case
of Enron, all the players failed to do their part. All these players play important part of any
organization because it is impossible for one person run an organization. The success of
organization lies in the collective efforts and smart decisions made by these important players.

Enron failure was primarily due to Enron¶s executive team trying to create an enterprise
which would increase wealth amongst their shareholders. However, when it was revealed that
Enron¶s stock prices were less desirable, certain aggressive accounting methods measures were
required. To make Enron¶s shares more favorable, the executive team relied on an increased
amount of new capital, but had to conceal the risks to the new investors. Once Enron began this
new type of accounting operation, the need to increase this type of deception increased with
every fiscal year. Enron wanted to make sure they kept moving forward at all costs. This is
where the checks and balances were needed (Gudinkunst, 2002). During this state of Enron, the
governance of the corporation failed to exercise their duties. It was believed the Audit
Committee of the Board should have been more critical of the auditors and their work. But
because the prices and earnings of stocks were continuously rising, there was no need to
investigate the internal accounting processes of Enron or the opinion letters of the accounting
firm. The Board had a false sense of security and was very happy with the success of Enron. This
allowed the Board to relax with overseeing management, while accepting information from the
executive team at face value (Gudinkunst, 2002). Enron employees were also involved with the
downfall of the organization and in turn suffered as well. The organization employed over 100
internal legal and accounting staff. All the employees seemed to be operating with approval of
the management team, which was supported by the executive team (Gudinkunst, 2002). Just as
with leadership and management, the employees¶ methods were never questioned due to the fact
the employee incentives were high. The employees were getting paid big salaries to help hide
corporate debt and boost reported profits.

The Enron scandal also brought into question in the accounting practices and activities of many
corporations throughout the United States and was a factor in the creation of the Sarbanes-Oxley
Act of 2002. Traditionally, corporate governance structures have been a private matter between
shareholders and managers with some state law restrictions, but the Sarbanes-Oxley Act (SOA)
has made structures governing the conduct of the corporation a matter of federal law. Even the
adoption of a code of ethics, previously within the domain of management prerogatives, is now a
requirement under SOA (Tipgos & Keefe, 2004). Due to the Enron scandal, SOA will provide a
method for balancing the power between the board of directors and top management of
corporations. Although the SOA does not have the ability to diminish the existing discretions and
prerogatives of management in conducting business, the plan can serve as a deterrent, however,
it cannot prevent management fraud. So in order to prevent management fraud, the process has to
be a vision shared by all involved. This includes shareholders, the boards, top level management,
and employees. Under the law, ³top management has to certify the accuracy of the financial
reports and make certain disclosures about the controls and procedures in place to avoid
fraudulent financial reporting. Even a code of ethics for senior corporate financial officers is now
a requirement of the law (Tipgos & Keefe, 2004). Such methods include internal control,
corporate governance, and code of ethics.

Ethics and ethical values are very important in accounting, strategic financial planning
and decision making process for every organization where accounting standard is followed. The
base for getting success is that business and accounting ethics should be followed. Unethical
behavior is not a key to achieve heights in business (Subramanyan, 2002). The best ethical
behavior in the field of accounting and decision making is that all the companies should follow
the International Accounting Standards. Following the right ethical policies will lead to
development of a good corporate image, as well as, will build up the trust and confidence of the
customers. It will keep the employees satisfied and will control the illegal activities taking place
in the organization. If right moral conduct is followed, the company will be able to build up
healthy and long term business relations and will have loyal customers. This will assist in
increasing the profitability of the company and will add to its future growth and success.
 In conclusion, Enron failed because of unethical practices by the management team and
all other players failing to act. Failures are inevitable in any business, but by putting in better
organizational practices risks can be minimized. The right ethical code of conduct should be
followed and corporations should focus on making the employees aware of the various ethical
policies. This will be helpful in controlling the wrong activities of the company.

Thomas, CB. (2002). 3

  . Time Magazine. Retrieved November 07, 2010 from
http://www.time.com/time/business/article/0,8599,263006,00.html

Robbins, S. P., & Judge, T. A. (2007).

   
   (12th ed.). Upper Saddle River, NJ:
Pearson Education.

Gudinkunst, A. (2002).   
  The Faculty Network. Retrieved

November 07, 2010 from http://web.bryant.edu/~facdev/Web%20Sites/newsletter/fall02/agudikunst.htm

Tipgos, MA., Keefe, TJ. (2004).        
   . The CPA Journal. Retrieved November 07, 2010 from
http://www.nysscpa.org/cpajournal/2004/1204/essentials/p46.htm.

Subramanyan, S. (2002).         . Retrieved November 07, 2010
from http://www.thehindubusinessline.com/2002/10/08/stories/2002100801900900.htm

References
Gudinkunst, A. (2002). Enron- A study of failures, who, how, and why? The Faculty Network. Retrieved
January 18, 2009 from http://web.bryant.edu/~facdev/Web%20Sites/newsletter/fall02/agudikunst.htm
Thomas, CB. (2002). Called to account. Time Magazine. Retrieved January 16, 2009 from
http://www.time.com/time/business/article/0,8599,263006,00.html
Tipgos, MA., Keefe, TJ. (2004). A comprehensive structure of corporate governance in post-Enron
corporate America. The CPA Journal. Retrieved January 16, 2009 from
http://www.nysscpa.org/cpajournal/2004/1204/essentials/p46.htm.

References:
1) Robbins, S. P., & Judge, T. A. (2007). Organizational behavior. [University of Phoenix Custom Edition e-
text]. Upper Saddle River, NJ: Pearson Education. Retrieved from University of Phoenix, LDR 531-
https://ecampus.phoenix.edu/classroom/ic/classroom.aspx
2) Wikipedia. (nd). Enron Scandal. Retrieved June 12, 2009, from
http://en.wikipedia.org/wiki/enron_scandal

References
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