Executive Summary

This report analyses the downfall of Enron Corp while specifically focussed on the system of
communication that the Company had employed. It shows the importance of communication
between the top and lower levels of management and how the failure in doing the same lead
towards the downfall of once thriving company, Enron. It also provides recommendations to
other companies as to how they can protect themselves from such a fate.

Background on the Company

Enron Corporation was a company established in the USA and dealt with commodities, energy
and services. It was established in 1985 when Houston Natural Gas merged with InterNorth.
The company was one of the world’s largest electric, natural gas, communications and pulp and
paper companies before it declared bankruptcy in 2001. It was found in December 2001 that
the company was actually in dire financial straits and also had committed accounting fraud. The
instance is known worldwide as the Enron scandal. Among many of its failures, the failure in
proper communication is also a significant factor that contributed to the downfall of the
company.

Analysis and Reasons for Failure

Enron Corp had achieved great success during the 1990s. Since its establishment, the company
had Arthur Andersen, LLP (Andersen) as its auditor for whom the company was the biggest
client as well. In 1999, the Company started to have “special purpose entities” (SPEs). SPEs
were partnerships which were held separately and they never showed up in the Company’s net
income reports. The officials of Enron separated the losses from equity and derivative trades
into SPEs. These SPEs would buy equity shares in other companies from the stock money
loaned to them by Enron. Enron would, therefore, profit from the increase in the share value of
SPEs but would also have them booking their losses. These losses, then, would not show up in
the financial reports of the Company (Arnold & De Lange, 2004).

In late 2000, the Company had a new chief executive in Jeffrey Skillling who had took over
Kenneth Lay for the position. However, only after a few months, Skilling surprisingly resigned

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from the Company citing personal reasons for his decision. Kenneth Lay took over as the chief
executive again. In the same month, Sherron Watkins, the first whistle-blower of Enron, wrote
to Lay anonymously and accused Enron of accounting fraud and financial improprieties (Arnold
& De Lange, 2004).

By October 2001, the Company had transferred losses of over $618 million to their SPEs. This
loss was publicly reported by Enron in the third quarter as net loss. The impact of this loss had
also to be shown in the equity which is why the company disclosed a decrease of $1.2 billion in
shareholder’s value. These events caused the company to declare bankruptcy and an official
inquiry was launched by the Securities and Exchange commission into the Company’s finances
(Arvidsson, 2010).

Enron’s auditor had possessed of the news of the Company being insolvent long before it
became official. But he never communicated the news to the public. Further, he advised Enron
to refrain from referring the charges against their net income of the third quarter 2001 non-
recurring. This information was also kept from the public (Arvidsson, 2010).

One of the key responsibilities of the senior managers of any company is to ensure that they
communicate with the lower level of management. Absence of such communication leads
towards drastic outcomes, as has been case in the Enron scandal. The communication with
lower management not only includes pertinent information but also includes a communication
of appropriate values and being open of the symptoms of a problem. It is quite clear that
Enron’s officials lacked appropriate values that Enron should have possessed. According to
Seeger & Ulmer (2003), leadership is a communication based process in which the values and
goals of the Company are notified to the followers. Enron’s senior officials had the
responsibility to guide their followers and communicate to them the values and goals through
which the Company would thrive. They also had to used communication to motivate them and
open lines of communication to them air their grievances if they had any.

Corpus analysis of the emails of Enron (Diener et al., 2005) reveals the discourse and behaviour
of the leaders of Enron, especially of Kenneth Lay and Jeff Skilling. The analysis reveals that they
had failed in fulfilling their responsibilities as leaders as they did not communicate the

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appropriate values to their employees. Employees of any organization do not take much
guidance from the words that are spoken to them by their leaders but take more inspiration
from the actions of the leaders. Even if the verbal communication to the employees of the
Company did include the explanation of appropriate values, the actions of the senior officials of
Enron informed otherwise because they were antithetical to the values that the Company
should have possessed. They rewarded and fostered a very different set of values in their
employees and that sent a message which was antonymous to RICE (respect, integrity,
communication and excellence). RICE was Statement of Human Rights introduced by Enron in
1996 and all of its employees were required to sign it. However, the follow up by the senior
officials was quite the opposite of what was signed.

Conclusions and Recommendations

Enron’s case informs about the importance of communication of key responsibilities and
appropriate values in a company. The responsibility lies on the leadership of the company as
they motivate the lower management to work with diligence and honesty. Even more
important are the actions of the leaders because they inspire the followers even more than the
words. The actions of leaders, therefore, are a form of communication that are of the most
significance in a corporate setting. Enron’s leadership instructed their employees of the right
set of values but that was only in words. The actions of the leaders and the sort of behaviour
that they rewarded was quite the opposite. The Company’s auditors made significant financial
gains while he had the Company as his client but his behaviour was not of the type that should
have been encouraged. Therefore, Enron’s downfall is partly owed to the failure in
communicating the right set values in the right manner. It is recommended for the leadership of
all the present and future companies that they communicate the right set of values to their
employees and back them up with their actions.

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References