Enrons Collapse free essay sample

Enrons Collapse In the case of Enrons collapse, many would blame the external auditors collusion with the management, the aggressive accounting policy it had adopted to manipulate its earnings or the Special Purpose Entity (SPE) it had created as a sham to conceal its debts. However, everything began from an internal environment with weak controls. The internal environment is the capstone of all other components within an organizations ERM framework, influencing strategy formulation, objective setting, as well as risk management. The internal environment is largely shaped by the tone at he top. And in the case of Enron, its failure was primarily attributable to the board and managements failure to take responsibility for the risks inherent in the companys business plan and strategy. Various elements of the internal environment had contributed to Enrons failure. Risk Management Philosophy and Risk Appetite Enron had a huge risk appetite which can be seen from its speculative trading activities as well as the use of mark-to-market accounting and SPE to manipulate earnings and conceal debts. We will write a custom essay sample on Enrons Collapse or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The source of revenue was vague and highly volatile. It was almost like Enron was engaged in gambling. However, well knowing the nature of income, the management still continued to carry out such activities. Managements huge risk appetite reassured the employees that Enron could easily handle these risks. Hence, everyone in Enron became risk-seeking. Board of Directors Attitudes One of the core principles of Anglo-American corporate governance is that the board should maintain a sound system of internal control to safeguard shareholders investment and the companys assets. Enrons board had defended itself by laiming that they had no idea about the unethical conducts Enrons management was involved with. However, the board had, in the first place, failed to make an appropriate assessment of the risks to which the company was exposed of. And it did not put in place the procedures by which it could obtain the information needed to oversee and monitor the management. Moreover, the independence of the board was also questionable as they allowed own conflict of interest to get in the way of their monitoring role. The board members received substantial payments for consultancy service apart from their directors fees. In addition, they were indirectly compensated by receiving gifts made by Enron to their universities and hospitals. As a result, the failure of boards monitoring role further weakened the internal control of Enron. Integrity and Ethical Values Integrity and standards of behavior are required for the organization to achieve an internal environment with strong controls. There should be a strong corporate Enrons corporate culture was usually described as arrogant, where everyone in the company, employees, managers or directors, believed that they could handle ncreasingly toxic risk without danger of going bust. Besides the arrogance, greed was as well evident across the organization. Top executives made use of mark-to- market accounting and SPE to manipulate earnings and conceal debts in order to further enrich their compensation which was tied to the performance of the company. Top executives actions of striving to enrich personal wealth rather than generate profits for shareholders had set the tone at the top which in turn led to employees efforts of maximizing individual wealth instead of creating value for the ompany as a whole. Assignments of Authority and Responsibility Corporate officers owe fiduciary duties to the organization, hence they must act in the best interest of the company and avoid incidences where conflicts of interest would arise. Although this is not enforced by legislation, it is normally set out in the organizations own code of conduct. A strong code of conduct is a critical element of assignments of authority and responsibility, not only in form but in substance as well. And Enron indeed had such code of conduct, explicitly restraining self-dealing. FastoWs involvement in LJM SPEs management would amount to self-dealing, which was a clear breach of Enrons code of conduct. However, the board had waived it under Ken Lays advice. Therefore, it can be seen that the tone at the top made Enrons code of conduct form over substance, which as well contributed to the failure Human Resource Standards Jeffery Skilling was usually credited with creating a system of forced rankings for employees, under which the bottom 20% was regularly dismissed on the basis of performance rankings drawn up by peers and superiors. Whereas those remained ere rewarded with stock options and performance-based increments. Thus employees attempted to crush not Just outsiders but also each other. And it is not surprising that they would keep silent even that they well knew about the unethical behavior of management. As a result, the ranking policy contributed to the diminishing of the organizations transparency and a widening communication gap between the board and the rest of the organization, making it even harder for the board to effectively carry out the monitoring role.